Cost Reduction In The Pharmaceutical Industry

A poorly thought through or incoherent programme has the potential to take the organization backwards.

A programmatic approach to cost reduction that includes the right approach and lifecycle management is critical and will ensure your cost reduction programme generates permanent improvements in operating efficiency, rather than damaging your business.

Adherence to a disciplined approach will enable pharmaceutical companies to position themselves not only to meet the imperative of near term cost reduction but also to emerge as more efficient, responsive organizations ready to meet the future challenges of a rapidly changing healthcare industry.

When setting up a cost reduction programme, there are five critical areas that an organization needs to get right. We examine these further below:

Step 1. Designing the cost reduction programme

When designing the cost reduction programme it is important that there is the right balance of initiatives. Too few and there is a high risk of failure or obsolescence, too many and there is a danger of mixed messages which lead to poor delivery or a significant detrimental impact on business as usual activities. 

However, the temptation to over analyze the opportunities should also be avoided; analysis should be advanced to the point where the decision is clear, not to the point where there is no further analysis that could possibly be done.

Step 2. Agreeing the desired outcomes

Care must also be taken to specify the appropriate outcome from the programme. The reductions should not threaten the core capabilities of the organization and therefore put the delivery of the business strategy at risk. 

Equally, the reductions should not be so loosely defined that a lack of clarity means that the net reductions realized are less than the sum of reductions promised by the programme.

Step 3. The approach to take

Delivering sustainable, strategic cost reduction requires controlled and managed change delivered through a central team working to a clear process. The central team must have the authority, independence and experience to drive the programme. It should be primarily an internal team supported by external expertise to bring in good practice from other organizations and also to test the thinking and ensure it is sufficiently challenging. It should also have a good functional spread to ensure an integrated approach across the organization.

The process must encompass the entire delivery of cost savings from establishing the links into those elements of the corporate strategy that are relevant to the cost reduction programme to ensuring that the benefits have been delivered and are seen to be sustainable.

It is important for the longer term benefit to the organization that the cost reductions are sustained; this means that the organization needs to learn from the cost reduction programme and adjust its future behaviors so that the lower cost base is maintained. Training that offers staff the opportunity to continually improve on what they are doing should also be allowed for within the programme.

Step 4. Ensuring realism

By working with a reliable, detailed cost data-set and associated metrics derived from the cost drivers for the company, insightful analysis can deliver meaningful and realistic targets. Supporting this analysis with internal debate, external benchmarking and identification of best practice will deliver a list of the current and potential initiatives that could be included in the programme. 

This list can then be filtered, refined and prioritized based on value, timescale and delivery risk to establish an optimized cost reduction programme that meets the requirements for cost reduction, is feasible with reference to the actual cost base of the organization and can realistically be managed by the organization.

Step 5. Helping people face the new reality

Changing culture is one of the hardest things for a management team to achieve. To help employees face the new reality they need to understand why change is necessary and then be motivated to help make the change. Sometimes this means encouraging them to accept the harsh realities of business, for example seeing a comparison between drug development pipelines today and ten years ago. It is also important to recognize that you can't change the entire organization in a single go. 

However, forward thinking organizations will identify individuals with a disproportionate influence in the organization, highlight their achievements and use them as 'champions' for the change, This approach really helps the change gather momentum. Reinforcing achievements and early successes with publicity will also help accelerate the new ways of working and deliver the cost reductions required.

(Abstract from the source: “ Cost Reduction in the Pharmaceutical Industry ” | 2011 Moorhouse)