He built firm by selling efficiency

Silicon Valley Business Journal

Douglas E. Caldwell

Out of a near-tragedy, Randy Lipps has built a multi-million-dollar corporation dedicated to more efficient health care as a way to improve patient safety.

Mr. Lipps is founder, chairman, president and chief executive officer of Omnicell, Inc., which builds products to automate and computerize the medical supply chain within hospitals for everything from surgical supplies to medications.

He got the initial idea as he was anguishing over his just-born daughter Sarah in 1991. She was born with hyaline membrane disease, which affected her breathing. As she was being treated in a trauma unit at the University of California, San Francisco, Mr. Lipps, an industrial engineer who had helped develop automation during a career with American Airlines, watched how health care was being administered.

"She had a dedicated nurse, 100 percent of the time, 24 hours a day," he says. "But most of her time was spent in what I would say was in less-impactful activities."

Those included finding medical supplies, doing reams of paperwork and other tasks that to Mr. Lipp's airline logistics-trained mind seemed inefficient.

"They'd spend a lot of time doing extensive documentation... sure, on my daughter, but a lot of times it was just on extraneous stuff," he says. "Airlines used automation very effectively to help them put resources in places where they could be best leveraged, and healthcare hadn't had the time to figure that out."

Once his daughter was out of danger and on the road to good health --she's now 13 and doing fine, he says -- Mr. Lipps began deeper investigation into how hospitals were being run.

"What I found was just an unbelievable amount of 'money,' as I call it, laying on the table because they didn't have the systems and processes in place to deal with it," he says.

Mr. Lipps hired artists to sketch out his ideas and with those in hand he made his first presentation.

"To my astonishment -- I wasn't in healthcare, I didn't have any money -- this hospital said 'sure.' I think that's an example of how hungry healthcare is for someone to solve some of their problems," Mr. Lipps says.

It took six months of work by Mr. Lipps and several Stanford University graduate students, working in his garage, to develop the first prototype of a system to automate many of the mundane but mandatory manual tasks handled by nurses.

From start through delivery of the prototype to Sequoia Hospital, Mr. Lipps says he spent a total of $85,000 out of an initial investment of $100,000 -- "$10,000 from 10 guys who'd never miss it," he recalls.

"While he was somewhat unproven, he's a very insightful person," says Bill Younger of Sutter Hill Ventures, one of the original 10 who put up his own money. "He had worked at American Airlines so he had seen what automation does for a well-established industry and he was trying to bring some of those same ideas to the hospital industry."

Since then, Sutter Hill has been an investor and Mr. Younger is on Omnicell's board.

When questioned how he could start his company and run it to the point of getting its first product in place on a Silicon Valley-paltry $85,000, Mr. Lipps replies, with a laugh, "I guess one of my traits is I'm kind of a dirt-cheap kind of person."

The prototype worked from the first and Sequoia Hospital has since bought more Omnicell products, he says.

From that point, Mr. Lipps was able to get venture capital and move out of the garage in 1993. Since then, Omnicell has grown and moved to larger quarters several times. From its first product, Omnicell has expanded its product line to "include systems for physician order management, automated pharmacy retrieval, medication packaging, medication and supply dispensing, open bar code supply management, nursing work flow automation at the bedside, and Web-based procurement," according to a description on its Web site.

Mr. Lipps says the sales cycle for healthcare products is a long one because consensus has to be built among many different groups within a hospital.

"A hospital is really a political animal," he says, where it's difficult to ferret out who makes the buying decisions. "You can get the users very excited about it but you might not be able to get the technical people involved," he says. "But what's making it easier today for us is the patient safety issue which has become a strategic issue for every healthcare institution. Our system is one of the easiest to deploy because it's a peripheral system, kind of a like a printer is to a computer."

Like many young businesses, Omnicell has ridden its own roller coaster of growth and retrenchment.

"When you have hard times, you feel like you've failed people because you hadn't had enough leadership or desire. A year ago, we had a lot of problems at the company and our stock was at $2 a share. We had to have a 10 percent layoff which was a real painful thing to do. We had to reinvigorate the company with some different types of management and different skill sets. And when I was doing that, I knew it was the right thing to do, but most employees at the time don't recognize what the result would be. It's like raising a child in the early years; they don't appreciate all the things you're doing for them," he says. The Nasdaq-listed stock was recently trading at over $13.

"He is one of the bravest guys I know," says Steve Diddams, founder of Diddams Amazing Party Stores, a Palo Alto-based chain of stores, who knows Mr. Lipps from their work at Menlo Park Presbyterian Church. "He's really the kind of guy who can make some really tough decisions and puts business first."

Friends remark about Mr. Lipps' off-work sense of humor and his family. He says he learns valuable lessons at home to apply at work. He has nine children, with a tenth on the way at the time of publication of this story. With that many children, Mr. Lipps makes a hobby out of studying birth order and its apparent influence on behavior.

"A big family is not much different than running a big company," Mr. Lipps says. "You've got to delegate and the older kids have to help with the little kids. The logistics of life are really borne by the whole family, not just the parents. Just like at work, you've got to size up people and try to put them in the best spots to leverage their abilities and build their confidence."

Douglas E. Caldwell is associate editor of the Business Journal. Reach him at (408) 299-1835.

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