Kodak exec manages transition to digital age in turbulent times

August 1, 2005

Beset by plummeting earnings, marked by a $146 million loss in the second quarter of this year compared with a profit of $136 million in the year-ago period, Eastman Kodak announced July 20 its intent to eliminate up to 10,000 jobs in addition to the 15,000 job cuts already set to occur this year. Underlying these problems is a bumpy transition to digital, which cuts across the company from its consumer to its healthcare products.

Beset by plummeting earnings, marked by a $146 million loss in the second quarter of this year compared with a profit of $136 million in the year-ago period, Eastman Kodak announced July 20 its intent to eliminate up to 10,000 jobs in addition to the 15,000 job cuts already set to occur this year. Underlying these problems is a bumpy transition to digital, which cuts across the company from its consumer to its healthcare products.

Kevin J. Hobert took over the reins of Kodak's Health Group in February, (DI SCAN 2/21/05) hoping to achieve as orderly a transition as possible. The group fared better than much of Kodak in the last quarter, adding $113 million to the bottom line, although the quarterly results fell short of the $124 million profit achieved in the year-ago period. The traditional business within the Health Group performed better than expected, while revenue growth in the digital products portfolio was lower than anticipated.

In an interview with DI SCAN, the new chief executive discussed the challenges of optimizing a declining business and growing a new one, addressing specifically the restructurings, corporate acquisitions, and rapidly evolving product lines that have come to characterize the company in recent years.

DI SCAN: What's your vision for the Health Group?

Coming into this new job as part of a natural succession plan at Kodak, I don't feel a need to create a radically new vision for the group. I have been a member of the leadership team for the last two and a half years, and I have had a role in helping to create the present vision for the company.

Basically, we want to help customers with the transition to digital solutions and help them realize the cost and quality-of-care benefits that should come with the transition to digital. If you look at our portfolio, we have put together products and services needed for that transition.

DI SCAN: Your background, directing the digital capture business for Kodak's Health Group, would seem to fit well with this corporate vision of transitioning customers to digital.

We really focused on customers that were previously using film and, in their transition into PACS and healthcare IT and informatics, had to replace those products. When you buy a new PACS, you are not looking for a combination PET/CT, but you need CR and DR, so we increased our focus on those areas.

We built our PACS/RIS business to deliver real productivity and workflow advantages. We also have the printers and services customers need to help with the transition. We can provide data migration services, create a network for customers, and apply lean thinking to help customers enhance their operations.

DI SCAN: There have been a number of changes at the top and in the organization. Some see this as a sign of instability.

We are in a transition with our business model, and this transition requires restructuring of some businesses to maintain profitability and meet customer needs. We have businesses, like the one dealing with film, that are in decline. It has its own go-to-market structure. We have printers, whose market is peaking right now, and PACS, which will eventually drive the decline of the printer market. But it still has quite a run left.

DR is rapidly growing. PACS, RIS, and information systems are just surging. We have a business composed of several different businesses, each with a unique model for how you go to market, satisfy customer needs, and make money.

The changes prompted by these changing models are not knee-jerk reactions or responses to problems. They are proactive changes. We're changing the way we serve customers, changing our business models to be successful in what is a fundamentally different industry from the past.

We have a well-defined succession plan for executives within Kodak's Health Group. We have a rigorous development process that we have really honed over the past years. Dan Kerpelman (former president of Kodak's Health Group) was in the leadership position for about three and half years, and when his departure was announced, my appointment was announced at the same time. That, for me, is a sign of stability. Dan had a great opportunity to return to Europe, being named a CEO and offered the opportunity to run a company. The fact that I was a member of the team reinforces stability.

DI SCAN: Where do you see your opportunities in the next year or two?

There are a couple of aspects of the vision that I would like to drive. One is that hospitals in general are becoming more integrated healthcare enterprises. It is happening around the world: networks of providers offering comprehensive care for patients. As we move more into healthcare informatics, PACS and RIS, we are selling more at the enterprise level. Putting together solutions, and bringing them together at the hospital level, is something that I want to make sure we approach with the best possible go-to-market strategies.

As healthcare enterprises become more interconnected, we are serving not just radiology but many specialties. This fits us well, because, with this transition to digital, most of our platforms are directly applicable to specialty markets. We have information systems, scaled-down PACS, CR, and DR products, all of which can sell into orthopedics clinics and women's health clinics and different specialties that are parts of a healthcare enterprise.

To do well at this, we are optimizing products across our different business units and delivering solutions to these markets.

DI SCAN: What about the increasing interest in the electronic patient record?

In the U.K., the National Health Service put together a huge countrywide tender and split the U.K. into five regions. This move is driving the electronic patient record and digitalization of healthcare. This is happening in many different markets. New European Union countries are moving directly to electronic digital healthcare, and that is a new opportunity for us.

We worked with Computer Sciences Corporation in the largest U.K. cluster to provide our enterprise information management, PACS, and digital capture products as part of the full solution that CSC is delivering. In other parts of the U.K., we are delivering pieces of the solution to other vendors.

DI SCAN: Kodak has done quite a number of acquisitions. One of your earliest and best was Imation.

That was a very important acquisition, and it was done extremely well. Much of the leadership team in our health group today are people who were part of Imation. But back then, making acquisitions was not a core competency of our company. Now it is. We have gotten better and better as we have done more acquisitions. We just completed the acquisition of Orex in March 2005. We did Lumisys a few years ago. The strategy is clear, the processes are better, and the understanding of how to drive integrations is better.

DI SCAN: You are in DR and CR. You have been developing mammography CAD. Where does this lead?

We have brought all the system design for DR and its manufacturing in house, because we decided that was an area in which we had to be vertically integrated to deliver value.

CAD is part of decision support, which is going to be a big part of digital imaging. CAD is also part of digital capture and part of PACS. In Europe, we have introduced a mammography CR product. CAD with CR mammography is going to work very well.

We have digital mammo film and a mammo printer. Thus, when departments go to digital, they can compare priors as they do the transition. We are introducing mammo PACS, and our mammo CR is completing clinical trials. Will we do digital mammography? That is another piece of the solution. We haven't done it yet, but it involves the kind of solutions we are tying together.

DI SCAN: I see a kind of ad hoc decision-making going on, but is there also global decision-making that drives the organization?

Absolutely, we have a global strategy. If you look at some of our recent acquisitions and joint ventures and partnerships, you'll see they all work toward building that digital transition solution. We purchased Orex to help us get into the specialty markets in CR. Orex products are very well suited to the specialty markets and well distributed in hospitals. They round out our portfolio. The Front Porch acquisition to acquire VIParchive software for enterprise information management fits right in. The Algotec acquisition fits in, and I think the PracticeWorks for dental DR and dental management fits right in. If you look at all of them, and you look at our strategy, everything fits.

DI SCAN: Growth brings challenges. What are you running into?

One is selling equipment like DR. We're used to selling media. Imaging equipment sells differently from media. Equipment is a one-time purchase. You sell three or four to a customer, and then you don't sell them more equipment for perhaps another few years. We have had to work on that as a company.

DI SCAN: I would think the challenges become more complex as you get into informatics, particularly an electronic patient record, which involves not only managing images but billing and patient demographics and admission data.

Film was developed as a full solution for customers. It was used to capture the patient image, to display the image, and to store the image. As we move into the digital world, it is about more than images. You can't really deliver the total benefits of cost and quality without integrating images and other information and looking at the radiologists' workflow.

In focusing on this, we realized that this is a space that we needed to move into, and we have done that fairly aggressively. But it is not unlike other Kodak businesses. We had the document imaging business involved in business systems using microfilm. We had the challenge of taking microfilm digital and providing solutions for the finance industry, insurance industry, and other industries that are very image data intensive. We have been through this before, and we understand how to put those solutions together.

DI SCAN: Are you getting into the pathology lab and other departments outside of imaging?

The IBA acquisition gets us into information systems across different hospital departments at enterprise level. But we also did the Front Porch acquisition, which provides the VIParchive product, the ultimate middleware for archiving medical images and information. This allows us to offer the industry's best EIM (enterprise information management) solutions. We can take images and information from across the healthcare enterprise and archive them. You can define rules and integrate different types of media and have the different access that you need for your workflow for all different types of information. It will automatically store them for the appropriate lengths of time. That brings us into a whole new area, which is being very well received - I think this was the key to our winning the NHS contract - and that is a secure e-mail product. We did this through a partnership with a company called Aliroo in July 2004. This product adds another piece to the sharing of images and information across the enterprise in healthcare in a secure format. Those acquisitions, as well as organic investments in RIS and PACS, are all signs of putting together this full solution set for our customers.

The other thing we try to do is to be very open in working with legacy systems. We have been working on integration for a long time. We understand that we don't own everything in medical and that we need to integrate with equipment and systems already onsite at customer facilities. This goes back to our beginnings in medical image printers. When we went into this market, DICOM was not around and interfaces were not well defined. As a result, we have more network devices than anyone out there, because we have more printers out there than any other company, and every one of these printers requires an interface, even today, to translate what it is getting into DICOM.

DI SCAN: How and what do you integrate?

You have to look at all the different things that need to be integrated to deliver a solution, and you have to understand a customer's workflow and how it operates. When you understand that, you vertically integrate the critical areas. We get to this point by looking at the different information systems and deciding where we need to be vertically integrated.

When it comes to picking partners, we look for companies that have the parts of a solution that we do not have. This has brought us to work with Cisco and IBM and many other companies in the healthcare field that offer different pieces of a solution.

DI SCAN: What drives these partnerships and acquisitions?

The interesting thing about Kodak, compared with other companies in the imaging industry, is that we are extremely focused on providing a specific solution set. We are focused on the products necessary to transition from film to digital healthcare. We are not trying to build the next multislice CT or MR. These are not the kinds of products that will lead to acquisitions by Kodak. They are not integral to delivering the solution, the digital transformation. We focus purely on this transformation. I think this differentiates us from the modality companies.

Other differentiators are our corporate culture and the history of customer focus we have demonstrated over the years. We have been in radiology since its very beginnings. This has given us an excellent understanding of customer needs that some of the IT companies in this space haven't yet developed.