Breaking Out of a Strategic Box
The biggest issue facing RTI Surgical the year Farhat joined was a misperception of what the company was relative to what it had become—it was stuck in a strategic box. RTI was long known as an allograft company, but its strongest growth prospects lie in its spinal hardware and OEM segments.
Additionally, RTI’s industry was (and remains) in a long-term deflationary cycle. Annual industry growth rates are stuck at 1-2%. To grow by even 5% means taking share from someone. As the 15th or 16th largest spinal implant company, RTI had precious little market power.
Maintaining profit margins—much less raising them—must have seemed like a pipe dream on Farhat’s first day.
Recalling RTI in 2017, Farhat is candid.
“Three years ago, the business was losing money. We missed commitments. We lost credibility with investors. We spent $3 million fighting an activist.” He remembers. “Banks were not willing to refinance us. Our operating costs were too high relative to the revenue. There was nothing in the pipeline.”
“Our one platform was a solution looking for a problem, candidly. Our OEM business was ignored and, most of the contracts were coming for renewal within 12 months. There was nothing that connected the company together. There were no overarching priorities.”
As Farhat noted to OTW in 2018, “Growing spinal implant business is a delicate task.”
But, RTI also had significant (if hidden) assets. Farhat recalls: “RTI’s tissue business was very strong in terms of processing, sterilization and distribution. RTI owned its design history files, IP and registrations. RTI had very knowledgeable people who understood the opportunities that needed to be uncovered and connected the organization together. RTI did have differentiated products, but not enough. There were also some interesting technologies in the pipeline. RTI was undervalued significantly in my mind.”
Farhat started by focusing on the demand side of RTI’s business. “Creating demand in this market is a game-changer. We want to train doctors on new therapies and products. We want to increase RTI’s value to the surgeon.”
And…here is what happened next.
Changing RTI’s Hardware and Software
Farhat characterizes the process of transforming RTI as a series of hardware and software changes. In his own words, here is what he means.
“For hardware changes we reduced RTI’s complexity, sold the cardiothoracic business, narrowed our focus to key markets internationally and reframed how we engaged with industry partners, including organ procurement organizations. We improved the operational excellence of the company, removing $25 million in operating costs and strengthening the balance sheet. Our productivity on sales per employee basis improved 50% in three years.
“Then we set the stage for growth. We focused the company on two segments—OEM and spine. We rebuilt the OEM pipeline, signed longer-term contracts with our OEM partners and created four unique platforms on spine.”
“For software changes, we focused on creating a common culture where people are thinking and acting on behalf of the customer. We focused on breaking down silos and creating an environment ripe for innovation. This was a mindset shift for many in the company.”
“Just like athletes who compete and want to do better today than yesterday, we were looking for employees who embraced a growth mindset and the mentality of ‘Give me the ball, I’ll take it and run with it. You can count on me. And we will work together to win.’”
“We focused on clarity of responsibility, accountability and integrity and relentlessly drove alignment to get results. We gave people permission to do their jobs and showed them a career progression—whether professional or technical. We had a standard operating mechanism and cadence that served as the heartbeat of the organization and placed patient and customer interest at the center of our focus.”
“If you’re just a pedicle screw company – you’re screwed.” – Camille Farhat
