playbook-Dancing with Elephants-August 2011

playbook-Dancing with Elephants-August 2011

Little Preventice is thriving by working with Mayo and Merck.

Many times, I have heard entrepreneurs begin a sentence this way: “If only we could get into IBM to pitch a partnership . . . .” Or Pfizer. Or Target. Or Cargill. 

The appeal is obvious. Big companies have the money, the customers, the distribution. They can do much more, and do it more quickly, than an entrepreneur can on his or her own. But it’s not easy to form real partnerships with such firms. 

The leaders of Preventice in Rochester, a four-year-old software company now with about two dozen employees, know about working with the likes of IBM. Preventice cofounder and CEO Jon Otterstatter was an IBM employee and later chief technical officer of SPSS, a business analytics software firm that IBM acquired in 2009. Preventice Chief Technology Officer Mike Smith held the same title with IBM Smart Business Platform. Other Preventice leaders previously worked at IBM, Hyperion Solutions, Siebel Systems, and Oracle.

Otterstatter and three others launched their firm in 2007. They planned to use their collective experience in enterprise software to create solutions for health care. 

“We have a drive to innovate, to dramatically decrease costs, to dramatically increase reach,” says Dyke Hensen, Preventice’s senior vice president of marketing and business development. “It is not exactly a novel idea, but it seems to be a novel idea in health care.”

Preventice funded its operation with personal capital and by selling technical services. “It’s what we call programming for food,” Otterstatter says.

The health care field is an attractive target for the firm; the leaders’ perspective is that our health care model is broken and in need of new tools, processes, and players. Preventice has as good a chance as any of being a change agent. But from the company’s earliest days, its leadership team knew that achieving their goals depended on forging partnerships with larger firms. The right larger firms.

They had a relationship at Merck & Company from their work in enterprise software. Merck has almost $46 billion in annual sales and 93,000 employees; addition errors in its IT budget might fund Preventice for a year. 

However, Preventice did not pitch a new platform to Merck’s IT executives, instead focusing on developing Merck-branded applications sought by brand managers and other line managers. Brand managers at a place like Merck control enough marketing budget to fund ideas meaningful to Preventice, Otterstatter notes. One example is Merck Vree, an iPhone/iPad application for patients just diagnosed with type 2 diabetes, enabling them to track diet and exercise and otherwise more easily adapt to the new normal of being diabetic. 

Another app is iManage Migraine, which provides a suite of educational tools, real-time tracking, and analytical capabilities to help patients manage their migraines. Both apps are free to download at the iTunes AppStore.

A handful of Preventice-built apps were the basis for Merck’s landing at number four on the 2010 InformationWeek 500 ranking of the most innovative companies in IT. Merck got the award and all of the ink, but it was largely Preventice behind the curtain. 

From the outset, the Preventice team wanted to partner with a leading health care provider and content provider. The Mayo Clinic, just three miles away, was at the top of its list. Discussions with Mayo started shortly after Preventice was formed; more focused talks, which led to the current business relationship, picked up steam in August 2009. 

A Mayo strategy has been to extend its reach without building new buildings. Simple tools such as iPhone apps are one piece of this initiative. Another is a remote patient-monitoring device developed by Mayo cardiologists; Mayo was seeking a partner to finish developing the product. 

“There has to be a way to monitor the patients, rather than keep them in a hospital,” says Steve VanNurden, chair of Mayo’s Office of Intellectual Property. “That is what drove a lot of these decisions” that led to the partnership with Preventice.  

Preventice took over development of the patient monitoring product, called the Bodyguardian. While that product is still in process, the company has been working on other products as well. The first release so far is a tool for skin allergy sufferers which uses the Mayo Contact Allergen Replacement Database. CARD has 8,100 known ingredients cataloged from about 7,000 commercial skin care products. The application, launched on the Web with mobile versions coming soon, allows allergy sufferers to identify which skin care products have chemicals or allergens they should avoid.

Among the pitfalls for small companies dealing with giants is the risk that the commitment will suddenly evaporate, like Lucy pulling the football away just as Charlie Brown comes in for the kick. But Mayo has skin in the game with Preventice; it made a direct equity investment in the firm. VanNurden says that the relationship makes good strategic sense for Mayo and is part of a series of such ventures in the past dozen years or so. He adds that if the goal is getting innovation into the hands of patients, the work needs funding. Otterstatter says Preventice is pursuing a similar equity relationship with Merck, but can’t comment beyond that.

Another risk for small-company partners is that Big Company likes your work so much they work you to death. When can you have 2.0? Or a Spanish translation? Otterstatter says the ability to say “no” is key to managing a large company relationship. He calls his style a “controlled no”—he tries to never surprise his partners, never be disrespectful, and see what he can provide, even if not exactly what was requested. 

“The higher you go up in the management structure, the more understanding they are,” Hensen says. “Lower in the organization is where you get your brains beat in.” 

Otterstatter says revenue for the year will be less than $10 million. In the past, Preventice sold its services for a fee. But increasingly, the model going forward is software as a service, so the firm plans for revenue to ramp up quickly as users are added for each application. 

Preventice sees its team as part of a wave of entrepreneurs coming into health care delivery, who have no investment in the status quo and plenty of experience solving complex problems. As Otterstatter puts it, “We couple ourselves with a gold standard like Mayo Clinic, and the magic can start to happen.”

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