By Chris Gaerig
In a struggling economy, investing large sums of capital without guaranteed returns is a risky proposition, something that Tony Richardson, VP of business development for service and sales company Oncology Services International (OSI), knows as well as anyone. But part of OSI’s business model is exactly that: The company has the largest inventory of fully tested refurbished radiation oncology medical devices and parts in stock, and acts as a speculative buyer in regard to used equipment. In addition to its national service business, it is this reliance on in-stock parts and equipment that helps OSI build long-term relationships with its customers. Recently, 24×7 spoke with Richardson about that business model, the company’s extensive service offerings, and the intricacies of refurbished equipment.
24×7: Could you briefly discuss the history of OSI?
Richardson: The company was started in 1985 as a service company fixing, initially, Philips linear accelerators. Our founder, who recently retired, was an ex-Philips employee who had come from the UK and become a pretty popular service guy in the New York and New Jersey service area. He decided, at the insistence of some of his customers, that it would be a good idea to start an independent company. He started out on his own and then, through organic growth, acquired more contracts and different products, growing the company steadily through the 1980s and 1990s.
Toward the end of the ’90s, it was a substantial company on the East Coast. That’s when our founder bought the parts company in Atlanta that became the source of a lot of the components that we have for fixing machines. It was the first foray into a series of acquisitions, which, by 2003, resulted in acquisitions of some smaller service companies on the West Coast and in the Texas area. This concluded with Oncology Services International becoming a national organization under a single ownership. As part of that series of acquisitions, we became the largest refurbisher of linear accelerators in the country. Now, we’re a company of about 80 employees, of which 60 are people who service or refurbish machines. We are a low-overhead organization, which is one of the things that has helped us to be a cost-effective alternative to manufacturers.
24×7: What equipment do you offer?
Richardson: We sell linear accelerators, but we also sell simulators and CT simulators. Essentially, we sell any equipment and technology within the radiation oncology department. We partner with some vendors to offer software products and accessory upgrades that accompany the units, in order to solve technical problems.
24×7: You sell to and service the entire US?
Richardson: Yes. The “International” in our name refers more to our equipment sales than to our service offerings. We sell linear accelerators pretty much globally. We’ve sold in South America, South Africa, parts of Asia, and parts of Europe. On the equipment sales side, we really are international, although 75% of our sales are still US-based.
On the service side of the business, about 90% of it is US-based, but we do have a service branch in Mexico, Puerto Rico, the Caribbean area, and other parts of Latin America. We’re covering a fairly large piece of ground.
24×7: What’s the distribution of OSI’s business between sales and service?
Richardson: Seventy percent of our business, in terms of revenue, is in service. I’d say 20% is equipment sales. And about 10% of our business is our parts business, which is a growing part of our business. The parts sales are also international. We sell and support quite a lot of linear accelerator service organizations in other countries around the world.
24×7: Where do you have service locations in the US?
Richardson: We have very strong coverage on the East and West Coasts and in the Midwest. We do not have the best coverage in what you might call the “corn belt” area, where there is a lot of space and not many people. We consider ourselves a national company and can reach, according to the demographic, probably 75% of cancer centers in the US with the staff that we currently have. We’re a national company, although there are some states that we don’t cover. But we are always looking for strategic “anchor” opportunities to grow into new areas.
The sales side of our business is significant. One of the benefits of selling equipment is a long-term service customer. When we sell a refurbished piece of equipment, our intent is that we work with that customer, provide warranty support, and at the end of the warranty, we can continue to supply support through service contracts. That’s been a proven method for growing our business and making sure we have a long-term revenue stream coming in from the products that we sell.
24×7: What sets OSI apart from its competition?
Richardson: The competitors that we have for preowned medical equipment—and we specialize in the radiology oncology field, we don’t play in any other field—very often are equipment brokers. They broker a deal between a seller and a new buyer. They offer contracts called “as is where is.” Then a customer buys and the equipment is “buyer beware.” But the bottom line is that people look at value and say, “I can buy a linear accelerator, and it will cost me X.” We’re selling on the concept that it’s better to be with a partner that is responsible for the turnkey solution rather than take the risk of buying a lemon and having a lot of problems with it.
24×7: You also have a test area?
Richardson: We are the only organization that deals with linear accelerators—outside of the manufacturer—that has its own testing bunker. We can test a machine—for example, run x-ray beam up to 25 MV—in a test bunker and make sure everything is working before it’s shipped. Other companies can’t run beam until the equipment gets to the customer’s site. There’s a quality assurance aspect to that, but there’s also a benefit that we can give to customers that need a quick turnaround.
Imagine that you have a site that’s earning revenue from a single machine and the facility needs a new machine. Any downtime while that machine is being changed out is actually lost revenue for the provider. They have to send patients to other centers and are not getting patient revenue. Time is money, as they say. We can have a physics group come in and do the physics commissioning on the new machine before it actually reaches the site. That can translate into many thousands of dollars of savings for a customer.
24×7: Your Web site mentions that you are not in the “sales business.” Can you expand on that philosophy?
Richardson: What we mean when we say that we’re not in the “sales business” is that we like to pride ourselves on being essentially a good neighbor for the radiation oncology community. We provide them with ongoing solutions, not just an initial sale and then walk away. Our whole business is driven by nurturing long-term relationships, offering good value, and continuing to be seen by our customers as a partner that can help them not only with the support of equipment but also as a consultant to help them solve technology problems that they are trying to grasp. We try to keep current with what’s going on in the field, and we often give our advice to help people who are trying to do some of the newer things at a price below OEM list price. We’re trying to build long-term relationships based upon value.
In our service business, we have over 90% retention on service contracts. That means that less than one in 10 of our customers will not renew their service contracts with us. Of those people that don’t renew, the most common reason given for failing to renew is that they buy a new piece of equipment from a manufacturer and have a warranty for that piece of equipment for a year. Quite a few of those customers will return to us after the initial warranty expires because of the relationship we’ve forged over the years.
24×7: You also sell refurbished equipment. Is all of your equipment returned to OEM standards?
Richardson: Yes. There are different levels of refurbishment. That’s something that’s negotiated with the customer making the purchase. However, in every case, irrespective of whether or not the machine is sold in the condition that we acquire it, we do full systems testing to the OEM acceptance requirements that would be applicable to it as a new machine. We change out any components that do not meet that acceptance requirement. And when we do the installation, we pass the OEM acceptance requirements with the customer’s physicist so that the machine is guaranteed to perform the way a new machine would. Typically, at that point, once it has been accepted as a clinically operating machine, we would enter into a warranty phase where we provide all parts and labor needed to maintain that machine’s uptime for a 12-month period.
24×7: Can you discuss these different levels of refurbishment?
Richardson: It’s a bit of an a la carte situation. Linear accelerators are generally pieces of equipment that have a pretty long life. However, they have many expensive components that may fail at any time. You could have a situation where a component lasts for 15 years and another one that fails after 8 months. We go through the equipment and make sure that we anticipate the reliability components—the things that are going to affect the uptime performance of the machine. If they are subject to wear and tear, we’ll replace those components as a priority.
In the refurbishment business, you can’t afford to replace too many components, because if you do, you price yourself out of the market. It’s like buying a car made out of parts. If you were to build a Ford from spare parts, it will actually cost you more than buying a new machine. You get to the point where it’s not a cost-effective solution. So we offer equipment that is as reliable as a new piece of equipment by going through our systems checks and procedures, and replacing components as required. Then, we offer a series of options that we can talk to customers about regarding levels of cosmetic refurbishment and replacement of noncritical components. Basically, it’s their choice. The customer can adhere to a budget that they feel comfortable with.
24×7: What kind of savings does OSI offer over the OEM?
Richardson: Typically, a full parts and labor contract through us compared to the OEM will probably save a third of the cost. With equipment, there is a little bit more of a variable, depending on the age and technology comparison. A linear accelerator of similar performance that’s 5 or 6 years old, compared to the purchase of a new machine, will probably run about 50% of the cost of a new machine.
What we find is that it’s actually not that cost-effective to sell machines that are much newer than 5 or 6 years old. Occasionally, you get a machine that’s only 2 years old. One of the only reasons to take a 2-year-old machine out of service is that maybe the original owner went bankrupt; there are no technical reasons for removing that machine from service. But the residual value in a 2-year-old machine, by the time it is reinstalled in a new location, is very close to a new one. So our sweet spot is machines that are in the range of 5 to 8 years old.
24×7: Do you perform depot service work, or is it all done on-site?
Richardson: These are big machines. The chances of taking it out of service, taking it to our facility, doing the refurbishment, and then reinstalling it are rare. The times we would do that with a customer’s machine is if the customer is moving the machine to a different location. We might, under those circumstances, instead of taking it from point A to point B, take it to our shop, do the refurbishment, and then send it on to its new home. That happens occasionally, but in most cases, if a customer wants work done on a machine—to upgrade it or refurbish it—then it will be done on-site. The machines that we refurbish in our shop are typically machines that we own—that we go out and buy for inventory. We will refurbish them before we resell them.
24×7: How often do you buy machines?
Richardson: We buy machines all the time; we’re a speculative purchaser. If there’s some equipment out there that we think is quality and resellable, we will competitively bid to purchase that equipment. Unlike some of our competitors, we buy for inventory. We don’t rely on having a buyer before we commit to purchasing a piece of equipment. We typically buy 25 to 30 machines a year. These are of varying ages and capabilities. Some of those machines will be relatively inexpensive to acquire, and we may strip them down for parts. Others will be new machines that we will definitely be turning around and reselling as a complete unit.
24×7: How does your trade-in policy work?
Richardson: We either seek out companies looking to sell equipment or they find us. We do buy trade-in equipment from the OEMs as well. One of the ways the economy has affected our business on the equipment side is that trade-ins from OEMs are reliant on the OEM selling a new machine. The economy did affect the number of good trade-ins because people weren’t buying new machines. In the last couple of years we’ve found it challenging to get enough quality trade-ins. People were hanging on to their equipment and not buying new.
In some ways, we’re symbiotic with the OEMs. Our success in the resale business is in part due to the success in the new equipment business. There is a benefit to the OEMs having a thriving preowned equipment business because it maintains the residual value of their equipment, particularly when it’s being leased by finance companies. You can make the analogy to a car: The residual value on a Mercedes is greater than the residual value on a Hyundai. That affects how much it costs to lease. We’ve tried to educate the OEMs that it’s advantageous not to see us as a competitor because we’re actually helping their cause when it comes to the value of their equipment.
We very rarely compete head-to-head with the OEMs for customers looking for a new machine: They’re either going to buy new or they’re looking for the lowest-cost way of achieving a technological solution. When they’re looking at the way that they can achieve a cost-effective technological solution, then they will look to preowned machines because essentially, there’s going to be no difference in the performance of the equipment or the reimbursement they’re going to get. It’s a complete mind-set: Do I want to buy new, or am I going to be prepared to work on a lower budget and still get the same benefit?
There’s always going to be a little gray area where people can flip-flop from one to the other, but most people go into a buying decision knowing that they’re either buying new or preowned.
24×7: Why is having a large inventory of parts and equipment a priority?
Richardson: It’s pretty important to us to be a reseller of inventory rather than a broker. We position ourselves to be a company to deliver what we say we’re going to deliver. The problem in brokering and not owning the equipment you’re going to sell is that there are often disappointed customers at the end of the day. The weakness to brokering equipment is that a deal may get struck to purchase a machine that the broker doesn’t own. What is essentially happening is the broker is waiting to find a customer before they’re willing to put money down to purchase the equipment. Once they have that deal, they work like mad to ensure they acquire the equipment. But very often, they may not be the successful bidder, at which point they have to go back hat-in-hand to the customer and say it’s been sold to someone else. We don’t like being in that position. If we offer a piece of equipment, we want to be able to demonstrate that we own the equipment and that it’s ours to sell.
Also, linear accelerators come in different models and capabilities, but there are also different energies and radiations. Users need to decide what they need, and those energies are very difficult to change in the field once a machine has been made in the factory. By having a broader inventory, we are in a position to solve more people’s problems because we have a variety of different machines that we can offer to customers.
24×7: Is that up-front capital investment ever a negative?
Richardson: I have to admit that there have been times that we’ve held machines for longer than we’ve really wanted to. Obviously, there’s a potential capital cost: A 5-year-old machine becomes a 6-year-old machine, and there is an intrinsic loss of value as the machine ages even though the technology and the wear-and-tear on the machine are more important than the manufactured date. It is a more costly philosophy than being a broker, but we don’t like being in the position where, when talking to customers, we aren’t able to assure that we can deliver.
24×7: How quickly can you buy a machine and turn it around for a sale?
Richardson: In terms of the physical work of refurbishing and repairing a machine for resale, the cycle time is from 2 weeks to 6 weeks. Some of the time really depends on whether or not we have a queue. Everyone has a backlog of some sort. If something is really urgent, then we put it to the front of the queue. When we’re selling machines, we ask, “When is the customer ready for the installation?” Quite often, there are delays. If it’s new construction, things take a lot longer and it’s not really an issue. In fact, we’re usually sitting on machines longer than we really want to because a hospital takes longer to get its construction done. However, if, for example, someone says, “I need the machine installed at this period of time because I have a down period,” we can be flexible to try and accommodate a quick turnaround. It’s just a function of applying the resources at the right time. 24×7 Industry Insider, 2011
Chris Gaerig is the associate editor of 24×7.