With 17 billion in revenues, McKesson is the major wholesaler in the pharmaceutical industry. Maintaining this leadership, in an industry which is currently characterized by major take-over turmoil and where average net profits hover around 2%, requires constant innovation. McKesson has achieved this by growing its generic drug inventories, providing value-added services and improving the efficiency of its own operations (Oswald and Boulton, 1995). McKesson's huge inventory of high margin generic drugs positions it favorably in the cost conscious managed care environment. This position can only improve as more drug patents expire. Key acquisitions and its own internal development has made McKesson a leader in the provision of value added services to many segments of the health care industry. Many of these services involve the application of information technology to rationalize and improve the efficiency of pharmaceutical and managed care procedures. Not surprisingly, McKesson's early forays into the application of web technologies impact this aspect of its strategy.

McKesson provides complete information technology solutions to support pharmacy operations, inventory control, benefits management and supply chain management to all segments of its customer base. Table 1 lists key services and information technology (IT) solutions that the company provides.

Table 1. A Sampling of McKesson Services and Products for addressing the requirements of various types of customers.

McKesson systems and programs rationalize and support every aspect of pharmacy operations that impact the delivery of pharmaceuticals to the end consumer. These operations include:

• Front office (in-store) activities -- e.g. physically dispensing products (RxOBOT), promotions (HealthyValu$), point-of-sale applications (McKesson POS), catalogs of products (Home Health catalogs)
• Advise and support on business activities -- e.g. support for filling in prescriptions (Pharmaserv), tracking dispensing records (Pharmarserv), advise on drug interaction (Omnilink), generics management (McKesson Select Generics), monitor benefits and health plan coverage (Omnilink, Caremax, Integrated Medical Systems)
• Back office administration -- e.g. inventory management (Econolink), store control and pharmacy management (Phamaserv)
• Financial Services -- e.g. Omnilink financial services provides automated reconciliation and reporting services, advanced payments and offsets on receivables
• Warehouse administration -- e.g. product supplies to major retailers from currently 41 warehouses nationwide, warehouse management tools (Acumax Plus)

This list further supports the contention that the company is positioned to operate profitably in a managed care environment, providing the benefits information, product substitutes (e.g. generics), and financial analyses that enable pharmacists to achieve the greatest margins within the limits of their contractual arrangements. These capabilities are achieved primarily through networks that pool information from various players in the health care industry -- including manufacturers, hospitals, pharmacies, and managed care providers. The networked nature of these applications makes the web platform a logical infrastructure for them.

The Benefits of Web Technologies

The most obvious benefits that McKesson hopes to gain from the use of web technologies stem from the cheaper infrastructure afforded by these technologies. Currently, there are plans to substitute the Internet for private networks. The company also investigates the replacement of high end PC clients that sit in pharmacies with cheaper, low maintenance network computers running browser software. These clients will be used as the front end for accessing McKesson's current information technology products.

The current push for using web technologies was fueled by their successful application to a high profile, high profit Department of Defense (DoD) project. Within 90 days, McKesson was able to meet the DoD's contract requirements for EDI and exceptions ordering over the Internet. The rapid development of these applications was achieved through the use of browser and scripting technology (Netscape and PERL for exceptions ordering) and off-the-shelf applications (Premenos' Templar for EDI). The rapid deployment of these applications, coupled with the magnitude of the contract that they won as a result, piqued McKesson executives' interest in exploring the potential for using the web infrastructure for providing its services. Since early 1997, Web-based client-server system InfoLink enables McKesson to provide customized and current information to both their sales staff and customers. Salespeople can now download the most current customer profiles and sales histories in preparation for their sales calls. The use of Internet and Web-based technologies again allowed rapid system development and lead to low maintenance costs.

A sampling of other projects currently being considered include a corporate-wide Intranet, and a version of Econolink over the Web. Additionally, the company plans to extend InfoLink's capability to provide customized promotional and training materials to both its sales staff and directly to its customers.

Achieving the deployment of Web technologies, presents special challenges to McKesson's IT department. These center around issues of managing expectations and overcoming the legacies and building flexibility into the infrastructure.

Managing expectations. The rapid development cycles of the DoD project created an expectation within McKesson that web applications involved short development times. This expectation may be further reinforced by the practice of using rapid application development (RAD) teams to build the front end for current web applications. These teams have the goal of getting projects done in 8 weeks. However, much more time is required to build the back-end to these applications -- e.g. logic, database extracts/links -- with traditional software development methods. Because RAD is still in the early stages of deployment, it is difficult to assess its effect on user expectations regarding delivery of a given application. So far it has helped users form realistic expectations of a given project's time requirements. During the RAD process, users get a better idea and articulation of the application that they want and in the process appreciate the programming effort required to address those requirements.

Another aspect of expectation management involves McKesson's customers. As more of McKesson's networks are replaced by the Internet, there will be a need to reassure customers and field staff that service levels and security will not change. This is particularly crucial since one of McKesson's key strengths is the quality of its customer service. In an effort to maintain these levels, McKesson establishes satisfactory levels of security using Netscape's SSL. Past experiences also show the importance of helping users maintain realistic expectations of the systems. The project team is wont to remind users that although they have to sit and wait a few seconds for a report to download over the Internet, it is still faster than waiting to get the report through regular mail.

Legacies and futures. Because of its recognized leadership in information technology solutions for the pharmaceutical industry, McKesson has a major investment in traditional mainframe architecture and developer capabilities. While it has been the mainstay of their past success, this infrastructure has also created problems for building a web-based capability. The problems include not only commonly recognized legacy issues like data integrity and compatibility with web technologies, but also, and most strikingly, it includes a difficult human resources dilemma -- how to quickly build competence with web development tools among your programmer group.

Given their role as the hub connecting a wide range of health care constituents, Web technologies clearly have much potential for improving McKesson's ability to enhance the value-added services they provide to their customers. Ironically, the company's past success with networking business partners and customers have created an entrenched infrastructure that presents complications for their exploitation of the web model.

Reference: Oswald and Boulton 1995 "Obtaining Industry Control: The Case of the Pharmaceutical Distribution Industry" in California Management Review (38: 1: 138-162)