In a highly globalized business environment, the competitive advantage which can arise from reducing expenses and thereby increasing profits will continue to fuel innovation. However, in practice, cost initiatives often disappoint. On average companies are not achieving expected savings and few reach or exceed their targets for cost saving initiatives. Often revenue growth leads businesses to become complacent about costs. Pharmaceutical companies must retain cost discipline even during periods of growth.
For cost reduction initiatives to be successful there must be strong backing from the very top of the organization. CEOs, CFOs and all the management team of pharmaceutical companies must be responsible for cost reduction. In addition more incentives should be provided for success in cost cutting. Every single person in a business has a role in this area and each must fulfill it to achieve the culture of cost-consciousness so essential to ultimate success.
Pharmaceutical companies, like all companies, can too often pick the easy option for cost initiatives rather than the one which will yield most savings. Improving process efficiency, by far the most popular approach to finding savings, can yield significant benefits but only if it is conducted rigorously. In fact it is off shoring that has provided the greatest savings. Some pharmaceuticals offshore clinical testing, manufacture and R&D to India for instance, and make considerable cost savings. However, off shoring remains one of the least popular strategies as it can be politically sensitive. Pharmaceutical companies must be prepared to adopt major changes to their business model ― including off shoring where applicable ― in order to remain competitive.
Other strategies for reducing costs apply to the pharmaceutical industry:
- better risk management
- more cost-effective service channels ― for example, the internet
- organizational restructuring
- discontinuation of unprofitable lines
- divestiture of unprofitable units
- adoption of shared service centers
- alliances and joint ventures to share risk and cost
- acquiring other companies (see Wockhardt case study).
An Indian pharmaceutical company leveraging successful cost structures in takeovers.
Wockhardt is an Indian pharmaceutical company with extensive operations in Europe and growing sales in the United States. Indian pharmaceuticals are deemed to derive their competitive advantage from low labor costs, especially for research scientists. Wockhardt spends most of its R&D investment in India where it is ‘cost effective’.
However, Wockhardt has gained further advantage through a series of takeovers in Europe. One reason for these purchases was market access, but the other important reason was careful consideration of possible synergies with Wockhardt. Overheads could be reduced, for example, by combining production facilities. With each takeover Wockhardt has been able to improve costs by between 10 – 20 percent.
Of course the use of IT improves efficiencies and reduces costs in many facets of pharmaceutical companies. One area that may not be utilized fully, however, is in the IT function’s ability to provide quality information to manage costs. Unfortunately, many companies do not have a clear view of what drives costs. Making costs and profitability of individual units transparent across the business is achievable through the use of IT systems.
IT is an expensive cost area itself, and the ability of IT to be delivered over a distance, has led to this function being one of the most frequently handled within a shared service center or outsourced. Like manufacturing, clinical testing and R&D, pharmaceutical can consider off shoring the IT function.
It is hard to get people motivated about cost management initiatives. Nevertheless, pharmaceuticals that achieve a sustainable competitive advantage are often those that embed cost discipline into the culture. A clear strategy and careful communication is vital to the success of any corporate project but becomes even more so in cost cutting initiatives where employees may (quite understandably) feel threatened by change. The change must be managed through:
- strong leadership
- effective communication ― through all stages of the change, so employees feel informed
- alignment of people processes ― training, performance management and so on, to embed the change
- a dignified transition plan ― treat any redundancies well
- looking after the survivors ― reward them for their loyalty.
