Can pharma grow profit while cutting budget without slashing jobs?
Dr Andree K Bates
According to FiercePharma, Merck plan to slash its workforce by another 12,000 to 13,000 jobs, as part of a plan to squeeze another $1.5 billion from its annual cost base. The squeeze on profit is understandable with several recent patent expiries – including the blockbuster Singulair in many countries. Merck is not alone in doing this. According to a report from the Institute for Policy Studies, 119,000 pharma job cuts have been made since 2008 including Pfizer, with more than 50,000 job cuts, Lilly, with more than 6,000, and Bristol-Myers Squibb with more than 9,000.
As Merck roll these cuts out, while at the same time Novartis also cut 2000 jobs, I pause to reflect on what is becoming the standard operating procedure when CEOs need to get more profit – cut jobs to slash costs. It is one way to go – and certainly a popular way.
Shouldn’t the question really be how can we grow profit in a downturn economy by making intelligent cost reductions to increase profitability?
In our experience, the answer to this conundrum of where to cut costs, is to carefully identify and examine all the non-drivers where money is being spent and not having impact and reduce spend there. This approach has been used by marketing directors to see where they can cut costs by reducing spend on non-drivers, and also by the C Suite by taking into account all aspects of operations and seeing which of these are not contributing to company growth to cut. Cuts for the sake of profit cannot be made sensibly without really examining drivers appropriately without creating havoc and losing some areas of profitability.
“…the answer to this conundrum of where to cut costs, is to carefully identify and examine all the non-drivers where money is being spent and not having impact and reduce spend there.”
However, when a company has a thorough and deep understanding of its customers and the different customer segments and how they perceive value in the drugs on offer and use that knowledge to examine its cost structure, the resulting cuts are in alignment with revenue growth and profit and the company is in a far better position to grow profitably in this downturn (or at least volatile) economy.
According to companies in a recent Accenture survey, three of the most commonly used areas for driving competitive advantage are service, innovation and pricing. But how does one know if the specific changes being implemented in these areas are driving growth and profitability? And by how much?
Mini Case Study
A top 50 pharma CEO, wanted to grow their market position as a company up from position 36 to somewhere in the top twenty. Analysis was conducted to encompass many categories of the company functions from trust in the company, business ethics, products, pipeline, management, customer service, rep performance, PR, and much more. The CEO discovered if the company position was to grow they would need to do more work in most areas but decided initially to start with training their reps since they were performing worst out of all areas against company market share. However, there were also some very clear areas that they were exceptionally strong on that were not showing up as being drivers for company market share or position. For example they were very strong on ‘transparent pricing system’ but this was not driving market share for the company. Conversely they were very weak on ‘attracts top people in the industry’ and that was a very important driver. So, they could reduce some spend on communicating their ‘transparent pricing system’ and spend that on trying to attract the top people in the industry and have some immediate gains. Also, by focusing on the weakest area i.e. rep performance, they could get some quick wins. So they instituted a five phased training program addressing anatomy, physiology, pathology and pharmacology, product based training, selling skills, commercial training, differentiators that were drivers while adding checks and balances and creating a rep incentive scheme that rewarded both the individual and team performance.
At the same time they started taking budget away from areas identified as non drivers and putting that into areas identified as drivers. Two years after beginning they conducted the analysis again. Performance overall had improved and the company was now seven places higher than they were in market position the previous time (mergers and acquisitions being taken into account). The perception around the brands themselves also had improved and the uptake of the marketing message was far stronger and the market share of both the company and several of the brands had increased. Top talent started to become attracted to the company also. They continued working on the driver areas that required more work and defocusing on the non-driver areas. After another 2 years they tested again and had got to position 23. They persevered and in the next 2 years when they tested they had got within the top twenty that was the original goal set. It was not a quick fix but a steady and consistent improvement in the driver areas of the company and defocusing on the areas that were not driving. If the company had simply cut jobs instead of going through this process they would not have attracted the top people in the industry and they would have damaged their position further!
“Where should you reallocate resources now so that next year’s revenues and profit levels will be growing?”
Here are some quick tips to follow to ensure you are focusing on the right things.
1. The market environment for pharma is bad. Accept that and stop wallowing in excuses. Instead focus on where you can develop new growth opportunities. Is there an emerging market that has higher growth that would be profitable to enter? Is there a customer segment you could squeeze more value from? Is there a way to get more profitable from the segments you are focusing on already by changing your message focus or sales and marketing budget allocations? Should you drop focusing on a segment? Does your management need to refocus on areas that is driving that they are ignoring?
2. Stop torturing the numbers so they admit to anything. ROI and other metrics can be used to justify many a bad decision. Consider how there have been many leading companies that have gone bankrupt suddenly. Surely they were justifying their spends somehow. Instead think. Look at what are the key drivers for profitable growth, and focus on them. Cut out spends on things that are not driving growth.
3. Focus money on resources that create new growth opportunities. Where should you reallocate resources now so that next year’s revenues and profit levels will be growing? Forget the past, look at now and the future.
4. Do not allow yesterday’s business model to dictate your financial decisions of tomorrow. The days of blockbusters are gone. Do you need to have a business model overhaul? What changes do you need to make?
5. Do not get bogged down in data overload. Identify the key metrics you need such as key market drivers, sensitivity indicators, market share, and profit, and focus on these. Identify and spotlight the core performance metrics of your operations that are absolutely critical to the health of your company. So many pharma are drowning in useless, indecipherable data rather than looking at the core numbers.
6. Stop flogging a dead horse. If a target segment is no longer supporting your goals and objectives, stop focusing on them. Are you hearing that certain segments are losing you money? Analyse whether they should be defocused on or shed completely or whether there is a cost effective way to help them without hurting your bottom line.
7. Plan a financial goal. No amount of strategizing will help a company gain competitive advantage if the strategy is disconnected to the company’s financial performance. Face your numbers and create a growth strategy plan driven by the facts so you can thrive despite these uncertain, economic times.
Given there are ongoing pressures in the environment, and within companies, to cut costs and deliver more shareholder value, it is not a surprise that most companies focus on the quick win of cutting costs. Unfortunately cutting jobs is a very quick win on the balance sheet. Other areas that have been implemented are consolidating back office activities with a global business service department or shared services, or outsourcing more areas, or creating supply chain or procurement efficiencies. These efforts have been useful in creating cost reduction. CEOS and CFOs are expected to continue to consider more ways to reduce costs and we will no doubt see more job cuts, strategic outsourcing and enterprise rationalization. By cutting costs with an axe instead of a scalpel companies risk stunting profitable growth as a result despite a short term stock market win. Companies must instead increase their focus on how predictive analytics can help improve the accuracy and efficiency of knowing where to cut on a corporate, and on a brand initiative level, and where to keep budget as it is. Creating profitable growth requires an understanding of where to focus (drivers) and where to pull back (non-drivers) and within the drivers which ones are more sensitive to action than others so activities can be fine tuned. By shifting resources to focus on the drivers that steam growth and away from non drivers that are a drag on the company’s growth and profitability, we can start to see real sustainable long term profitable growth
About the author
For any questions or if you would like to see a demo of the tools discussed in this article, please contact Dr Andree Bates of Eularis http://www.eularis.com or contact your closest Eularis office http://www.eularis.com/about-us/contact-us and the message will be passed on to her or a local team member to speak with you.
How can we grow profit in a downturn economy by making intelligent cost reductions to increase profitability?