CEO SUMMARY: Will lessons learned during the commercial lab industry’s consolidation frenzy be learned and applied in the Quest-SBCL merger? History has a way of repeating itself. But Quest Diagnostics’ CEO has a different plan. He also has a tool not utilized by lab executives earlier this decade—the customer-first management philosophy of “meeting and exceeding customer expectations.”
Remember when the lab industry’s huge dinosaur labs roamed the country? Like Tyrannosaurus Rex in a feeding frenzy, they gobbled up independent labs one after another, dismantling them to feed newly-acquired specimens into
their regional testing mother ships.
But the unwritten side to this story was that most acquiring labs lost huge chunks of that acquired business as they dismantled the acquired lab and consolidated those specimens into a distant lab. As clients became alienated, they switched their business to competing labs. This frequently left the acquiring lab with a big purchase cost, and insufficient specimen volume to amortize that purchase.
Lab Industry Pattern
This was a lab industry pattern: lose client accounts whenever local lab sites are closed and testing consolidated into regional centers. For executives at Quest Diagnostics Incorporated, this industry pattern will be foremost in their minds as the acquisition of SmithKline Beecham Clinical Laboratories proceeds later this year. Combining the two companies without alienating existing clients of both firms will be a major challenge.
For Quest Diagnostics, its acquisition of SBCL is a double-edged sword. After combining the two laboratory companies into a unified operation, Quest Diagnostics will be a formidable competitor in the marketplace. But, the challenges of successfully integrating the two companies will tax the management skills of executives at both companies.
In that regard, Freeman may have an overlooked ace to play. Clients and readers of THE DARK REPORT know that Ken Freeman is not a career laboratorian. He was originally part of the corporate team at Corning Incorporated, one of the nation’s earliest successful adopters of the quality management philosophy.
In acquiring SBCL, Freeman gains an organization of people already deep in their own quality management philosophy. It is this common ground—quality management—where Freeman has strength from which to build a unified company.
“At Quest Diagnostics, our customer-first philosophy is crafted around the concept that satisfied employees create satisfied customers, and these create satisfied shareholders,” said Freeman. “At SmithKline Beecham, they’ve coined a term, the ‘SB Way,’ meaning ‘simply better,’ to describe their customer-focused philosophy.”
It is recognized that the most successful companies today are those in which quality management philosophies and principles are deeply imbedded. Quest Diagnostics and SBCL are much further along in that cultural transformation than most other clinical laboratories in the United States.
An Ace To Play
Ken Freeman recognizes that ace card,and intends to play it. “Integrating multiple cultures is always difficult. The fact that both laboratory companies have customer-focused cultures and understand how processes drive the business means we start from common ground.
“SBCL has a justifiable reputation for quality and service,” added Freeman. “As operations of the two companies are combined, it is this common management philosophy of focus on the customer which becomes a strength.”
Given the size and high visibility of this merger, executives at both laboratories will be challenged to use every advantage to achieve a successful integration. Expect quality management methods to be an essential tool during this process.
Lab Dinosaurs Became Extinct
Dinosaurs and extinction are good metaphors to describe the fate of the nation’s largest laboratory companies of just ten or twelve years ago.
Remember the names: MetPath, Allied, Physicians Clinical Labs, MetWest, Damon, International Clinical Labs, Nichols Institute. In their heyday, they dominated the industry landscape.
And where are these powerful monsters of 1988, 1991, and 1994? Extinct! Their genetic descendants live on in the form of Laboratory Corporation of America, Quest Diagnostics Incorporated, and SmithKline Beecham Clinical Laboratories.
It was a rapid process which led to the extinction of a thriving industry of independent commercial laboratories. Most industry executives attribute the quick financial reversal of the clinical lab industry to declining reimbursement and punishingly low capitated rates. But there is another market dynamic which was equally responsible, but virtually overlooked.
That market dynamic is the process of laboratory consolidation. When a large laboratory company purchased that small, local laboratory from its pathologist-owners, it seldom handled the acquired business with a high level of success.
As the acquiring lab dismantled its prize and shipped specimens off to a distant lab for testing, it frequently alienated a large segment of the acquired client base. Customers switched to competing labs. Since the purchase price for a lab was based on its existing volume of business, any lost client volumes meant the acquiring laboratory had paid for business which no longer existed. Yet it was still obligated to pay for that lost business!