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 / Winter 2004 / Issue 37(originally published by Booz & Company)


Kenneth W. Freeman: The Thought Leader Interview

The founding chairman and CEO of Quest Diagnostics identifies the five stages of a turnaround.

Photography by Peter Gregoire
In business, transformation has become the rage. Securities analysts tout companies that have successfully transformed. Publications — strategy+business included — dissect the elements of transformations. A growing library of management books (including several praised in this, our annual “Best Business Books” issue) provide transformation rules and lessons. But the fact is, the confluence of foresight, ability, and timing that results in a business transformation is a rare event.

Kenneth W. Freeman has run — and won — this trifecta. As the founding chairman and chief executive officer of Quest Diagnostics, he took a battered firm, spun off in 1996 from a distant corporate owner, and made it the eighth-fastest-growing earnings engine in the United States, according to Fortune magazine. During a five-year period ending in 2003, Quest Diagnostics delivered profit growth of more than 56 percent annually. During the same span, Quest shares appreciated 730 percent, the second-highest percentage gain among all S&P 500 companies. Although its growth was certainly abetted by a series of strategic mergers, an enormous part of the company’s success derived from the re-creation of its culture.

“I wanted to take a company that was hostile and hierarchical, and not particularly disciplined, and create a values-oriented, honest, disciplined company where the people respected each other,” Mr. Freeman says. “I had to model the behavior at the grass-roots level.”

Most readers have been, quite literally, touched by Quest Diagnostics, which is based in Teterboro, N.J. Quest Diagnostics was originally cobbled together by Corning, the glass company, from several hundred acquisitions during the 1980s and early ’90s. Under Mr. Freeman’s stewardship, today Quest Diagnostics is the largest medical testing firm in the world, with 37,000 employees performing tests on 130 million patients annually, for about half the hospitals and physicians in the U.S.

Quest Diagnostics’ recent transition to new leadership has been as exceptional as its evolution from chaos to growth. Only three years into its spun-off life, Mr. Freeman identified and began grooming his successor, Surya N. Mohapatra. Having passed the CEO title to Dr. Mohapatra earlier this year, Mr. Freeman, now 54, will relinquish the chairmanship to him this December. A few months before the scheduled handover, s+b editor-in-chief Randall Rothenberg sat down with Mr. Freeman in a modest conference room in Quest Diagnostics’ New York satellite office to learn how to execute a transformation.

S+B: It’s rare that a chief executive gets to create a company consciously. Most of the time, origins are buried in history, or you’re an entrepreneur too consumed with day-to-day business to think about culture and organization. But you were dwelling on this from day one.

FREEMAN: We had to get the hearts and minds of the employees — to give them something to believe in, to help them understand whom they were working for, to understand their role, to take ownership for what they had to get done, and to feel excitement about what the company could become.

S+B: Why was there such a lack of identity?

FREEMAN: Quest Diagnostics evolved from Corning, which since 1851 was primarily a glass and ceramics company. But by 1982, Corning was tired of being so cyclical, and was looking to diversify into services. They had done some things in medical products, which had gotten the company access to hospitals and diagnostic testing laboratories. So the senior leadership said, “Why don’t we buy one of these labs we sell all these instruments to?”

They did, and then proceeded to start rolling up the industry. There were about 5,000 mom-and-pop labs out there, with average revenues of a few million dollars. By 1995, Corning Clinical Labs had become one of the three largest labs in the country, all of which were about the same size — about a billion and a half in revenue. At that time, the total U.S. market was probably about $30 billion.

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