Measurement is the Key to Management in Driving Margin Improvement
It is a generally-accepted business maxim that you can’t manage what you can’t measure. Yet in the Life Sciences industry, price, profit and revenue lifecycle optimisation remains poorly-defined and disjointed, with the result that pricing goals are unclear and performance uncontrolled.
This was underlined in a recent survey undertaken by Model N and EPP Life Sciences. Here, almost three-quarters (71%) of senior executives and managers confirmed that their companies are either not measuring performance or are doing so in a purely ad hoc way in response to one-off business drivers.
The lack of transparency can lead to significant revenue leakage. The opportunity to create an agreement or contract and the order to invoice process are frequently complex in life sciences, a problem which is often exacerbated by operational disconnects between stakeholders, data and the processes themselves, with discounts, rebates and incentives not allocated to products or customers in a consistent, controlled way.
“59% of companies face discrepancies between orders and invoices”
The result is both dramatic and disturbing, another finding the survey showed that 59% of companies face discrepancies between orders and invoices, yet 65% do not have in place regular exception reporting processes which automatically identify errors or inconsistencies.
Yet this is not an insurmountable issue. Despite the complexities involved, options are available which allow the business to put in place revenue lifecycle management. This provides consistent visibility, auditability and accountability of pricing processes across the whole enterprise - key to maximising margin performance.
A new commercial reality
Like other industries, Life Sciences have not been immune to the effects of the global economic downturn. It has impacted, for example, the way drugs are made available to patients, the way manufacturers engage with their customers and the implementation of commercial pricing strategies across disparate geographies. Today, two-thirds of firms are reporting that sales are growing more slowly, flat-lining or even declining in some cases.
What is different however is that for many providers to the Life Sciences market, this new reality is one of which they have no previous experience and for which they are unprepared. Yesterday’s world of the blockbuster drug is very different from that of tendering and rebating, in which customers keen to drive down the cost of healthcare are using every available tool to increase price and margin pressure on suppliers.
“Only 12% [of companies] have effective technologies and processes in place to protect margins and ensure profitable new business”
Manufacturers recognise the problem, but are ill-prepared to respond effectively. An overwhelming 87% see the growth in international reference pricing (IRP) as central to competitive advantage, yet only 12% have effective technologies and processes in place to protect margins and ensure profitable new business.
Lacking the right tools, highly complex companies will inevitably be unable to put in place consistent and optimised commercially effective pricing strategies, whether for new product launches or existing patent-protected or off-patent product portfolios. Decision-making also remains essentially reactive, with the business a victim of market conditions rather than master of its own commercial destiny.
Once again, the growth of IRP shows the damaging impact this can have. Here we can see an acceleration of price and margin erosion, as customers in large markets become aware that lower prices are being charged in much smaller markets as a result of earlier local price pressures. Intuitively, many senior executives are aware of the need to improve control of pricing and profit, but have typically had to rely on anecdotal reports rather than more definitive evidence on the damage this is having on the business.
Gaining a clearer picture
A key reason is that, in the past, solutions have not been available to provide the essential visibility to ensure effective centralised control. More recently, the emergence of industry-tailored end-to-end revenue life-cycle management now enables full transparency at each stage of the process. This ranges from from initial pricing strategy to execution and ongoing review, enabling the business to maintain control and respond fast to changing market threats and opportunities.
Our survey showed that most Life Sciences firms have a long way to go; only 6% have in place integrated revenue management supported by global data source. A further 58% are using non-collaborative Excel or multiple point solutions, which inevitably fail to deliver process consistency. This is especially problematic in an environment in which price, profit and revenues are created and delivered across many functionally, geographically and divisionally diverse and unconnected stakeholders.
Some Life Sciences companies believe that their pricing processes are relatively good and so are reluctant to tamper with them. At senior VP level, reference pricing is seen as in place, the business tracks dynamics and has pricing corridors ’under control’, with the result that management is confident that it is setting prices on a sensible, logical basis.
This may be true, but in many cases they are unaware of the price actually invoiced in individual cases, as this is the responsibility of the field office. It is not uncommon in such cases for a disconnect to result between setting the commercial strategy and its execution. And, without proper co-ordination and centralised oversight of local market pricing dynamics, there is a risk of significant profit leakage over time.
At a time of market change, in which more products are coming off-patent, competition is increasing and procurement processes more stringent and tightly controlled, it is critical to recognise that decisions on pricing and profitability are strategic and demand full transparency and control, together with the ability to measure their impact at each stage on the lifecycle in order for corrective action to be taken if needed.
Learning from the best
The benefits of centralised measurement and control are both substantial and increasingly critical if the business is going to survive and thrive in a harsher economic environment. However, the fact remains that such transformational change is not simple to implement and demands full cross-functional buy-in to succeed.
“Even when the concept of revenue lifecycle management has an internal ‘champion’, it is essential to provide support for an effective business case which convincingly identifies the benefits”
Even when the concept of revenue lifecycle management has an internal ‘champion’, it is essential to provide support for an effective business case which convincingly identifies the benefits – and urgency – of every department working together as part of an enterprise-wide, end-to-end approach.
In working with a specialist third-party provider, first it is essential to identify where the company is on the revenue management maturity curve. This will help pinpoint where the current pain points are and the main operational, technological or cultural obstacles impeding effective measurement of current and ongoing performance.
It is then possible to identify appropriate case study examples of companies that have successfully undergone a similar transformation process, together with the level of price and profit improvement achieved as a result of adopting a cross-functional, multi-geography and multi-level approach.
In an area where tangible performance improvement sits at the heart of business change, this is key to building an effective business case in which all stakeholders must play a key role – and be accountable – throughout the lifecycle in optimising price, profit and revenue performance.
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