Tom Pirelli and His Exceptional Software Business

September 19, 2012 — 7 Comments

Tom Pirelli ESI Baby

I caught Tom Pirelli on his mobile phone one morning last week. He was near his house in Jupiter, Florida preparing his thoughts for an afternoon meeting about his latest venture, (something to do with using therapeutic lasers to manage chronic pain). He immediately strikes me as a man overflowing with energy, though he is not so young anymore.

I learn that he made a noble attempt at a leisurely retirement after selling his software company, Enterprise Systems, 15 years ago. But it would seem retirement did not fit his constitution. He has since started an ambitious foundation to provide better affordable housing options to impoverished communities in Mexico and Haiti. He has worked with USA Rugby, and took great pride in seeing his favorite sport included on the roster for the 2016 Olympics in Rio. And, of course, he has involved himself deeply in this new laser therapy business.

Tom is a success through and through with the sort of bona fides that might just turn a less humble man into a braggart. Yet despite his litany of accomplishments, this is the picture for which Tom is best remembered:

We’ll return to that later…

An Opportunity in the Materials Management Niche

You can infer the priority a hospital places on any given department by noting the prominence of its location. Revenue generating units like cardiovascular services are always in areas that are well-lighted and easy to access. Patient billing gets bright signs to advertise its offices – usually just off the main lobby – and the many clerks standing ready to help settle your accounts.

Materials Management is almost always hidden deep in the basement.

This is the group responsible for buying supplies, managing inventory, and overseeing waste and disposal. It is considered a well-run shop when products are available to clinicians, when it can conduct itself on an ever-shrinking budget, and when it remains otherwise unseen and unheard. Most other industries add a few functions to its workload and call it supply chain.

It is not a group upon which hospital executives heap attention or resources, forcing the better materials managers to master the skill of doing more with less. This is as true today as it was in 1981 when Tom started a company to address the needs of this largely neglected market.

Tom is a code jockey, a software developer, trained in the computer science labs of Princeton University in the late-1960s. He spent six years of his early career with American Hospital Supply (now part of Cardinal Health) in the outskirts of Chicago. He was Director of IS and charged with creating software the company could sell to its hospital clients. It was supposed to simultaneously help them manage purchasing and inventory functions while also (subtly of course) coax them into buying more from AHS.

During this time a 14-year-old kid at a local computer store introduced Tom to the newly-launched Apple II. Tom was smitten, intuiting immediately the disruptive potential for this new tool in a world then dominated by centralized mainframes.

He quickly shelled out $4,500 of his own dollars to buy one for himself (they were scarce at that time, and he had to pay $500 over retail price to get it), and he spent many a night teaching himself its ins and outs. Tom brought this convert’s zeal into the office, too, pushing AHS away from its legacy computing platforms and onto Apple. This was the future, he thought, and he would make his company a trailblazer.

Alas, as Tom described to me, he was soon fired from his job “because I bought too many Apple II computers for the company.” The top brass disagreed with Tom’s assessment. They did not see the coming PC revolution; they preferred staying yoked to the mainframe.

By that point Tom had spent plenty of time with hospital materials managers to understand their needs and recognize the potential for a technology that addressed those needs. He had a vision now. He was not going to let being fired extinguish that vision.

And so he started Enterprise Systems.

Earning His Keep with Customers

Mainframe computers had worked their way through government, academia, and the largest corporations before finally finding a place in the U.S. healthcare system. The largest hospitals were able to create full IS departments with programmers to code custom applications to automate the otherwise paper-filled processes of various departments.

Materials management, as could be expected, was low on the priority list. “IS kept telling them to wait five years and they would get around to them,” Tom told me. But when they checked up on their place in the queue a couple years later, IS had tossed the stick out a bit further. It would be an additional five years. No matter when they asked, it seemed that had to sit tight for another five years.

They were stuck, with no service by their own organizations, and frustrated. To boot, they were given no budget to seek systems from outside companies. Tom knew this, but he also knew their knack for always doing more with less. He had the blueprint for a solution in his mind (which he had refined over the years through countless sessions with the materials managers of two local hospitals…these guys being glad subjects as Tom plumbed their thoughts over beers in Chicago area bars).  His plan was to bypass the mainframes – indeed, the entire IS department – by building an application on the Apple II.

He would ask for no money upfront. Rather, he would bundle all the costs of the software, hardware and services into a usage fee that could be slipped innocuously into the department’s operating budget. It would be a line expense, approved at a lower level and with less executive oversight than traditional technology purchases. It would not be subject to the grueling capital planning process. And Tom would give his clients an unrestricted 30-day right of termination, eschewing the long-term contracts demanded by nearly all enterprise software licenses both then and today.

Tom had, in short, introduced one of the first software as a service (SaaS) models. This was some 20 years before Marc Benioff would popularize the concept with salesforce.com.

A Devotion to Innovation and Continual Improvement

“Those first five years were hard,” Tom shared. “Really hard.”

Let’s consider his business predicament. He had to build a new software system from scratch. While he had identified early-adopters who would serve as development partners and beta sites, they had no budget to help fund his vision. And there was no guarantee that, even if he built the best solution imaginable, his early-adopters would be able to pay him for it.

Tom was building on spec with a strong conviction that things would work out just fine if he did his job the right way. He would have to earn his keep, demonstrating overwhelming value to his customers, if he hoped to get paid for his efforts. A more conventional business mind might take one look at the risk – the utter lack of cash flow for several years to come – and pass on it.

Not Tom. He dove right in, starting with a purchasing module.

“The biggest problem hospitals had in 1981,” Tom said, “was managing all these purchase orders by hand. A buyer would have to sit at the typewriter, punch in the item number and quantity for everything he needed and then fax it to the vendor or call in each order individually.” It was the crux of the materials management process, it was manual, it was terribly inefficient, and it lent itself to too much human error.

To design his solution, Tom sat side-by-side with clerks at his early-adopter hospitals in Chicago. “We would watch what they did, over and over again. We just watched.” He would then go back to his Apple II, cobble together a prototype, present it to the users for feedback, and refine.

This iteration looped over and over and over again. Indeed, this would become Enterprise Systems’ hallmark approach to building new modules and enhancing its features. Development would always be tied closely to customer needs, and Tom would always stay close to development. This was integral to the culture he was building.

Tom was, after all, a coder. He made great pains in the early days to establish a rigorous and disciplined methodology for developing his software. Almost as a precursor to the now-dominant service oriented architecture, Tom set strict guidelines about maintaining a detailed library of business logic from which all developers could pull; he insisted that his programmers abide to a highly-modular structure to create the sense for users that they were getting customized features but without creating a code base that was impossible to maintain. As the company grew, Tom reviewed coding samples from any prospective developer, measuring each on his or her ability to produce simple, elegant logic. He points out to me throughout our conversation, that he built a team of brilliant people – calling out several by name – and gives them credit for the system’s ultimate success.

Tom spent 90 percent of his time on the road. He was not an office manager. He wanted to be with customers, understanding their needs and translating what he learned into a stream of constant product innovations. He came to know his customers, down to the lowest ranked end-user, on a deep and personal level. He walked with them as they conducted inventory counts on the patient floors. He sat next to them as they keyed in updates to their item master files. He worked next to them stocking shelves through the night on third shift. He watched. He listened. And ultimately he learned the master software design skill of balancing what users say they want against what you understand they need.

Slowly but surely the materials management system was coming together. His early-adopters became paying customers, and they sang the praises of Tom and ESI, granting him access to more hospitals to begin all over again the process of earning his keep. He sought out clients with reputations for intelligence and innovation, making them development partners to help refine his tool. He engaged prestigious institutions like Vanderbilt and Northwestern, using their insights to improve constantly and to catapult ESI’s capabilities beyond anything else that might try to copy his growing success.

Patient Capital

Despite the growth, the business side remained a slog. “We lost money our first four years,” Tom said. “And only turned a small profit in our fifth year.” Tom had poured every penny he had into the company. At one point he sold his car to make payroll. He was sleeping on an air mattress in a cramped Chicago apartment.

All businesses in their early stages, no matter how brilliant the concept or talented the leaders, rely on more than a little luck for their survival. For Tom and Enterprise Systems, such luck came when he was introduced to Bob Noyce, a founder of Intel and at that point its chairman.

ESI had already moved from the Apple II onto the growing PC platform with its Microsoft operating system. Intel was making its own big transition (a strategic inflection point as CEO Andy Groves would later describe it) from producing memory chips to re-tooling its entire business toward microprocessors. The famed Windows-Intel alliance was just beginning, and Noyce was eager to see industries of all stripes moving to the PC (and Intel) standard. And he liked Tom, believed in Enterprise Systems, and was therefore glad to help cobble together a syndication of venture funds to inject much needed capital into the business.

Noyce put in his own money as the ultimate signal of faith. As Tom describes the deal being made, this new investor reached into his wallet, pulled out a personal check, and proceeded to make it out for $250,000. He handed it to Tom, asking politely that he not cash it before the lawyers could finalize the paperwork.

This was the luck Tom needed to get over the hump. “That saved us,” he said. He pressed his lawyers to expedite all legal formalities. The company needed that money to pay a load of bills coming due.

With the venture funding, however, came a tremendous amount of pressure for Tom to revisit his billing approach and even to change the company’s revenue recognition policies. Even though the business had begun turning a profit, the venture capitalists wanted more and they wanted it quickly.

Tom stood strong on his approach to earning and keeping customer trust. He was building a business for the long-term and did not want to sacrifice that potential for a short-sighted attempt to squeeze profits. Noyce remained as a mentor and an ally, advocating for Tom’s philosophy; being that rare example of an investor who is willing to act as patient capital for an entrepreneur building his business the right (albeit slower) way.

Noyce continued that unflagging support until his untimely death in 1990.

The Consummate Showman

Now, finally, we can return to the infamous picture of Tom dressed as Baby New Year.

The occasion was a 1993 installation of the ESI system into a hospital in southern New Jersey.  In those days the hospital accountants wanted the materials management software to come online at the beginning of the fiscal year with a fresh inventory count. All the better to determine a precise inventory value in service of a pristine balance sheet. That meant the materials managers had to come into the hospital on New Years Eve and methodically record every inventory item late into the night. (The accounting department, of course, went home.)

That also meant that Tom and his implementation staff were standing right next to their customers, helping with the count and making sure all other aspects of the system install were going according to plan.

Such activities, with required attendance over a holiday, aren’t conducive to an environment of good cheer.

Over a round of beers client team leaders the night before, Tom made the off-handed suggestion that he pull a stunt at the meeting to kick-off the counting festivities. Perhaps, he wondered aloud, he could come into the room wearing nothing but a diaper, sash and baby bonnet and give a rah-rah speech to stir up some energy in the troops.

Now this is anything but out of character for Tom. He had long regarded himself as cheerleader in chief for his employees and customers. He liked off-beat high jinks. At user conferences he would come up with a theme, such as Star Trek, and parade around the meetings dressed as a proud Captain Kirk.

At one annual gathering of the Association of periOperative Registered Nurses in Anaheim, Tom heard rumors that a competitor had booked Chippendale dancers to entice the mostly female crowd to its event. Not to be outdone, Tom staged an impromptu cabaret in which he and eight of his top executives dressed in drag and performed Aretha Franklin’s R-E-S-P-E-C-T. “The screams were ear-splitting,” he recalled about the night.

Tommy and the Forgettables

Tom is, to say the least, a born showman, perfectly at ease with the sort of shenanigans few customers anticipate from the executives in charge of their technology (but which they love when it’s an authentic display of fun).

And so it did not take much urging that night from his accomplices at the bar to commit Tom to his Baby New Year act. The cabal held itself to a strict code of silence leading up to the act, hoping to make the charade an absolute surprise. All the better to raise the spirits of all those workers stuck in the basement of the hospital this New Years Eve.

And it worked. Of course it worked. The crowd was doubled over in hysterics at the sight of a grown man – their vendor! – in a diaper, doing a little jig on stage before sending them off to their task. The somber tone left and somehow the drudgery of counting IV tubes and catheter bags late into the night seemed a bit less mind-numbing than it had before.

 

Tom Pirelli baby B

On Legacies

Tom did a remarkable job building Enterprise Systems, Inc. from the smoldering ashes of the career terminated at American Hospital Supply into a company that carved a prosperous niche in the previously unrecognized market for materials management information systems.

He went from two customers on the outskirts of Chicago willing to dip their toes in the water because their IS departments ignored them (and because they believed in Tom), into hundreds of loyal hospital users across the country.

He bootstrapped it with all his money, found a way to earn his keep with customers, and ultimately built a business with sales around $50 million and a successful public offering on the NASDAQ exchange.

By any account, Tom had built his business into a roaring success. And yet, as he recounts, “the thing people always say they remember when I run into them is that time I was Captain Kirk, or performed as the Blues Brothers, or came out dressed as the New Year’s Baby.” I didn’t sense he was necessarily disappointed as he says this.

Such memories do nothing to dampen his legacy. They provide more vivid color, if anything. And I can attest from personal experience that they do not define his impact on the industry.

For six years I was a sales and marketing executive with a software company building its own solution for hospital materials managers. It was 23 years since Tom had first introduced his ESI purchasing module, but we would call on accounts that still refused to try anything else. “Why should we,” they would ask, “when it already does everything I need it to.”

In our management meetings we would openly say we aspired to being the next ESI. When we launched a promising new product to help hospitals manage their supply contracts (a surprisingly complex endeavor), we sought to emulate the approach Tom took with his development partners. We tried building a community of forward-leaning early-adopters, holding them close and picking their best ideas to guide our own product design.

Yet try as we did to reverse engineer his tactics, we never could do it quite like him. And despite such lofty aspirations, such early promise, such a solid example on which to model ourselves, we plateaued early and could never win the hearts of customers quite the way Tom did.

Strangely enough, our inability to supplant him provides perhaps the greatest insight into his accomplishments – that in the fast-evolving world of software technology, Tom still had loyal users extolling the virtues of his product a full generation after it first came to market. This is, I think, his proud legacy.

Paul Dryden

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7 responses to Tom Pirelli and His Exceptional Software Business

  1. I was one of those early adopters and followers of Tom Pirelli and ESI! The story above is absolutely accurate and brings back many memories of the development years of ESI. Tom was not only a great visionary, but he formed a company made up of other individuals who were dedicated and hard working folks — not to mention, they all shared Tom’s desire to have a good time while changing the industry! I have personally admired Tom’s dedication to what he believes in and his desire to be the best at whatever he does. He is truly someone to be admired! Lastly, it should be noted he was not too long ago inducted into the Healthcare Supply Chain hall of fame – the Bellwether League!

  2. Great article on my former employer. I worked for Tom and ESI from 1984 – 1994, what a great time. I learned a lot from that man, most importantly the customer is the most important person in any company.

  3. Maria Gomez-Ward October 11, 2012 at 6:07 pm

    He also created one of the best companies to work for – it was intense, high energy and so much fun, we became like one big family. Many of the people who worked there still keep in contact – we are all on facebook – he built a company and a family . I worked there from 1992 to 2000. It was the best place I have ever worked and we all worked hard but the memories are still precious! He also was involved in charity – even back then, so it does not surprise me that he is still doing charity work. I am glad to hear that he is still going strong.

  4. I came across this article because I was wondering what Tom Pirelli was
    I was wondering what Tom Pirelli was doing these days. I couldn’t agree more with Maria’s description. I grew so much professionally and personally – sounds like cliche but it is the truth. I loved the fact that we were able to empower ourselves. We worked hard and played hard -wonderful synergy of fun and hard work. I have lots of fond memories. Once Tom P. showed up in a Turkey suit and said “hey, I heard a Turkey runs this company!”. A person at that level could laugh at himself!

  5. Thanks for the update on Tom. I first met him when I was up at ESI in 1989 for training as part of the new VHA-NET Customer Support Team. That was 25 years ago this month, and I was wondering what happened to him. I loved his energy and his crazy antics & videos.

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