Rishabh Bindlish, MD – AAPAC Life Sciences Lead, Accenture Strategy, advises that pharma companies need to tighten their belts using a comprehensive forward-looking cost management mindset
India is one of the world’s biggest suppliers of generic drugs and complex formulations. It accounts for 20 per cent of global generics exports volume and ranks among the top five fastest-growing pharma markets. Yet, Indian life sciences or pharma companies are facing the twin challenges of declining top-line growth and decreasing profitability – caused by heightened US FDA scrutiny, pricing pressures, and rise in manufacturing, employee and compliance costs.
The industry is at an important inflection point. It needs to invest more in innovation, but for that it needs more capital – which is becoming hard to find. Between March 2017 and 2018 alone, the EBIDTA margins of life sciences companies in India dropped from an average 18.7 per cent to 15.2 per cent.
The answer lies in looking beyond revenue growth to free up capital trapped within the company. Pharma companies need to tighten their belts using a comprehensive forward-looking cost management mindset. Instead of a ‘looking in the rear-view mirror’ approach where costs are projected based on past demands and incremental cuts are applied to previous budgets, they need an approach that looks at every line item and sets it to a zero base across the organisation—from the front office to the supply chain and everywhere in between. The rear-view mirror approach is slowing the growth engines of businesses and leading to cost overruns. Therefore, pharma companies need a Zero-Based Mindset (ZBx).
A Zero-Based mindset is essentially a comprehensive cost management approach which looks at:
Zero-Based Spend: Identifying discretionary consumption of non-labor overhead costs that free up cash to improve growth, capability investments and EBITDA while driving cultural change.
Zero-Based Front Office: Improving marketing, sales, customer service and pricing to lower customer acquisition costs while optimising customer spending.
Zero-Based Organisation: Creating new business value and driving profitable growth through a clean sheet organisational design that shifts talent and resources to distinctive capabilities.
Zero-Based Supply Chain: Optimising the supply chain to drive cost of goods sold (COGS) reduction by identifying “should costs” and enabling continuous renewal that constantly resets the cost baseline. A closed loop process ensures results hold over time.
Just like any major transformation, ZBx is not an easy fix. Only the companies resilient enough to go through hardship will thrive. According to the Accenture report ‘Beyond the ZBB Buzz,’ companies report that cultural buy-in (67 per cent), change management (41 per cent) and data visibility (33 per cent) are the hardest obstacles to overcome. Yet the hardest things to do are also among the most important. Culture and change are what make ZBx stick. Unlike traditional techniques that use a cut-the-fat and gain-it-back approach like every fad diet does, ZBx is a lifestyle transformation. It requires big changes in organisational thinking and doing so that the ‘weight’ never comes back.
To achieve the desired cost optimisation, companies need to prioritise three areas:
Grow leadership commitment: CEOs and leaders are responsible for driving and operationalising ZBx into their business each day. They should manage and communicate the change correctly as ZBx won’t work if employees don’t understand the need and what is in it for them.
Intensify focus: Examine company costs carefully—from plant maintenance and customer marketing to sales. This will require forensic visibility, opening the cost gaps relative to the ‘should be’ costs as well as closing the gaps in an engaging way with all the stakeholders involved. Reset the budget to a zero base and change your company governance and culture.
Build an owner’s mindset: Provide a structure for ‘category ownership’ to ensure there are checks and double checks to keep the players honest. This requires adopting a new operating model—one that reduces complexity, clarifies responsibility and helps enable a sustainable corporate lifestyle. This will ensure that a sustainable cost management philosophy is part of the company’s DNA and employees constantly question the need for spending.
The future holds immense potential for the Indian pharma sector. With the right cost optimisation models, outcome-based approach and a skilled workforce, Indian pharma companies can gain a significant competitive advantage.