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Daou
Systems – a professional IT consulting and managing services company dedicated
exclusively to healthcare organizations
Technology
Computer Networks
(OTC: DAOU)
Daou
Systems, Inc.
412
Creamery Way
Suite 300
Exton, PA 19341
Phone: 610-594-2700
Daniel
Malcolm
Chief Executive Officer
Interview
conducted by:
Diane Reynolds, Co Publisher
CEOCFOinterviews.com
February 2003
Bio of CEO,
Mr. Malcolm was
appointed Chief Executive Officer effective January 1, 2003. Malcolm joined Daou in July
2001as Chief Marketing Officer and President of the Technical Services Division. In
his first year at Daou, Malcolm re-launched the brand and positioning of the Company, and
achieved strong growth in the government sector business. Additionally, he
positioned the client relationship and IT management practice, also known as the Daou
Technology Center, and the infrastructure services business for strategic growth in 2003.
This rebuilding
effort was a primary initiative at Daou for 2002. Prior to joining the Company, he
served as Vice Chairman and Chief Operating Officer of LaserLink.net from March 1999 to
March 2000. LaserLink.net was a branded Internet access firm, where Mr. Malcolm helped to
grow and energize the Company for a subsequent sale to Covad Communications, Inc. [COVD].
From April 2000 to January 2001, following the acquisition of LaserLink.net by Covad, Mr.
Malcolm was Vice President of Covad’s Consumer Business Division. From June 1996 to
February 1999, he was the Chief Operating Officer of American Healthware Systems, Inc., a
financial software and services vendor to acute care hospitals. Previously, he held senior
executive positions with Integra, Inc. from January 1991 to May 1996 and Shared Medical
Systems (SMS, now Siemens Medical Solutions) from March 1985 to December 1990. He served
in various roles during his tenure at SMS, starting as a regional sales manager, then
moving into executive-level business development and marketing positions and ultimately
serving as Vice President of New Business Development. Mr. Malcolm held various management
positions within IBM from July 1973 to February 1985. Previously, he was a commissioned
Officer in the U.S. Army. Mr. Malcolm holds a B.S. in Marketing from Drexel University.
Company Profile:
Daou Systems, Inc., provides professional IT consulting and management services. The
company provides these services to healthcare organizations in the design, deployment,
integration and support of infrastructure and application systems. Daou offers a range of
comprehensive services, from strategic consulting to IT application design and
implementation, systems integration and functional outsourcing.
There are two vital
components of every healthcare organization’s IT infrastructure: one is the
information technology itself, the other is the expertise to manage it. Daou Systems
provides both through a comprehensive range of services. They pride themselves on an
infrastructure services team that has unparalleled expertise in the design, deployment and
support of the infrastructure for today’s systems in healthcare organizations.
Daou provides
services to more than 1,500 healthcare organizations, including leading private and public
hospitals, integrated healthcare delivery networks (IDNs), managed care organizations, and
government healthcare.
Some key services
include:
- Management consulting
practice
- systems integration
practice
- application support
practice
A 20-year track
record of assisting clients at every key point in the application system continuum from
needs assessment to procurement to implementation to post-implementation support, offering
specific solutions to specific needs.
Daou also
understands emerging technologies and tries to prepare its clients to deal with the
impending revolution. Daou feels they can bring better knowledge to this intersection in
making new technologies work with legacy systems.
CEOCFOinterviews: Mr. Malcolm, please tell us a little about
Daou Systems.
Mr. Malcolm: “Daou Systems, Inc., provides professional IT
consulting and management services. The company provides these services to healthcare
organizations in the design, deployment, integration and support of infrastructure and
application systems. Daou offers a range of comprehensive services, from strategic
consulting to IT application design and implementation, systems integration and functional
outsourcing.”
CEOCFOinterviews: Why just healthcare?
Mr. Malcolm: “I think healthcare is unique and very
complex, but I think one of the benefits we offer is our dedication. Healthcare is where
we grew up and what we understand as I take a look at the number of the clinical systems
evolutions and the quality of care evolutions that we see. We are still a small company in
terms of size at about $38 million dollars and we can’t really be all things to all
people. Our roots are in healthcare and I think that is where we are going to stay for a
long time.”
CEOCFOinterviews: Where are your revenues coming from?
Mr. Malcolm: “We really have three primary markets; the
first, is the commercial provider marketplace, which is our primary market. It is made up
of community hospitals, the specialty hospital such as the heart or children’s
hospital, the regional integrated delivery networks and the national networks. Our two
secondary markets are the payer and the provider markets. The payer market is only
secondary based on size. In the provider market, 3,000 hospitals in the United States are
greater than 100 beds in size. When I look at the payer marketplace, we target ourselves
to that middle payer market and of those companies there are about 200 middle payers that
go across the country. The third marketplace is government health, the Department of
Defense, the Veteran Hospitals and The Bureau of Indian Affairs Hospitals.”
CEOCFOinterviews: What are the current challenges in the healthcare
space?
Mr. Malcolm: “There are a couple of challenges in the
healthcare space right now, one affecting the other, but these challenges only serve to
enhance Daou’s creditability and position for growth. One is that there aren’t a
lot of dollars in the provider and payer marketplaces. When you take a look at the payers,
the insurance organizations or HMO’s, there is tremendous pressure to sustain or
lower premiums and many of the payers out there find it very challenging to keep premium
increases under check. On the provider side, there are also significant reimbursement
challenges. The payers aren’t picking up a lot of money, so their reimbursement rates
into the provider hospitals have not gone up.
One of the things that we have seen here is under the headline of “biting the hand
that feeds you”. We had a hospital here outside of Philadelphia County, Chester
Hospital that actually filed a lawsuit for monopolistic practices against their biggest
insurance company, Independence Blue Cross responsible for over 70% of their
reimbursement. Because their reimbursement rates were so low, it was creating a major
problem and a crisis at this community hospital.”
CEOCFOinterviews: Can you tell us more on how this is
affecting hospitals?
Mr. Malcolm: “Well, although there isn’t much money
in the provider or payer market space, the need to improve the quality of healthcare stays
prospectively strong. Hospitals and networks of providers need and want to retain and
attract team medical staff and so they have to continue to evolve their clinical systems
to improve the quality of care and make information more available. More and more
physicians are coming into the system and want to order tests themselves and see the
results in an independent setting, either in the hospital or in their own physician’s
office or as they are traveling in their car. Therefore, what they need is image
management across an enterprise. Many more people are having MRI’s done or x-rays
done and physicians as well as patients want to be able to have that data available not
only in the hospital but also in the doctor’s office or available for a specialist
hospital that is making decisions about their care. Physicians want the ability to see a
lifetime clinical record or to retrieve information on episodes of treatment, so they need
the Internet capability there. In addition, there are departments that are also looking to
gain increased functionality like the emergency room, the operating room and obstetric
work in the delivery of a baby.”
CEOCFOinterviews: Whom do the hospitals usually turn to for
help?
Mr. Malcolm: “Since the dollars are very tight to
support this dramatic need to improve the quality of care, hospitals look to talk to their
trusted advisor on the challenges that this represents. In many cases, the trusted advisor
is the software company or the primary software company in which they have implemented
their systems. The big four software companies that we talk about are Siemen’s;
McKesson, Eclipses and Cerner. What they generally find out is that the current systems
they have installed won’t get them where they want to be. Therefore, they will need
to go to the software company’s new systems, their server-based systems. However,
those new systems will cost somewhere between $12 million or $15 million dollars and take
three or five years to install. Well these hospitals don’t have that kind of money to
do that. They would like to go that way, but they do not have the money or the time to be
able to do it. Therefore, a few of them, make the hard choices to upgrade, but many others
are left with the problem and to try to cope with that, they will put together an
inexpensive pilot to be able to keep some of the clinicians at bay until they figure out a
better strategy.”
CEOCFOinterviews: Do you offer a solution?
Mr. Malcolm: “At Daou, we want to be able to drive and
add value at the intersection of a hospital’s legacy applications. We want to take
these legacy applications and integrate them with new and emerging technologies. We think
we have the ability from all that we have done with our partners, our experience base, our
know how, that we can integrate these new emerging technologies with a client’s
current systems and give them about 75% of the function and value for about a third of the
price and about a third of the cost. That is our true value proposition back into the
marketplace.”
CEOCFOinterviews: I know you are there to ensure the dependability,
the compatibility, but security seems to be biggest issue facing everyone.
Mr. Malcolm: “There are a couple of pieces, and clearly
one of what we call our pillars of excellence is advance security and patient privacy.
Advance security is what we call Enterprise Image Management or the capability to move
your x-rays or MRI across the regional network or into your physician’s office. That
is one of major issues that the hospital faces, if you are taking your patient record and
making it available across the Internet to your physician or to yourself in a patient
point of view you want to make sure that information is secure and not being shared or not
given to anyone else. Therefore, to be able to have the capability for advanced security
and to be HIPAA, which is the government’s standards for patient privacy, in order to
be HIPAA compliant you clearly need to take a number of steps to do that. We do that with
our network, our firewall protection and some of our advanced security protection software
that is implemented. That is one of the pillars, which is needed to be able to
improve the quality of care and to give this independent location capability for patient
data.
Another need is for physicians who want to generate orders and see results in a location
in an independent basis, they need the ability to have a single sign-on to the lab system,
the radiology system, the pharmacy system and the lifetime clinical record. Right now in
many hospitals, a physician does not have that capability and paper records are not
necessarily readily available. Therefore, the physician must ask the patient, how he or
she is feeling or maybe even what medication they were previously given. This is because
the data is not easy to get to. The physician needs the capability to sign on once and get
to any of the systems available.
We aren’t a single software vendor, but we looked at the major single software
vendors that are out there, the MD Exchange, Sentillion, Common Access and Integrate, and
we know the pluses and minuses of those and based on a hospital needs we can represent an
appropriate one for them. The final aspect we look at is how do you support the physician
after they are using this technology as well. These are the areas that we call our pillars
of excellence. We’ve invested a lot of time and know-how and what we feel is that we
can offer to a hospital that trusted advisor roll or our experience to help them make the
appropriate decisions based on their budgets.”
CEOCFOinterviews: Can you tell us why you executed a work force
reduction?
Mr. Malcolm: “There was a piece of Daou that was built
on an acquisition strategy. Our original heritage company focused around network
infrastructure, the capability of bandwidth, of security, of implementing new networks
that would allow physicians access to data. Our network infrastructure was our core
business, but to that core, my predecessors had the vision that other, what I call,
strategic surround, services would compliment that core. Application support would be an
example. We have what we call the Daou technology center for ongoing and user support to
be a third. In addition, we have an integration group that develops integration
methodology and integration software to have systems talk together. We grew up through
acquisition and had a number of complimentary business units. However, in many cases as in
any internal organization, business units can grow into silos, where there are hurdles to
cross-reference the added value that they bring. We were facing some of that hurdle, where
it was more difficult to put together a number of pieces that would be a solution to a
hospital, because we had these various business-sized silos.
We have reorganization to where we have one person, Vince Roach, who is my Executive Vice
President of Commercial Operations, and Vince now has ownership over top of what used to
be these business units. Now he can more easily cross-mesh the needed types of services or
applications or network knowledge in order to offer a solution to our clients. When we
started to break down some the business unit silo affect, we found that there was a
redundancy in some of our administrative support and some of our overall resources, so
what we ended up doing is this consolidation. Unfortunately, there was a slight pairing
off of some of our redundant resources.”
CEOCFOinterviews: Do you see acquisitions in the future or do you
want to concentrate more on internal driven growth?
Mr. Malcolm: “We started up a very active business
development program last year in May (2002) and Bill Carlson, who has been in the
healthcare marketplace for a long time heads that up for me. However, the majority of what
we see here will be of organic growth or growth through our strategic partners. We
announced our strategic partner program and our first two strategic partners with the
vision of being able to extend the Life of Legacy systems and integrate emerging
technology. Our partner program will assist us and enhance the value that we bring to our
hospitals. Therefore, we are looking at our partner program and primarily organic growth
in the near future in order to fuel our revenue growth.”
CEOCFOinterviews: You are fairly new at the CEO position and have
done some reorganization of the management team, how has this affected the company
overall?
Mr. Malcolm: “I would tell you from a customer
standpoint it has been transparent. From a company standpoint, I think we improved
our efficiencies. I’ve been with Daou for 15 months and at that point in time I had
about half of Daou that I was responsible for and that was the technology services. I went
to the CEO position and Vince Roach now has taken over the Application and Business units.
From that standpoint I think our folks realize we are leaner and feeling the pulse rate of
our customer at the senior management level. Since I’ve given Vince all four
primary business unit operations, they see a potential benefit and a synergy to do
that.”
CEOCFOinterviews: Do you think you will see profitability in 2003?
Mr. Malcolm: “Yes, we can see profitability in 2003. We look to achieve a 15% growth
in revenue this year. We will see our operating costs increase based on the increase in
revenue but not on a linear basis. We will recognize economy as a scale and we will
achieve profitability in 2003. We think profitability will show itself on inconsistent
monthly profitability on the first half of the year and then come in to a more consistent
profitability on a monthly and quarterly basis starting with the third quarter of ’03
and moving forward.“
CEOCFOinterviews: Do you have short or long-term contracts with
your customers?
Mr. Malcolm: “That is a great question. We have a
blending of both. The majority of our revenue comes from projects that have a finite
useful life that is traditionally less than a year in length, they come from project work.
The minority of our revenue comes from on-going multi-year contracts. One of the
objectives that we have is to start to change that blend over time, shifting more into a
recurring revenue, multi-year contract but continuing the project work. What is nice about
Daou is that Daou did the hard thing first and that was to provide a quality and valued
service to our clients. If you look back at our revenue history, you would see that we
have had many long-term loyal customers that would seem like recurring revenue. However,
in reality Daou was only as good as its last project and because it continued to do
quality valued work for them, they continued to give us more and more work, but it was on
a project to project basis. I want to continue that type of working relationship, but I
also want to be able now that we are moving into the clinical systems evolution, grow more
long-term relationships and partnerships and be able to blend both the project and
long-term growth.”
CEOCFOinterviews: From an investor’s standpoint, they want a
company that has had long term standings with their clients so they know that there is
income coming in for the next five or ten years.
Mr. Malcolm: “Yes, and I think I need that blend quite
honestly to give the investors confidence on a quarter-by-quarter projection on where Daou
is going. Hence, that is why I want to mix the blend between maintaining our project work
with our customers, while signing some multi year recurring contracts as well.”
CEOCFOinterviews: Are you relying on any one client over
another for the majority of the revenue?
Mr. Malcolm: “No! What is nice is that there are a
number of large clients; there isn’t one major client that has a significant impact
or a significant percentage of our overall revenue.”
CEOCFOinterviews: You just signed a contract with the University of
Chicago. How is this going to affect the revenues coming up?
Mr. Malcolm: “I love to say it will increase them. The
University of Chicago is one of our long-term clients. The contract really has two parts
to it from our side. We have a long-term departmental outsourcing agreement, whereby we
are their internal network staff. Daou manages and staffs that department for the
University of Chicago and as part of our overall relationship, they wanted a new network
design and implementation that will carry them through their systems evolution. They were
able to acquire Daou and Cisco to be able to provide that and we are right in the process
now of implementing that $3 million dollar job. The other terrific part of it is that we
had a great deal of short-term anecdotal references that I can point to. A smaller
hospital, Memorial Hospital in Springfield Illinois just signed for a major network design
and implementation by us. Catholic Healthcare Partners, a very large regional
delivery network of services is doing significant business with us. Therefore, there
are a number of pieces that in fact we have been able to do and partnership arrangements
indirectly that are providing the revenue growth that we are hoping for in years to
come.”
CEOCFOinterviews: What do you feel will gives Daou a competitive
edge?
Mr. Malcolm: “There are two pieces that give us our
competitive edge. Number one it is our vision. We are putting together all of the pieces
that in a cash-strapped market place we can extend the useful life and value of current
systems and also give them the emerging technologies. We are putting all of the parts
together based on our experience and know-how and we able to give a total solution. It is
a unique packaging alternative with strategic partners. Number two; I think our company
size is a benefit. Being a $40 million dollar company, I think we are large enough to be
professional, we have best practices, sound professional management and implementation
skills but we are small enough to be very nimble and very flexible. We listen to our
customers and understand exactly what they need. I think a combination of our vision and
size puts together a good argument of why Daou.
CEOCFOinterviews: What do you feel is something that can get
a potential investor excited about Daou?
Mr. Malcolm: “I think that we have to do it the old
fashioned way, we have to earn it. I think that the biggest thing for the investors,
is the healthcare IT market or healthcare in general is a fragmented market that has an
awful lot of hype. One of the key elements for us is to come out with imaginative and
creative vision of packaging and then execute on that performance. From an investor
prospective, we need to be able to show the execution and implementation of that vision to
be able to allow them to see traction. Once they see that and understand that it was
planned then I think the investors will have a significant interest in Daou.”
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