Deloitte Debate 3
Shed non-core operations.
As the economy contracts, many companies are nding they have become too largeand diversied or their own good. Divestitures and portolio rebalancing are critical tools in the resizing arsenal.However, it’s important to consider the impact that a spin-o or carve-out might have on sales, the supply chain,and supporting business unctions.
Take a holistic approach.
Dierent cost reduction initiatives have dierent timelines and produce dierent results.By applying a comprehensive and integrated approach, companies can better manage the overall eort to achieveboth immediate savings and large-scale improvement.A structural approach to cost reduction can better position a company to protect its margins, capture market share,and capitalize on opportunities such as bargain-priced acquisitions. It can also ree up resources to invest in newproducts and services, marketing, and advertising. These activities can help a company survive the downturn and geta jump on competitors when the economy turns around.
A view from the life sciences sector
Sanjay BehlPrincipal, Health Sciences & Government, Deloitte Consulting LLP
Lie sciences companies are wrestling with a wide range o challenges, including major product ailures, slowingsales, price pressure, and weak product pipelines. In addition, many pharmaceuticals companies ace expiringpatents that in the near uture could signicantly reduce their sales. These challenges have caused most lie sciencescompanies to underperorm the S&P 500 over the last ve years.Typical responses include mergers and acquisitions, as well as licensing to strengthen product pipelines. However,cost reduction must also play a key role. An eective cost reduction program can improve earnings and sharevalue while the company waits or uture revenue to kick in. It can also boost long-term margins and improvecompetitiveness.Recently, large pharmaceutical companies have announced layos in SG&A, R&D, and manuacturing as part o anongoing eort to keep costs in line with revenue. They are also signicantly reducing costs in other areas. Someleading medical device companies have taken similar steps. Yet, many other companies in the sector have yet totake action. Here’s our advice:
In this troubled economy, no company is immune rom cost pressure. I you haven’t put a costreduction plan in place, now is the time to start. Create a balanced mix o near-term tactical opportunities andlonger-term structural opportunities that give you the fexibility to respond to an uncertain uture.
Examine the core.
Many companies are understandably reluctant to cut costs in undamental areas such assales, manuacturing, and R&D. However, we believe there are ways to reduce costs without damaging the corebusiness. Companies should examine their operating models and identiy opportunities to reduce costs or generaland administrative activities and support unctions. For example, establishing a shared services model or supportactivities — such as sales operations or research operations — can save money while at the same time improvingservice levels by creating a critical mass o capabilities and greater cost fexibility. Also, it may be possible to reduceservice levels in ancillary areas such as market research, analytics, creative services, and alliance managementwithout signicantly undermining the company’s overall perormance.
Aggressively reduce spending.
Negotiate better prices on external marketing spend. Reduce expenses in areasthat lack a clear ROI, such as grants, investigator initiated trials, and eld medical team activity. Work with contractmanuacturers to secure better service levels and eliminate minimum order quantities that limit your fexibility.Reduce the scale and scope o existing R&D projects, keeping projects alive but eliminating non-essential activities.
In some cases, structural change might be the best way to do more with less. For example, somecompanies are reducing the size o their sales sta — which is a huge expense — while at the same time investingto make the sales sta more eective through improved targeting, a stronger contracting strategy, and higherrequirements or education and experience.Actions like these can help companies compete successully in the rapidly changing lie sciences marketplace andposition them to thrive when the economy turns around.