Further down the road, Manning anticipates other as yet unexplored uses for Buddy's technology. One possible market is drug manufacturers, who could use a Buddylike system to keep track of patients in clinical trials of new drugs. Another potential customer base is nursing homes, where Buddy could reduce the need for costly nursing staff by helping residents do routine tests themselves.
In Manning's view, tapping such potential will require a twofold effort. "We need to keep listening to our customers' reactions and suggestions," he says. "And we need to respond by continuing to innovate. If we can refine Buddy and perhaps come up with new versions of the system to meet different needs, we can remain the leader in the field even after new competitors come in."
For a man who still has a lot to prove and whose own projections don't show Buddy turning a profit until 1990, Manning has lost none of the excitement that made him quit McKinsey. It's contagious, too. Walter McNerney, a past president of Blue Cross/Blue Shield and currently professor of health policy at Northwestern University, has advised Manning since Buddy Systems's birth. "Tom really believes in what he's doing, and his energy and enthusiasm have gotten this thing as far as it is now," McNerney says. "If it keeps passing muster with the medical community, as it has so far, it's got a good chance of succeeding." Once McNerney's former employers and their ilk agree to foot the bill, Buddy could be a $200-million baby.
For an update on this company, see Anatomy of a Start-Up Revisited: Laying the Groundwork
Anne B. Fisher is a business writer based in New York City.
Research assistance was provided by Leslie Brokaw.
EXECUTIVE SUMMARY
THE COMPANY
Buddy Systems Inc., Northbrook, Ill.
Concept: Make and sell a computer monitoring system that delivers an "electronic house call," enabling doctors to keep track of the patients whom hospitals are being forced, by a financial crunch, to send home sooner than they used to
Projections: A 1989 loss of $400,000 but profits each year thereafter, with 1991 sales of $9.6 million yielding aftertax income of $902,000
Hurdles: Getting doctors to use a device that involves no direct observation of patients and that may raise liability concerns; getting major insurers to routinely reimburse for use of the system; sustaining operations over what may be a longer than anticipated product-acceptance and sales cycle
THE FOUNDER
Thomas J. Manning, 34, CEO
When Tom Manning started Buddy Systems in 1984, he was in effect moving from an ivory tower into the trenches. Since 1979 he had been a consultant in the Chicago office of Mc-Kinsey & Co., advising top management of health-care companies about how to adapt to a fast-changing business environment. It was in the course of that work that Manning spotted the trend he is attempting to exploit with Buddy Systems: the shift from costly hospital care toward treating more patients in their homes.
Before he joined McKinsey, Manning worked his way through Harvard, where he received a B.A. with honors in East Asian Studies in 1977, and earned an M.B.A. from Stanford in 1979. While at Harvard he helped run the $1-million-a-year Harvard Student Corp., an undergraduate-run business that provides a variety of services to students and publishes the Let's Go series of bargain-travel guides. "That experience was the root of my interest in someday starting and running a business of my own," Manning says. He is founder of a newly formed network of entrepreneurs in the Chicago area. The group, whose 18 members are founders and CEOs, meets every six weeks to talk about the issues and problems facing growing businesses.
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FINANCIALS
Buddy Systems Inc. Operating Statement
($ thousands) 1989 1990 1991
Revenues
System sales $0 $4,667 $7,486
Recurring (parts, maintenance) 0 1,024 2,158
Total Revenues 750 5,690 9,644
Cost of Goods Sold 400 2,584 4,480
Gross Profit 350 3,106 5,164
% gross profit 47% 55% 54%
Operating Costs
Sales & marketing $0 $1,073 $1,859
General & administrative 0 838 1,071
Research & development 0 567 744
Depreciation 0 64 102
Total operating costs 750 2,543 3,776
Operating costs as % of sales 100% 45% 39%
Operating Income (400) 563 1,388
Income tax 0 197 486
Net Income (400) 366 902
Net income as % of sales 0% 6% 9%
WHAT THE EXPERTS SAY
FINANCIER
PETER SANTEUSANIO
Partner at Hambro International Venture Fund, a $150-million Boston venture capital firm; has been on boards of three companies selling to doctors and hospitals
I think Buddy Systems has a next-to-impossible task in selling to doctors. Consider the question of liability. If patients stay in the hospital, then the liabilities are shared by the nurses and the hospitals; if they go home, potentially more of the liability falls onto the doctor. And the last thing in the world doctors want is more liability.
I'm also concerned about barriers to entry. It's not clear what's patented here. The people at Buddy allude to patent protection, but I think the barriers are, at best, questionable. Much of their data -- blood pressure, weight -- can pretty easily be gathered in other ways. Maybe the EKG is the one thing that they could put some barriers around, although I'm not sure. It would seem that someone in the EKG business, a Hewlett-Packard or somebody -- and there's fierce competition in this industry -- could knock this thing off. And they have a whole lot more resources.
