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November 06, 2015
Four levers for enduring, strategic cost management
By: Donna Peters

Invest in at least one of the four levers to realize a reduction of approximately 20-50 percent in operating expenses.

Historically, life sciences companies have been able to ride out the peaks and valleys by 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.

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. But for life sciences companies wanting to drive competitive cost structures as well as achieve greater operational agility, the following four levers could be key:

Consumption

Life sciences companies need to be keenly aware of their consumption, making sure they focus their expenditures where they really matter—smart spend for growth.

The consumption lever includes approaches and success factors such as:

  • Visibility and forensic analysis.

  • Cost/spend benchmarking.

  • Category spend accountability and strong controls to monitor consumption.

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.

Supply/Price

Although the onslaught of acquisitions in life sciences has created opportunities to use a supply/price focus as a cost competitiveness lever 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 well-established procurement and strategic sourcing best practices.

Teva’s Jim Akers cites four pillars to maximize cost competitiveness through supply/price:

  • 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 not only to facilitate the procurement process, but also to accelerate speed to market.

  • Building a network of suppliers committed to the success of your business.

Structure

Unfortunately, in the world of progressive operating models, life sciences companies are behind the curve, with few companies recognized as leaders of this trend. In  terms of  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 funds to directly drive growth?

  • Is the service received aligned with the cost to deliver?

The structure lever is focused on:

  • FTE/headcount benchmarking.

  • Alternative operating models.

  • Spans of control and delayering.

Process

After years of 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 manual and time-consuming activities that do not ultimately improve overall company performance.

The process lever can be achieved by:

  • Process benchmarking.

  • Adopting leading practices and implementing global standards.

  • Taking a holistic perspective and identifying which resources, processes and capital in the organization create value, and which do not.

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 these four levers can expect to see a permanent reduction of between 20 and 50 percent of operating expenses for in-scope functions.

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