April 29, 2009

Profile - McKesson and Comparative Advantage

On Monday, I wrote about corporate philanthropy and comparative advantage. I argued that companies should focus their corporate philanthropy programs on contributing resources to which they uniquely have access, resources that they can provide at a cost that is lower than the beneficiary would pay on the open market. As such, I argued that most companies should donate primarily expertise and perhaps products, giving cash only to leverage such donations. Today, I want to illustrate that theory.

Last week, I had the chance to speak with Carrie Varoquiers, President of the
McKesson Foundation and Vice President of Corporate Citizenship at the McKesson Corporation. Back in February, I wrote a post on the impact of the recession on CSR. Carrie commented on that post, saying, in part:

“I have also noticed a dearth of corporate operating foundations, which is actually quite
surprising. Most corporations have institutional knowledge and in-house resources to create and manage social benefit programs, especially if their Foundation’s mission is well aligned with their business. It’s very curious. Perhaps we will see more of this model moving forward.

I’m not saying traditional grantmaking corporate foundations shouldn’t exist, I am simply saying that it’s not the only option for creating meaningful social change.”

This way of thinking is very much in line with how I think about corporate philanthropy and comparative advantage, so as I was writing Monday’s post, I reached out to Carrie to hear more about how she approaches this issue.

First, a bit of background: San Francisco-based McKesson describes itself as “a health care services company dedicated to helping its customers deliver high-quality health care by reducing costs, streamlining processes, and improving the quality of care and patient safety.” According to
its profile on Hoovers.com, the company is a pharmaceuticals distributor (the biggest in North America) and a medical supplies wholesaler; it also provides software and technical services to insurers and health care providers. The publicly-traded company’s 32,000 employees generated 2008 sales of $101.7 billion.

Carrie joined the McKesson Foundation in 2003 and took on her current role last year. She told me that, historically, the company practiced more “traditional philanthropy”, giving small grants to a wide variety of nonprofits because it was the right thing to do. Recently, though, McKesson engaged in a strategic planning process for its community engagement function. As a result, it’s decided to focus its efforts on chronic disease management, beginning with diabetes.

McKesson’s approach to this issue goes beyond aligning the company’s cause with its business goals, which has been the extent of strategic philanthropy for most companies. McKesson is also aligning the types of resources it donates with its own comparative advantage. As Carrie points out, the company could have chosen simply to make a grant to a nonprofit that works on diabetes management. Indeed, cash is a resource of which McKesson has plenty – as of December 31, 2008, its
financial statements indicated that it was carrying nearly $1.2 billion of cash and cash equivalents on its balance sheet and stockholders’ equity was close to $6.2 billion. However, as I discussed yesterday, McKesson does not have unique access to cash. Instead, it has unique access to its professional expertise – and Carrie told me that the company has professional experience in chronic disease management.

According to McKesson’s new strategy, while grantmaking will continue to be a component of its philanthropic strategy, the company will also operate its own social engagement programs – something along the lines of the corporate operating foundation Carrie mentioned in her comment. The company will be contributing its expertise in chronic disease management, which I believe will enable it to contribute resources of greater value than the cash it could contribute for the same cost to the company. Currently, the Foundation is investigating the feasibility of a diabetes cell phone project, whereby automated calls are made to diabetes patients, who respond with information about their blood sugar levels; the technology flags patients that require follow-up. The technology, which Carrie described as inexpensive, has demonstrated decreased ER visits in pilot programs.

I’m especially interested in the fact that the company is experimenting with an earned-income strategy for its foundation. The McKesson Foundation hopes that, by selling the program to insurance companies based on the expected cost savings, it will be able to subsidize the cost of providing it free to uninsured patients in community clinics. Through this earned-income approach, Carrie hopes not to get more money into the Foundation’s endowment, but instead to be able to expand this healthcare quality improvement to more patients.

I asked Carrie why, given the apparent market opportunity, McKesson is researching this project through the Foundation, instead of a business unit. She told me that, in such a large, geographically dispersed company that provides so many services, “This project is in its infancy, so little data is available to prove the viability of this disease management strategy yet”. She described the company as mission-driven - "everything that we're doing is improving patients’ lives" – so the business unit presidents see all of their possible business opportunities as beneficial to society and, within that, look for the largest profit margins and the largest markets. While the project has not yet met the investment criteria for McKesson’s business units, the corporate social engagement function has the flexibility to take it on if the feasibility study proves successful.

I also asked Carrie about some of the challenges she’s facing as she takes this relatively unorthodox approach to corporate philanthropy. She talked a lot about innovation, and the lack thereof in the very traditional field of philanthropy at Fortune 500 companies. She told me that change will have to be driven by the leadership of these companies, or by the analysts who evaluate their activities. She also acknowledges that this approach to social engagement is much easier for her to implement, given the industry in which McKesson operates – “I don't know how that would work if you were looking at a company like Gucci”. I was particularly intrigued by a comment she made earlier in our conversation, about the need to take care in carving out a philanthropic focus area when a company decides to donate the resources it uses to make money – she told me that, when the McKesson Foundation attempted a similar social engagement approach a few years ago, the project ended up in direct competition with one of McKesson’s business offerings. As such, it was important that she identify an area that the company is not in and doesn’t plan to expand into, at least in the near future.

I’m really excited by McKesson’s approach. As I said on Monday, I think companies can dramatically increase the impact of their community involvement, without changing its cost to the company in question, by leveraging the very resources that make them successful in business. McKesson has a comparative advantage in providing expertise about chronic disease management, and that’s relatively more valuable that its cash contributions. I look forward to following this story to see how it works out and what we can all learn from McKesson’s approach.


  1. If you read just a little between the lines, it sounds to me like Carrie is saying that the initiative will emanate from the Foundation until they've determined its profitability. Interesting approach. You could be cynical and say the Foundation is a great place from which to do the beta on the initiative without impacting the P&L of a business unit. On the other hand the notion of a company's CSR platform being aligned with its R&D agenda could be regarded as visionary. For what its worth, I absolutely agree with your approach to CSR and think McKesson is certainly a company for all CSR practitioners to keep an eye on.

  2. I imagine that it would be difficult to spin a Foundation initiative out into a business unit, due to IRS regulations surrounding self-dealing. Company foundations are only allowed to benefit companies in ways that are "incidental and tenuous". That said, I'm not sure if (or how) the IRS would prevent a company from taking advantage of learnings from a CSR initiative, along the lines of your R&D comment, above - anyone know of a good example?

    Here's is a list of resources on self-dealing, from the Foundation Center: http://foundationcenter.org/grantmakers/topicalresources/list08.html

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