7800 Belfort Parkway, Suite 250
Within just a few years, Physician Sales & Service, Inc., has grown into the first national physician supply company in the United States. Following a series of acquisitions, PSS also became the leader in the $6 billion office-based physician supply market. Sales for the Jacksonville-based company reached $236 million in 1995, up from $66.1 million just four years earlier. With the strength of recent acquisitions, revenues for 1996 were predicted to approach $500 million.
Company founder Patrick Kelly grew up in a Richmond, Virginia, boys' home. His experience with both forgiving and strict guardians helped him to develop a penchant for risk-taking, which he brought to PSS. "People here will never get in trouble for making a mistake," he told Inc. in 1995. He also gained experience in the U.S. Army, where he issued weapons, and the practice of delegating decision-making to young people impressed and intrigued Kelly. Later this became vital to his own training and recruiting methods.
With the help of an investor, Kelly, then in his mid-30s, founded the company in the spring of 1983 in Jacksonville, Florida, with two partners, Bill Riddell, who served as executive vice-president for sales and marketing, and Clyde Young. Kelly, Riddell, and Young had worked previously as sales representatives at another medical supply business. In order to facilitate decision-making, Kelly received 31 percent ownership versus 23 percent for the other three.
Doctors' offices have limited storage capacity and are prone to occasional shortages of critical supplies. To differentiate itself, PSS began to offer next-day delivery of most items versus the usual wait of three to four days. This practice allowed PSS to charge premium prices, which financed technological improvements in its distribution and sales departments. For example, competitors relied on commercial shipping companies, but PSS bought its own trucks.
Kelly's initial goal was to make the same money at PSS as he had at his previous job. The company's growth in these years was encouraging, but it did not become phenomenal until, in 1988, Kelly was inspired by a motivational speaker to set a bold goal for PSS. Its mission: to become the first national physician supply company in a field of regional players. The goal was heralded on banners and stationery and in conversation. The ambitious statement encouraged and emboldened the company's young staff. In 1987 PSS achieved sales of $13 million from its five Florida-based branches, but sales surged to $31 million in 1989 from ten branches. In 1991 there were 32 branch offices.
The company has been quick to use new information technology to improve service. In 1993 a new wireless data-transmission system supplied by RAM Mobile Data and Compaq Concerto laptop computers was implemented at a cost of $1.5 million. However, as information technology vice-president Darlene Kelly (not related to Patrick Kelly) stated, "The investment more than paid for itself in less than a year." Sales for the average representative increased roughly $10,000 each month, grossing $3,000 for the company. The system was first used to input orders from the field electronically, opening the possibility of same-day delivery (for orders received by 11:00 a.m.) while increasing the time available for sales. Administrative work at the service center was also greatly reduced. By 1995 PSS was boasting a same-day fill rate on 94 percent of items carried, or 16,000 products. The "Instant Customer Order Network" (ICON) enabled a decentralized approach at PSS, empowering sales representatives to make pricing decisions in the field. ICON was later upgraded to include instantly accessible pricing and usage histories, which allowed representatives to offer physicians timely, informed advice on budget and inventory management. Manufacturers' equipment catalogs and cost analyses were also immediately available.
Sales representatives, called "PSSers," were more than necessary to bring customers the benefits of this service and technology. Since the beginning Patrick Kelly had always practiced careful management of his staff. Experienced professionals had been difficult to acquire due to the company's short history and the tendency for jilted employees to sue PSS. However, the company developed a successful recruiting and training program for its young sales staff, who in 1995 averaged 27 years in age.
Kelly and his colleagues visited colleges, searching for candidates with ambition and drive rather than experience. Young team members brought many advantages to growth-oriented PSS. With fewer family connections, they could work longer hours and accept relocation to new facilities. They were also more amenable to performance-oriented compensation. True to his military background, Kelly promoted from within and not necessarily by seniority. A thinning of the top ranks through expansion created a considerable demand for new high-level managers, all either groomed from within or brought in through mergers. The wide-open possibilities for advancement in exchange for hard work seemed quite attractive to the type of individual Kelly sought. In return for the efforts laid out by his staff, Kelly, who disdained bureaucracy, promised to place no barriers on their potential for success.
PSS trainees learned various areas of the company's operations: working in warehouses, making deliveries, studying sales techniques, and learning about the products. Eventually, "PSS University" was established in Jacksonville, Florida. After sixteen weeks the trainees who made it through the first phase (about 90 percent of those who signed up) spent an intense week studying the industry and PSS sales techniques. Full days in class--punctuated by written tests, role playing, and video critiques--were followed by dinner lectures emphasizing important points. PSS was eager to invest heavily in training&mdash⟩proximately $10,000 to $25,000 per salesperson--in order to foster phenomenal growth. The trainees reduced the need for full-time warehouse and customer-service employees.
Attrition in the training program reached 30 percent before the PSS Sales Interview Guide was drafted in 1989. Like the previous hiring strategy, it emphasized attitudes and behavior rather than experience. Qualities sought in salespeople were aggressiveness and energy. The sales-training dropout rate fell to ten percent after the more highly selective interview guidelines were implemented; job offers were made to only 70 candidates out of 800 that applied in 1990. Cash incentives were a part of the process for those who did the hiring: branch managers received $2,000 for each successfully trained candidate. Once hired and successfully trained, PSSers tended to remain loyal. In 1989 turnover was only five percent. Providing each employee a stake in the company's success was critical to this stability.
The job was demanding. In 1995 the average representative called on 200 clients. PSS salespeople were trained to keep clients informed of emerging developments in products and to develop consulting relationships that naturally would increase their persuasiveness in selling products. Incentives were impressive; every type of employee at PSS had the possibility of earning a bonus, which could be as much as several thousand dollars, based on branch profit rankings. To increase motivation, company numbers, including daily sales reports and monthly profit-and-loss statements, were kept highly visible. Kelly even took to passing out $20 bills during visits to branches, rewarding those who correctly answered a randomly chosen question from a book of 100 work-related questions. Similarly, surprise "Blue Ribbon" tours twice a year rated each branch on 100 standards for doing business.
The company needed a constant supply of leadership talent, yet it found the best salespeople suffered high turnover when promoted to management. Kelly's solution was to institute "Creativity Week," a meeting aboard Kelly's boat in which prospective leaders read management texts such as The Seven Habits of Highly Effective People and discussed hypothetical cases. During the cruise, additional students were picked up each day, and the original three became mentors. Since 1987 all PSS managers went through the program.
PSS organized many recreational activities to motivate its troops and sustain an environment of expectancy. Regional annual picnics treated staff to two or three days in a distant resort. The interbranch volleyball tournament that began at these picnics culminated in playoffs at the national sales meeting, which also featured golf, and there were half-day trips for corporate staff. The company's focus on performance was enlivened by the "PSS Challenge," which brought monthly performance meetings into recreational settings such as bowling alleys and ballparks. An integral part of the PSS Challenge was a game show-style contest in which teams tested their knowledge of a particular business subject. PSS also took care of advertising and promotion in house, an approach that helped give its branch mangers and sales representatives a feeling of ownership toward sales promotions.
Although the concentration on profits helped buffer the company against the potential drawbacks of rapid growth, it consistently ran into problems with nervous banks, which urged the company to build up more equity and to contain its sales growth. At least five banks dropped PSS until Kelly increased the company's equity. In 1983 his 21 employees invested $50,000 in PSS; the founding partners added $100,000. An employee stock-ownership plan, which in 1995 owned one-fifth of the company's stock (worth around $46 million), offered pretax payroll deductions and matching company contributions and was reported to be responsible for creating 40 millionaires. An employee stock-purchase plan, for after-tax sale of stock, was later added along with stock-option incentives. The venture capital firm of Tullis-Dickerson & Co. bought one-fifth of the company in 1989, and in 1994 its initial public offering at $11 per share raised almost $16 million, lowering its debt-to-equity ratio to around 1:1.
The PSS of the mid-1990s continued to boast a high level of customer responsiveness, featuring same-day service. PSS asked for no minimum order and provided simple statements free of hidden handling charges. Doctors in the United States became much more price-conscious after President Bill Clinton's health care reform efforts in 1993; PSS responded by dropping prices on popular items and establishing a "comprehensive savings plan," Network Plus, a type of buyer's club that offered hassle-free credit and lower prices. Profits suffered with the new emphasis on low costs, but eventually market share increased and lower expenses helped recover the difference. The company also expanded its relationship with its clients, offering biomedical equipment repair and consulting services in the areas of space planning; laboratory design; federal safety regulation compliance; sterilization, sanitation, and infection control; inventory management; and financial services. Sales reached $169.7 million in 1994, an increase of more than 250 percent over 1990. Each sales representative wrote $468,000 in sales, an increase of nearly 40 percent since 1990. New branches typically became profitable within 18 months and eventually earned eight percent profit on sales, which, during this period, were increasing 22 percent per year at the average branch.
In 1995 sales reached $236.19 million before the acquisition of Taylor Medical, which PSS bought for $65 million. The privately owned company, based in Beaumont, Texas, was PSS's third-largest competitor, with 18,000 customers in 23 states and annual revenues of $122 million. At the time, PSS serviced 57,000 medical offices in 48 states with its existing 56 service centers. The deal also gave PSS 175 sales representatives, increasing its total to 620. PSS had previously acquired Lancet Medical Ltd. of St. Louis, where PSS already had a service center. Lancet's 1994 sales were worth $1.5 million. PSS also signed an exclusive distribution agreement with Abbott Laboratories to distribute its Physician Office Laboratory line of diagnostic equipment; this was projected to bring PSS $65 million the first year, $100 million the next.
In 1994 Kelly had announced a new goal: $1 billion in sales by the end of 2001. Having attained its goal of becoming the first national physician supply company, and likely to reach $500 million in sales in 1996, PSS would seem to be more than halfway there.
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