The Op-Ed: Concubinage Is Not What It Used To Be

The Op-Ed: Concubinage Is Not What It Used To Be

December 22nd, 2011 // 1:57 pm @

Looking for ways out of their difficulties, some drugmakers have been turning to the automotive industry for advice on restructuring, vertical integration, product development time and the supply chain. But is this a wise move? To consider the question, we asked Daniel Hoffman, who is president of the Pharmaceutical Business Research Associates consulting firm and a weekly pharma blogger at The Philadelphia Inquirer, to explore the issue. Consider his thoughts and tell us what you think…

The pharmaceutical industry has been avidly looking at how other industries managed to survive by transforming themselves. For almost a decade some observers have suggested that pharma should pursue what Oracle ceo Larry Ellison called the Hollywood model (see here and here) by abandoning end-to-end capability and retreating to a few core functions.

While the notion holds some appeal, its practical application remains limited by fundamental differences between pharmaceuticals and movie making. For example, although many scripts kick around Hollywood for a dozen years before they appear as films at the multiplex, that is only because a commitment to proceed with a film project requires the right combination of financing, personnel, market conditions and numerous other factors. Once a property is “green lighted,” however, development times average less than two years.

By contrast even when pharmas put newly synthesized compounds into go-ahead development, those that eventually reach the market typically require at least a decade to get there. This substantial difference in the lead-time needed for new product development creates scores of other disparities between pharma and the movies.

Pharma’s highly regulated operating environment represents another fundamental difference. Besides, pharma’s management has historically lacked the panache, the swiftness and the marketing savvy of Hollywood’s moguls. As Teva ceo Shlomo Yanai once famously said of Big Pharma’s club-footed operating style, “You can’t take a Persian cat and educate it to become a street cat.”

More recently, as pharmas have looked around for other industries to emulate, many of them sought one-eyed guidance from the major consultancies. These recommendations have led some people in the drug industry to look favorably upon the auto companies (see here).

An initial impetus to benchmark against the auto industry comes from the cost cutting changes the carmakers successfully made in the past two years. For example, at one point the Big Auto companies were all vertically integrated. Now 70 percent of an automobile’s value comes from suppliers. In other respects as well, the major auto manufacturers managed to survive partly by retrenching to a few, core operations. Now, they just basically “orchestrate an army of contractors.”

This led a few of pharma’s top managers to believe they can learn something from the auto companies about reducing fixed overhead expenses. Certainly, production is one area where pharma can benefit from studying Detroit and the Japanese. But production has never been a principal success factor for pharma, where gross margins generally exceed 80 percent. Commercial success or failure in the drug industry pivots around the key functions of R&D and marketing/sales.

This fundamental factor places a key limitation on how far the Ivy League MBAs can apply the automotive analogy to pharma. Auto companies, for example, can usefully partner with parts suppliers because consistency and predictably low pricing provide the keys to efficient production. GM, Ford and Chrysler will not typically benefit if their parts suppliers regularly urge substantial course corrections during a production run.

Pharmas looking to emulate the automakers as orchestra conductors fail to perceive this important difference of context. In operating areas such as marketing, the rigid adherence to consistency characteristic of automotive production is less useful than innovative vision. Applying lessons from production to business operations then creates problems in staff support areas such as market research. When drug companies lock themselves into so-called “partnering” relationships with larger suppliers, they acquire a predictability that precludes fresh insight.

Knowledgeable staff managers at pharma companies are aware of creating this self-imposed dysfunction, but they must succumb to the dictates of finance managers and purchasing, neither of whom give a fig about insight. To the contrary, these digital managers of formula and ratio prefer to view market research, pricing, forecasting, competitor monitoring, payer insights and related functions as commodity services. That way they can dictate an idiot savant’s choice by favoring the cheapest bidder and the volume discounter, the same way their Detroit counterparts would pick a camshaft fabricator.

So if making movies has too many differences from drug development to offer many practical ideas, the usable suggestions to be gleaned from car making also appear limited. No matter, pharmas appear content to adopt the jargon from these other industries and apply the programs out of their appropriate contexts to give the impression they are making leading-edge innovations.

In fact, it is actually a deceptive misuse of language to describe external, fee-for-service suppliers to business staff as “partners.” Partners maintain an equity stake in the enterprise, in addition to receiving cash for their labor. That very concept of partners holding an equity stake remains true whether one is discussing business entities or domestic relations.

In the latter, for example, a woman who receives just money and assorted favors from her live-in companion is a concubine, not a true partner. Likewise when a pharma company’s marketing research supplier receives exclusive rights to conduct a substantial majority of the work in some area, it functions as a kept consort or a doxy, not as an independent-minded agency with a partner’s prerogative of recommending wholesale changes.

The problem has grown far worse as a result of significant layoffs over the past two years. Since companies target people over 50 as the first to go in any layoff round, many of the remaining FTEs (full-time equivalents) lack the experience to discern when they are receiving reliable, yet poorly conceived boilerplate from mandated suppliers. Some younger workers fear acquiring a reputation for slowing things down, so they concentrate on the process of checking the boxes and moving things along, instead of addressing the substantive issues.

When one approaches such a politically inclined business staffer who has been hosed by a “partner” supplier, her response at some companies is a combination of rationalization, denial and arrogance. Questions put to her on various issues elicit the response that those matters have already been addressed and further considerations are unwelcome.

A former colleague refers to this phenomenon as “Maginot Line thinking,” a reference to France’s system of defending its borders during the 1930s. The principal feature of the Maginot Line consisted of fortifications with artillery that was cemented in place, facing eastward. Although Charles DeGaulle and a few other dissidents of the period pointed out the fallacy of this static approach, the French smugly believed they had adequately thwarted the prospect of a German invasion. Alas, the Wehrmacht easily circumvented the Maginot Line by invading from the north, passing through Belgium and taking control of France in four weeks.

Directors of the various business functions make similarly dysfunctional or cosmetic “innovations” and then sell them hard at department meetings and through internal emails. Lately, these sleight-of-hand, morale-boosting efforts try to peddle the message that staffers will be able to do more with fewer resources. Directors tell their subordinates about earth-moving changes that will allow them to “operate as a vibrant group.” The entire communication process comes to resemble the call-and-response of revival meetings. The rah-rah messages from directors elicit reply-to-all emails from manager-level staffers who gush about “how great it is to be a member of an organization that has so thoughtfully addressed the challenges.”

Meanwhile, wiser survivors down the hallways, even those equipped with ample supplies of cynicism and insight, silently suppress the gag reflex when Halliburton/Dick Cheneyesque cronies are referred to as partners.

The preferred and value-preferred suppliers, for their part, remain content to grind out their global tracking and ATU studies in the manner of factories making sausages. No matter if the client runs aground, the supplier will just move in with another host.

It seems that partnering isn’t what it used to be. Neither is concubinage.


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