In October 1999, Kent Thiry, a businessman with a positive track record in the dialysis industry and former Bain & Company consultant, was hired to lead the turnaround of a near bankrupt dialysis company called Total Renal Care (TRC). Warren Buffett says that turnarounds rarely turn. Intelligent fanatics have the capacity to lead turnarounds and Kent Thiry’s leadership at TRC, now known as DaVita HealthCare Partners (DVA), is a great case study.
From 1999-2016, Thiry turned DaVita from a $200 million microcap on the brink of failure into a $16 Billion midcap and the best dialysis company in the world. Business and stock performance has been stellar. DaVita revenues have grown from $1.3 billion to $14 billion, net losses of $147 million have turned to net income of $477 million LTM 2016, and retained earnings have increased from negative $100 million to a positive $4.4 billion. Thiry executed an astute capital allocation strategy without diluting shareholders. The company actually has 37 million fewer shares outstanding. Kent Thiry and his “village” have compounded shareholder value at a 31% CAGR during his sixteen-year tenure, producing a 70-bagger for shareholders. That compares to a 4.8% CAGR total return for the S&P 500 over the same time period.
In terms of clinical outcomes, DaVita went from mediocre (at best) to leading the industry. Today, 46% of DaVita’s facilities receive 4 or 5 stars on The Centers for Medicare and Medicaid Services (CMS) quality rating system compared to peers 22%. By the end of 2013 the company had a gross mortality rate of 13.7%, the lowest mortality rate in the dialysis industry. If your life depends on dialysis, your preferred choice would be DaVita.
Would it have been possible to identify Kent Thiry as an intelligent fanatic and form the conviction to buy and hold DaVita soon after he took control?
Ian Cassel and I propose that it is possible to identify intelligent fanatic led organizations early. There are patterns amongst great leaders and organizations. And yes, Berkshire Hathaway’s Ted Weschler knew the dialysis market very well and picked up on the pattern at DaVita. His fund disclosed it bought shares in 2003, but was likely buying prior. It is likely his investment has compounded at an 18% CAGR over a fourteen-year period. Berkshire Hathaway is now the largest shareholder in DaVita, owning 18.6% of the company. In 2014, Ted Weschler explained on CNBC why he likes DaVita.
In 1999, DaVita, then named Total Renal Care (TRC), was on the brink of bankruptcy. A hasty roll-up strategy had left the company in total disarray. The company couldn’t track their clinical outcomes nor could they correctly bill or collect, leading to delays in insurance reimbursement, their sole source of revenue. Cash flow was stymied with collection issues and the company was violating its debt covenants. If lenders had asked for advanced payment of any of the $1.4 billion in outstanding debt, TRC would have folded and the DaVita success story would have never transpired.
Previous CEO Victor Chaltiel and other executives had either left the company or had been fired. Employee morale was at an all time low. Fortunately, in October 1999 the board of directors was able to convince Kent Thiry to suspend his plan to spend six months with his family and instead attempt to turnaround TRC. Kent had successfully grown another dialysis business, Vivra, and sold it to Grambro AB for $1.5 billion.
Building a Village
Thiry first “got the right people on the bus.” Many of the talented individuals he knew and trusted during his tenure at Vivra joined TRC. Even with talent, however, the numerous nurses and front line staff at the dialysis centers had extremely low morale. Employee turnover was extremely high. Thiry’s first order was to turn around the beliefs and behaviors of employees starting in May 2000 at a company gathering in Phoenix Arizona. There, 500 to 600 clinic managers, senior managers and other staff discussed, debated and voted on the company’s new core values. The mission, values and culture were the levers to pull to turn DaVita into a great dialysis company. As Bill Walsh, former coach of the San Francisco 49ers, often said, “Champions behave like champions before they are champions.” Thiry and his team had to convince teammates to believe they were champions at rock bottom.
During the meeting, employees chose the new name DaVita, Italian for “giving life,” and chose the following core values:
- Service Excellence
- Continuous Improvement
- (later) Fun
The mission and core values were easy to understand and since employees chose them, they had ownership. DaVita’s mission and core values also are very similar to Southwest Airlines and other highly successful intelligent fanatic led organizations. This was not a coincidence as senior managers were benchmarking their culture against these successful companies.
Kent found ways to bring the mission and values to life. DaVita gatherings now had skits, senior managers dressed as the three musketeers, chants, call and response and other activities. While odd, each activity encouraged people to talk about the mission and core values of the company in a way that was memorable. A dry memo and other forms of communication, commonly used by organizations, would have been boring and fallen flat. Many of these activities acted as bonding opportunities similar to those found in other communities such as the armed forces and sports teams. The clips below were taken from Kent Thiry’s 2005 presentation at Stanford Graduate School of Business entitled “From Demoralization to Living Community”
Here is an example of the songs:
Chants such as “One for all, all for one” have been the backbone of DaVita. Thiry got the idea after watching the Three Musketeers and it encompassed the ethos that he wanted to create at the new DaVita.
Rehabilitating the culture of the company was not easy in the beginning for Thiry. He had to take a risk and persist with the new change to fully transform the business. The following video shows the response he received during the meeting in Phoenix in 2000 and the transformation in the ensuing years.
Kent Thiry and other senior managers also created the concept of a village in hopes that DaVita would become a “community first and a company second.” Such a mental framework made many of the changes they wanted seem logical as a community with quality citizenship which otherwise would look like a bad idea from the corporate perspective. Employees were considered teammates and if they “crossed the bridge” of believing the company was special, they became “citizens” of the “village” where the leader, Kent Thiry, known as KT was “mayor.”
To be a village, KT had to act like a “mayor” and treat his “village” like a true village. Town hall meetings were instated where employees could ask senior management questions and were meant to provide extreme transparency. DaVita also celebrated “village” victories. Once the company reached solvency, like an army general, Thiry announced victory. He recorded the following message sending it to 1,500 teammates.
All of these cultural changes could have been identified as early as May 2000 when DaVita’s share price was at its lowest. Over time, the cultural shift could have been evident. All these changes, while weird and highly unconventional, were the precursor in turning the dysfunctional team into a well-oiled organization achieving the best clinical outcomes in the industry.
DaVita has won multiple awards in different areas which shows how successful their “village” culture has become.
You Can’t Fix What You Can’t Measure
In 1999, TRC couldn’t track any clinical outcomes and loosely tracked financial transactions. DaVita was not delivering a net savings to our healthcare system. Managers spent a great deal of time openly communicating the elephant in the room, getting to solvency. A significant portion of time would also be spent talking about the company’s core values. What could have been identified during that time were the systems being developed to increase efficiency and productivity.
In the early 2000’s, the company implemented tracking and analytics so that clinical outcomes and financial results could be tracked and evaluated by everyone. Kent Thiry and all other DaVita “villagers” had a sense of accountability and used it as a way to motivate each other.
While employee turnover was extremely high when Kent Thiry joined TRC, the new DaVita culture retains them much longer. Employee turnover decreased by almost 50% between 2000 and 2005, which was a real cost savings to the company.
Incentives and Team Unity
DaVita honors their teammates’ values with celebrations and rewards for performance. The Triple Crown Profit Sharing Program either gives cash bonuses or 401(k) contributions to teammates. These bonuses can be earned in three ways: the village meets financial and clinical goals, teams meet various goals, or individuals demonstrate core values at work. No other dialysis company has similar financial rewards.
In addition, the DaVita Village Network was established as an unconventional benefit to maintain the DaVita “village”. Many of the DaVita teammates make less than $15 per hour and have few, if any, financial safety nets, so DaVita’s Village Network provides that safety net. Every teammate takes a dollar out of their after tax pay check to help a neighbor in financial need and DaVita at least matches it with another dollar.
By 2012, the program raised $2 million and the impact on DaVita “villagers” in financial need has been significant. There are many stories of the village helping each other out, but Kent often repeats the story of a lower-paid teammate experiencing difficulties. As a single mother with a daughter experiencing grand mal seizures, she was experiencing significant financial hardships. She sent the following letter to the “village” after receiving financial assistance:
“I came to work with a lingering worry in my heart. Ever since my daughter Emma has been in hospital, I have been afraid. Afraid that it would happen again to her. There’s a 50 percent chance of her having more seizures. Afraid of how I will provide for her financially, from the hospital bills calling my name from that devastating night. Afraid if I will make it. I’ve really tried to stay positive throughout all of this, but it is hard. Then during our weekly home-room, my manager presented me with a Village Network grant and letter. I cannot even begin to tell you how this has affected me today. Not only did I feel a huge relief from the recent pressures, but I have a feeling of family and love. A feeling of a village that will stop at nothing to help another person in their time of need. Never in my life have I experienced anything to make me feel this special. So from here on out, my day has a different outlook. My heart feels calmness. I feel calm simply because it has been proven to me this morning that the human soul is one of the most powerful forces in making good things happen. Thank you, DaVita, for showing me the true meaning of team. One for all, and all for one.”
By providing both the external financial and the internal higher cause motivations, DaVita has been able to significantly increase the efficiency of their work force. Retention of quality human capital and higher efficiency lowers costs delivering a net savings to the company and the US healthcare system.
Growth Through M&A
Companies that have successful M&A strategies often times have strong cultures. We see this in intelligent fanatic 100-Bagger case studies like Middleby Corporation (MIDD) and Patrick Industries (PATK). These companies, just like DaVita, are able to inject their culture into the acquired companies and get the most out of their often times neglected human capital. DaVita has been able to sustain growth by acquiring other dialysis companies. They have made three large acquisitions and seventeen smaller acquisitions since 2000. Below are the three large acquisitions:
Gambro Healthcare (Dec 7, 2004) – $3.05 Billion
HealthCare Partners (Nov 1, 2012) – $4.42 Billion
Renal Ventures Management (Aug 24, 2015) – $415 Million
Shareholder friendly management is a bit harder to forecast before their capital allocation record is evident and obvious. What can be observed early is how management and the CEO talks about their organization and shareholders. Interestingly, most intelligent fanatics do not spend a lot of time catering to Wall Street and even to their own shareholders. Their goal is first and foremost to provide the best experience for the customer and employees. By treating both of those groups extremely well, they retain talent and produce happy, repeat customers. Both of those driving forces, combined with growth, lead to ecstatic shareholders.
In Kent Thiry’s case, he often talked about the means to an end. The means for most companies is to run operations to achieve the end, greater profits. To Thiry and DaVita, more profits were the means to the end of providing better quality of care to patients and creating a better community for the company. To create the best dialysis company in the world, he had to invest heavily into its infrastructure and employees.
It also helps to observe positive capital allocation actions as time goes on by management. Unlike the previous leadership of TRC, Thiry and DaVita grew by acquisitions in a disciplined way. When acquisition targets were not available and shares were undervalued, the company repurchased shares. In 2003, DaVita purchase 27 million shares for $630 million and from 2009 to 2012 repurchased $1.2 billion worth of shares.
All Great Companies Started As Small Companies. Early on in DaVita’s transformation, it could have been evident that DaVita was an intelligent fanatic lead organization. You can often times spot intelligent fanatics early by looking for a leader with an unconventional strategy with a strong emphasis on culture and customers.
If you enjoyed this short case study, you’ll enjoy Intelligent Fanatics Project: How Great Leaders Build Sustainable Businesses scheduled for release on September 15, 2016.
In addition to annual filings, I used the following sources for information:
Kent Thiry’s 2005 presentation at Stanford Graduate School of Business entitled “From Demoralization to Living Community”
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