Breaking free from the cost-cutting cycle in the life sciences industry

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1 Accenture Life Sciences Rethink Reshape Restructure... for better patient outcomes Breaking free from the cost-cutting cycle in the life sciences industry It s time to think differently about strategic cost management By Cherene Powell, Donna Peters and Seth Rogers

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3 Almost every executive in the life sciences industry is thinking about cost control. In Accenture s 2015 High Performance Finance Study of the life sciences industry, 100 percent of the Finance executives surveyed indicated that cost efficiency is currently their number-one priority. 1 But are they pursuing the right kind of cost reduction one that is both strategic and sustainable? In the first quarter of 2015, according to Accenture research, 2 27 of 31 life sciences companies emphasized operating excellence and cost management in their quarterly reports. Johnson & Johnson is in the midst of a multi-year initiative to save $1 billion that can be reinvested in the business. 3 A new program from GlaxoSmithKline is looking for 1 billion annual cost savings by 2017, with savings expected to come from a mixture of sources including manufacturing, R&D and finance. 4 AstraZeneca announced it will focus on continuous investment in R&D, pipeline acceleration and return to growth through structural change in SG&A. 5 The challenge facing most life sciences companies, however, is not only in achieving cost savings but in taking cost out in a sustainable way. According to Accenture research, almost all savings from traditional cost management initiatives in the life sciences industry evaporate within three years, helping contribute to a culture and mindset of seasonal cost reduction. 6 This indicates there is a fundamental need to change underlying cost structures, build permanent cost control behaviors and make sustainable cost management part of the company s DNA. Taking the right actions to structurally reduce operating expenses can free up cash for R&D, new-product introductions and market research. This in turn can fuel growth and innovation, thereby creating a sustained profitability advantage and driving competitiveness. Accenture s High Performance Finance Study found and increased focus on balancing cost and growth among life sciences executives with over 50 percent of respondents indicating that cost and growth must be equally addressed. That represented a 20 percent increase from In Accenture s 2015 High Performance Finance Study of the life sciences industry, 100 percent of the Finance executives surveyed indicated that cost efficiency is currently their number-one priority. 1 3

4 Four levers for structural strategic cost management Companies can focus on a variety of interventions to take out non-working expenditures, particularly from back-office functions such as finance, procurement, HR, IT and real estate. Life sciences companies should look at four key levers that can drive competitive cost structures while simultaneously achieving greater operational agility: Consumption As life sciences companies look to increase investments in R&D and commercial launch, they need to be keenly aware of their consumption, making sure they are focusing their expenditures where they really matter smart spend for growth. The consumption lever includes: Visibility and forensic analysis Cost/spend benchmarking Category spend accountability and strong controls to monitor consumption Other industries such as consumer goods are already targeting reduced consumption as a means to reinvigorate growth. According to a recent press release, one of the Coca-Cola Company s primary strategic initiatives is to expand its current productivity program by targeting annualized savings of $3 billion per year by The program is focusing on four key areas: Restructuring the company s global supply chain, including manufacturing in North America Implementing zero-based budgeting across the organization Streamlining and simplifying the operating model Driving increased discipline and efficiency in direct marketing investments Through these productivity initiatives, the company expects to fund the marketing initiatives and innovation required to deliver sustainable net revenue growth. These savings will also support margin expansion and increased returns on invested capital over time. 8 Life sciences companies need to embrace this concept to deal with external and internal pressure to bring new products to market faster while maintaining or exceeding current levels of profitability. A few industry leaders have started to look at this lever and they will set the standard that all other companies will find themselves chasing over the next few years. Supply/Price The onslaught of acquisitions in life sciences has created opportunities to use a supply/price focus as a cost competitiveness lever. But it doesn t take a multi-billion dollar acquisition to drive cost out of your supply base. Reducing price in supply can be done in a number of ways using wellestablished procurement and strategic sourcing best practices. Jim Akers, Senior Vice President Procurement and Global Head of Indirect Procurement & Travel for leading generics manufacturer Teva, cites four pillars to maximize cost competitiveness through supply/price: 9 Hiring procurement colleagues who are true subject matter experts in the spend categories they support Following a strategic sourcing process that holistically manages business value Using systems and tools to not only facilitate the procurement process, but also accelerate speed to market Building a network of suppliers committed to the success of your business 4

5 The results speak for themselves. Teva has launched a program where procurement facilitated an entirely new agency engagement model with marketing and sales, including regulatory, legal, corporate communications and finance. The result was a more efficient and effective way to manage the company s creative agency partners. The initiative also delivered significant double-digit value. Teva is also improving its supplier contracting process. It used to take approximately four months to contract with a new supplier but with changes in systems and technology, the company expects that time to decrease to about one month, helping the business engage suppliers faster and accelerate speed to market. All of these changes have a significant impact on the bottom line. Jim Akers manages over $4 billion in spend and expects to deliver savings that exceed industry benchmarks and his peers. You can t do that without the right level of commitment from the business, Akers says. Structure In looking at internal structures, life sciences companies should be asking questions such as: Is my company s cost-to-deliver in line with peers? Could I remove cost from support functions and reallocate to directly drive growth? Is the service received aligned with the cost to deliver? The structure lever is focused on: Full time employees/headcount benchmarking Alternative operating models Spans of control and delayering In the world of progressive operating models, life sciences companies are behind the curve. Most companies have either a traditional business unit-centric operating model or have only implemented single-function or multi-function shared services, a model first introduced back in the early 1990s. Fortunately, there are some exceptions. Take Johnson & Johnson for example. As part of a long-term strategy, the company is focused on delivering a multi-year effort to globalize several functions through standardization and simplification. Fundamental to this effort is the transition of some of the work in finance, HR, procurement and IT to a fully-integrated global business service. These functions will be structured by end-to-end processes, helping to break down traditional functional silos. This new operating model will result in greater agility, competitiveness and growth. It will also provide the ability to quickly respond to rapidly changing go-to-market models, reduce cost and drive value for the business. 5

6 Process After years of meeting complexity with complexity, companies are seeking to apply process simplification techniques and global process standards. One example is the concept of materiality balancing risk to effort, focusing resources only where it matters and eliminating the manual and time-consuming activities that do not ultimately improve overall company performance. Companies must be bolder than they have been before. They need to scrutinize the value-add of every piece of data manually collected or cleansed, every report executed, every meeting conducted and then have the intestinal fortitude to fundamentally and permanently change how work is executed. The process lever can be achieved by: Process benchmarking Adoption of leading practices and implementation of global standards Taking a holistic perspective and identifying which resources, processes and capital in the organization create value, and which do not To complement its new operating structure, Johnson & Johnson is taking a relentless look at process standardization. All sectors and all countries will follow the same standard processes a significant change but one that is critical to achieving value in the company s new operating model. Sustained cost takeout to drive growth Any combination of these four levers requires a structured approach and clear accountability to sustain advantages over the long term. But the potential benefits are significant. Companies that invest in one or more of the four levers of strategic cost management see a permanent reduction of approximately 20 to 50 percent of operating expenses for in-scope functions. Historically, life sciences companies have been able to ride out the peaks and valleys of their market, relying on high margins from a few big products, or by making temporary cuts. Today is a different era, requiring a more enduring approach to cost management to permanently fuel growth, compete and win. 6

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8 Stay Connected Contact the Authors Cherene Powell Donna Peters Seth Rogers References 1. Accenture research based on quarterly earnings reports, Margie Manning, Johnson & Johnson s shared services search comes amid a cost-cutting move, Feb 27, 2015, 3. GSK Press Release: GSK sets out prospects for newly shaped Group and expectations for improvements in performance , 4. AstraZeneca, earnings call July 30, High Performance Finance Study: Life Sciences Perspective, Accenture High Performance Finance Study: Life Sciences Perspective, Accenture Coca Cola Press Release: The Coca-Cola Company Announces Actions To Drive Stronger Growth, Oct 21, 2014, 8. Accenture interview with Jim Akers, Senior Vice President Procurement and Global Head of Indirect Procurement & Travel at Teva About Accenture Accenture is a global management consulting, technology services and outsourcing company, with more than 336,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world s most successful companies, Accenture collaborates with clients to help them become highperformance businesses and governments. The company generated net revenues of US$30.0 billion for the fiscal year ended Aug. 31, Its home page is About Accenture Strategy Accenture Strategy operates at the intersection of business and technology. We bring together our capabilities in business, technology, operations and function strategy to help our clients envision and execute industry-specific strategies that support enterprise wide transformation. Our focus on issues related to digital disruption, competitiveness, global operating models, talent and leadership help drive both efficiencies and growth. For more information, or visit About Accenture Life Sciences Accenture s Life Sciences group is dedicated to helping companies rethink, reshape or restructure their businesses to deliver better patient outcomes and drive shareholder returns. We provide end-to-end business services as well as individual strategy, digital, technology and operations projects around the globe in all strategic and functional areas with a strong focus on R&D, Sales & Marketing and the Supply Chain. We have decades of experiences working hand-in-hand with the world s most successful companies to improve their performance across the entire Life Sciences value chain. Accenture s Life Sciences group connects more than 10,000 skilled professionals in over 50 countries who are personally committed to helping our clients achieve their business objectives and deliver better health outcomes for people around the world. Accenture Life Sciences Blog Accenture experts share insights and opinions on opportunities and challenges in the pharmaceutical and medical technology industry. LifeSciencesBlog. Copyright 2015 Accenture All rights reserved. This document makes descriptive reference to trademarks that may be owned by others. The use of such trademarks herein is not an assertion of ownership of such trademarks by Accenture and is not intended to represent or imply the existence of an association between Accenture and the lawful owners of such trademarks. Accenture, its logo, and High Performance Delivered are trademarks of Accenture. 8