X-ray vision Featured

6:18am EDT April 29, 2004
Nov. 21, 2002, was Jerry Cirino's first official day on the job as president and CEO of the newly formed SourceOne Healthcare Technologies.

He had just created a company that had $1.3 billion in sales and a 52 percent market share in the $2.5 billion U.S. medical imaging distribution market, delivering products including X-ray film and digital imaging equipment to hospitals and medical centers. He had combined the Health Care Products division of Royal Philips Electronics in Cleveland and its arch-rival, Diagnostic Imaging of Jacksonville, Fla., a division of PSS World Medical.

Most of his key executive positions were vacant, entire departments didn't even exist and there was no headquarters.

To add to the problem, both companies were individually projecting million-dollar losses. His job was to now take two negatives and make them into a positive. For Cirino, this wasn't some temporary turnaround assignment from a parent company. This was his idea. As a 20-year veteran of the medical imaging industry, the former No. 2 man at Picker International -- which became a division of Marconi in 1982 before it was bought by Royal Philips in 2001 -- and as the head of its distribution business, he knew the industry, the competition, the vendors and the customers.

"After Philips bought Marconi, they decided to sell off the distribution company I used to run," says Cirino. "I left Philips at the time with the specific purpose of wanting to find the financial backing to buy back the company.

"My business model revolved around not only buying the assets here, but also that of the largest competitor sometime afterwards. There was no set timetable, but both businesses were underperforming, and the real opportunity was to bring them together and realize the synergies from that and to combine the strengths of both companies."

Cirino understood the potential of the merger and was confident things could be turned around. He had produced earnings growth of 55 percent and 25 percent in 2000 and 2001 respectively while serving as executive vice president of Marconi. He had restructured Marconi's European and Latin American subsidiaries and improved earnings 25 percent in the first year of implementation.

And while with the Health Care Products division of Marconi, Cirino is credited with doubling the division's sales to more than $500 million while maintaining substantial profit margins.

This was a man who knew how to turn a loser into a winner.

Cirino found his financial backing at Platinum Equity, a Los Angeles-based private equity firm that saw the same potential. On Nov. 18, they closed the deal on Diagnostic Imaging, followed two days later by the closing on Marconi.

"Within three days, we had closed on both acquisitions," says Cirino. "The original plan called for about six months between acquisitions, but things happened that changed that. Both sellers were persistent about getting the transaction complete."

Cirino officially took the helm on Nov. 21 and immediately flew to Jacksonville to meet with the employees of the former Diagnostic Imaging to explain what was happening. The next day, he returned to Cleveland and did the same with employees here.

"The people here knew me from my days at Picker," says Cirino. "The Jacksonville people knew me as the guy that led their competitor."

Now both groups knew him as president and CEO.

The transformation had begun.

Taking charge
The first thing Cirino had to do was get an assessment of the overall situation.

"We took a quick look at the financial situation we had walked into," says Cirino. "We had a fairly good idea from the due diligence process, but until you really get in, you don't really find out everything. You always find something.

"What we walked into was a financial picture that wasn't good at all. Projections for '03 were a range of break-even at best to a multimillion dollar loss on the EBITDA line."

The integration of the company from two separate entities into one needed to happen as soon as possible to get things going in the right direction.

"We had done a lot of the pre-work, but we really couldn't finalize our plan and strategy for integrating the two companies until we got in here," says Cirino. "We had to turn around the sales and performance.

"We put together 10 staff-driven integration teams. I appointed one senior executive from the company in Florida as vice president of integration. His job was integration czar. He had broad authority to work with and direct the 10 teams. These teams were all along disciplinary lines -- marketing, operations and so on. Each team had a chair, but the chairperson reported to the czar of integration. There was fast progress because of the fact that we didn't have the bureaucracy to work through to get this done."

Speed was of the essence, and the list of problems that needed solving was long.

"I was very familiar with the business because I had been in it for 20 years," says Cirino. "I knew our suppliers and customers. We opted out of certain products. We were able to make a lot of quick decisions without six months of analysis. We simply didn't have time to do that."

Costs were eliminated. Redundant jobs were dropped. Sales force compensation was changed to emphasize more profitable lines and better rates were obtained from suppliers reflecting on the company's newfound strength in the market.

In the company's first quarter, SourceOne doubled the EBITDA of what Diagnostic Imaging and Health Care Products had done combined in the previous quarter and three times what Cirino thought the company would do.

"We had an extremely profitable first quarter," says Cirino. "We had only gotten through maybe a third of the integration activities, so we had quite a ways to go."

When SourceOne was formed, it was missing key elements at the corporate level.

"Because of the way we got both companies -- they were both carve-outs from larger companies -- they didn't come with infrastructure, which was a big challenge for us, especially in the first six months," says Cirino. "For example, here we were sitting on a $1.3 billion company with virtually no HR department. The business we bought in Florida came with zero HR people.

"We had a couple of people here that had been part of the Picker-Philips group. But we had no treasury department, no bank management and no accounts payable department. We had to set up entire departments that we simply didn't have."

Despite the challenges, Cirino says building departments from the ground up really paid off for the company.

"It was a once-in-a-lifetime opportunity," he says. "Here we are behaving entrepreneurially like a start-up company, but being a $1 billion-plus business. We had no policy manual. We had no policies on vacation, conflicts of interest or the other things that other companies had. From that standpoint, it was a great opportunity to invent and not deal with stuff that was legacy that we didn't like.

"We were able to put together policies that we felt were the right things for this company."

In addition, most of the executive staff at both locations had been let go so Cirino could build his own team from scratch.

"It made for a pretty intense first 30 to 60 days for the company," says Cirino. "We had to figure out how we were going to accomplish all that and do all the executive recruiting and so on. We also knew that by the time we put together an infrastructure of legal, IT, finance and so on, we were going to need a bigger place to go to."

Location, location, location
In most acquisitions, a larger company buys a smaller company. The larger company absorbs whatever it needs from the smaller one and gets rid of the rest in one way or another. Corporate functions are usually picked up by the larger entity at its headquarters.

Cirino didn't have that luxury. The acquisitions he and Platinum Equity made were just pieces of larger companies. Not only did he not have a corporate infrastructure, he didn't even have a building to call home.

"We were operating in both Jacksonville and Cleveland. In Cleveland we were still in the old Picker building in Highland Heights, and the building in Jacksonville belonged to PSS," says Cirino. "We had transition agreements with both companies for several months, but two reasons compelled us to move: One, the transition agreements were very expensive, and two, there was also a time limit."

Platinum Equity left the decision of where to locate the corporate headquarters completely up to Cirino. The two obvious choices were Cleveland and Jacksonville.

In January 2003, Cirino was on a business trip when his cell phone rang. It was Gov. Jeb Bush of Florida, lobbying him to locate the headquarters for the new company in Florida.

"He wanted us to establish the headquarters in Jacksonville, which in January, is pretty tempting," Cirino jokes.

But Cirino -- a native Clevelander who grew up in Little Italy -- ultimately decided on Cleveland. The next question was, where in Cleveland?

"We ended up doing a four-city competition between Highland Heights, Mentor, Solon and Willoughby," says Cirino. "We looked at the facilities available and what incentives the cities were willing to offer to bring in 300 jobs, which is a pretty big plum."

Mentor won.

"We liked the building and felt the city was right for us," says Cirino. "The city met with us and worked with the building owner. They put together an incentive package that was not tax abatement. We didn't have three or four months to make a decision.

"This was January, and we needed to get the project going to build out the office. Mentor was the choice because of the building, the business-friendly nature of the people and the economic development department."

The "building" was basically a shell with dirt floors and 27-foot ceilings, and Cirino wanted the company in by July. The plans were approved by the city and the project started in February. On July 4 weekend, SourceOne moved into its new home.

"We brought about 175 people from Highland Heights and migrated others from Florida or other parts of the country," says Cirino. "We centralized everything here. There are about 140 jobs that are new to Ohio that we brought here."

Culture creation
A new company means a new culture for the employees. But for Cirino, the culture was far more complex than just incorporating one into the other.

"You obviously have culture differences when you are merging a company," says Cirino. "Because the company in Florida was less than 10 years old, and they came about by the parent company acquiring a bunch of local independent X-ray distributors -- 57 of them over about a six- or seven-year period had been aggregated together -- they never centralized their business. We, up here, had been centralized for decades. We had one culture up here. Diagnostic Imaging, because of how they came to be, arguably had a large number of cultures we had to work through.

"When you merge a company, it is nice to be able to find out what the two cultures are and what the new one is going to be. We had not just two cultures but numerous cultures. We decided to establish the culture we wanted for SourceOne very quickly before an ad hoc culture developed on its own. We felt we had to do that very very quickly."

In February 2003, Cirino brought in a facilitator to work with him and his staff to determine what kind of culture the new entity would have.

"We sort of locked ourselves away for several days to work on our culture," says Cirino. "Remember, these were two companies that competed with one another in the marketplace, and now they are together."

In March, the company rolled out its Mission-Vision-Value statement. It focuses on results, accountability and teamwork. Every employee is given a laminated card with the statement on it.

"You see those words a lot when you walk into every corporate lobby and see it hanging on a plaque on the wall and stuff like that," says Cirino. "We didn't want it to be 'stuff like that.' We wanted it to be something that is really understood by employees and that we live with it and show it by example in everything that we do. We have a rule here at the headquarters that if you are asked for your card and you don't have it, it is a $50 fine. I've given a few fines over the past few months, but most people keep them out. It's a way of showing that I think it is important. If the CEO doesn't show that he or she believes in it or thinks about it, then it will never happen. It will just be a plaque on the wall.

"I'm delighted with the way the employees have embraced our mission, vision and values. We've done it three times faster than I ever thought we would. It's never finished, and you've never established your culture firmly or finally, but I think we are very far along."

Cirino credits the quick adaptation to the fact that the culture truly is new, and not just one company's or the other's. It takes parts from each and incorporates new ideas.

"This was truly a SourceOne, independently arrived at set of values and mission for the company," says Cirino. "This is what we want going forward without relationship to what either company has done in the past."

Cirino has quarterly meetings to keep everyone updated on where the company is and what the plans are. He also meets with groups of 10 or so employees twice a year with no supervisors present.

"It lets me talk to 10 people who are really down in the weeds getting the work done," says Cirino. "I found that it's a great way for me to get the pulse of the company at a critical time. I came away with lots of good information and ideas from the employees."

Not every idea is a strategic breakthrough, but sometimes the little things can help everyone serve the customer better. During a meeting with some of the employees from the call center, they said they needed better copiers.

"They do a lot of copying of customer orders and such," says Cirino. "To be honest, I didn't even know what brand of copiers we had. With everything going on last year, it wasn't real high on the priority list. Apparently we had copiers that were breaking down all the time and weren't printing well, didn't collate the way they were supposed to and were keeping people from doing their jobs faster.

"We were asking people to work a lot of hours and take responsibility, so I walked out of the room and went to the person that runs our facility and said, 'Change out the copiers.' I was told five reasons why we can't. I didn't care. The people that use them think they are trash. Let's get them fixed.

"That wasn't a big strategic issue for the company, but it's a great example of how employees offered input and we got it changed. It mattered to our employees who are trying to service our customers. We were slowing them down when we wanted them to hurry up. These meetings really kept my eyes on how we were doing in that very important first year."

A new culture was also instilled at the executive level.

"I kept several people on both companies' staffs, but the vast majority of executives I separated from the company," says Cirino. "It wasn't until May or June where I had most of the major functions filled. I waited and did a lot of interviews. I wanted to make sure I had all 'A' players. There are no 'B' players on my team."

Chemistry is important to the success of the executive team.

"I want the staff to not always agree necessarily, but I wanted professional people" says Cirino. "I want constructive chemistry on my team. Even when you are disagreeing with the team, they need to be dealing with each other on a professional level and not personally. I've seen it differently, and it can be very, very destructive and the company is not served well. I don't put up with any destructive commentary by one staff member about another. I saw some of that in the past, and it is a massive waste of time.

"Don't come in here and tell me about Jim. If you have a problem with Jim's program, we'll get Jim in here and talk it through. There is no behind-the-scenes stuff and no political maneuvering. We're all in this together, and we all want to win. This team is doing a good job of that."

With a new CEO, new faces in the executive offices, a new name and a new headquarters, it was easier for everyone to accept SourceOne as a new company.

"We do have a new company," says Cirino. "There are remnants of both of the old companies, but we are a brand new company. That's the key to what we are doing as a company, because it helps take our minds off the past. Forget the past. Let's look forward."

Now that the company has mostly completed the integration, it can focus solely on its business.

"We are now looking at strategically where to take this company and how we will transition from the analog world with products like X-ray film into the digital world and information management systems, as well as looking at acquisitions" says Cirino. "We have an aggressive interest in doing acquisitions to grow the company now that we are past the integration. We know where we need to go, we are just looking for the right partners and to develop good relationships with suppliers, and I think we can score big in the next couple of months."

Integrating any acquisition will probably seem easy compared to what SourceOne has been through in the past.

"We could not have gotten through this without highly dedicated and focused people," says Cirino. "There were lots of people reacting to the new company, but it was the day-to-day communication from our people that helped our customers feel comfortable with what SourceOne was. It was a tough transition, but our people did a phenomenal job."

How to reach: SourceOne Healthcare Technologies, (440) 701-1200