Exciting progress in the life sciences industry is enabling companies to better predict, prevent, treat, and cure a wide range of diseases. The number of yearly US Food and Drug Administration approvals has nearly doubled between the early 2000s and today.
At the same time, however, many companies are grappling with falling or stagnant productivity—the exception being those in the fast-growing biotech subsector (Exhibit 1).
For healthcare conglomerates and big pharmaceutical companies, the single largest cost driver is selling, general, and administrative expenses. For midcap and generics companies, it’s cost of goods sold. But whatever the causes, declining productivity is problematic, given that the cost of developing innovative drugs is rising steeply. The average internal rate of return from pharma innovation today, at around 3 percent, is already below the cost of capital.
With competition intensifying—the number of drugs per drug indication has grown by 40 percent since 2006
—there is a danger that returns could fall still further, along with faltering growth. The need to improve productivity is urgent, not only to meet shareholder expectations but also to maximize the returns that can be invested to improve patient outcomes.
Many companies are already acting. Indeed, in the past five years, 26 of the 30 largest global pharmaceutical companies have announced major transformations—restructuring their organizations, overhauling operations, and streamlining business units. We anticipate that many more companies will follow suit in coming years, embarking on still-bolder cross-functional transformations in pursuit of long-lasting productivity gains.
In the past five years, 26 of the 30 largest global pharmaceutical companies have announced major transformations.
Transformations can differ in form but face common challenges. Companies can enjoy profit gains from digital and analytics transformations that embed digital tools and data and analytics capabilities across the company, operating-model transformations to help companies interact with healthcare professionals and other stakeholders more effectively, and strategic transformations to capture new growth opportunities. Yet any company contemplating a transformation is all too aware that successful transformations—those that bring about a step change in performance—are notoriously hard to pull off. The results from our latest McKinsey Global Survey
reaffirm an uncomfortable truth: successful transformations are the exception, not the rule. Less than one-third of the surveyed respondents, all of whom had been part of a transformation in the past five years, said their companies’ transformations had achieved a sustained performance improvement.
Against this backdrop, we examined some 30 successful transformations undertaken by life sciences companies in the past five years, seeking to understand what has made them exceptions to the rule. We found that all adhered to five transformation principles that we believe help explain their success.
The flywheel effect: Five principles that mark successful transformations
McKinsey’s experience working on transformations with hundreds of companies around the globe suggests that successful transformations follow a common approach that meticulously frames, designs, and executes the transformation and pays close attention to four enablers: the company’s operating model, culture, talent, and technology infrastructure (see sidebar, “A tried-and-tested transformation formula”).
The approach works as well for life sciences companies as for those in other industries. Notwithstanding, life sciences companies may have to work particularly hard to overcome a natural conservatism that can work against them in a large-scale transformation. Theirs is a world of multiyear R&D cycles, stringent regulatory and quality standards, and risk-consciousness. The upshot is a preference for incremental performance improvements that will likely stymie a transformation that by its very nature has to be bold.
The successful life sciences companies with which we have worked demonstrate that companies can overcome such constraints through adherence to five principles (Exhibit 2). Together the principles create a flywheel effect, building on each other so that the transformation gains strength and accelerates as it progresses, much as the flywheel on a rowing machine creates momentum. Eventually, the transformation becomes unstoppable.
1. Think big
Successful transformations captured 1.5 times more value than management teams thought possible. Life sciences companies’ prudent and risk-conscious culture can make them prone to setting ambitions too low, thereby forfeiting the value of a transformation before it even starts. Setting expectations high, in contrast, can give a transformation the needed momentum by drawing employees out of their comfort zones and underscoring that this is not business as usual. At this stage, it is not essential to understand exactly how the value will be. What is important is a stretch target, and achieving it will necessitate cross-functional initiatives rather than piecemeal ones that tend not to deliver sustainable change (see principle 2). The successful transformations we analyzed captured some 1.5 times more value on average than management teams thought possible at the outset.
Such an ambitious approach paid off for the new CEO of a pharmaceutical company that held a significant leadership position in emerging markets. During the previous ten years, the company had made several unsuccessful attempts to improve performance markedly, so the management team was somewhat skeptical about the extent of the new CEO’s ambition. Not satisfied with incremental cost-cutting tactics, the CEO sought to double top-line growth and raise profitability four- or even fivefold in the space of two years. The transformation included adding new products through business development and licensing, as well as strategic deals and acquisitions, commercial and operational productivity enhancements, and the restructuring of the company’s profit-and-loss and balance sheets. The company’s profit margins now outshine those of most of its competitors.
2. Look for value everywhere
Some 75 percent of total value captured comes from marketing and sales, manufacturing, and procurement.
Life sciences companies that pull off successful transformations use many more levers than others, seeking to capture value wherever it might lie in the company. While cost management might sometimes be appropriate, levers that improve the company’s strategy, revenue growth, and structure are also important, as are the enablers of a transformation, such as leadership development, capability building, and a change management program. Value can lie in a range of areas, including sharpening the company strategy, seizing growth opportunities, optimizing structures, and streamlining cost management (Exhibit 3). At the companies we analyzed, some 75 percent of the value captured came from applying a combination of levers in three areas: marketing and sales, manufacturing, and procurement.
Such a comprehensive approach reinforces the flywheel effect by leaving no stone unturned in search of value while simultaneously capturing cross-functional synergies. One vaccine company transformed the performance of its product launches by embedding a digital planning and execution coordination process across the medical affairs, sales, marketing, IT, procurement, and supply chain functions. It pulled growth levers such as healthcare professional segmentation and commercial analytics to capture the revenue potential of its new vaccine, as well as operational levers, such as the integration of launch planning into the sales and operations process to ensure production costs were optimized and order fulfillments were timely. As a result, the company not only launched the product successfully but also reached scale much sooner than initially had been thought possible.
Tackling numerous parts of the organization simultaneously to build momentum will inevitably present its own management challenges. Meeting those challenges is more likely if the company has a central transformation management office that sets direction, decides the sequencing, orchestrates implementation, and facilitates communication across functions to foster collaboration and learning.
3. Mass-mobilize to embed a culture of execution excellence
In successful transformations, at least 10 percent of the workforce is engaged in transformation initiatives. Many organizational factors can compromise transformation programs that look great on paper. In life sciences companies, typical compromising factors are a misaligned management team, cultural conflicts, and slow execution processes. Our analysis suggests that the greater the number of people engaged in the transformation, the more likely it is that such hurdles can be overcome. Many company leaders rely on a small task force to drive a transformation, whereas the successful ones we examined mobilized a total of some 10 percent of executive leaders, middle management, and frontline teams in key functional areas. As much as 30 percent of middle managers might be involved. Here, the CEO and the executive team play an important role, needing to be visible leads from the front and own the transformation.
More people bring about more progress, of course. But the real power comes from embedding them in a culture of execution excellence. The transformation office not only guides all efforts within well-defined workstreams but also upskills employees rapidly with the tools and capabilities needed to quicken the pace of implementation—performance management and workforce planning systems, for example—and puts in place supporting governance mechanisms. The office also supports leaders to develop the behaviors and functional skills needed to deliver on high aspirations such as a willingness to take well-managed risks or the know-how to craft robust business cases that will win additional resources. Over time, with growth in the number of people experiencing the new ways of working and the benefits of the transformation, the new practices spread organically.
Sometimes, however, it helps to speed things along. Part of the transformation of a global pharmaceutical company entailed building a more performance-based culture underpinned by an ownership mindset. Rather than rely on a small task force to drive the transformation, the company engaged its workforce in more than 150 transformation initiatives. Simultaneously, it launched a company-wide campaign emphasizing the importance of being jointly accountable for business outcomes and making decisions aligned with the business as a whole and not just a discrete part of it. As the executive committee and senior management teams began to think more holistically about how to allocate resources and share new capabilities across business units, the company culture changed from one defined by silos to one united by a mindset of shared responsibility for the overall performance of the business.
4. Fire up quick wins
On average, 35 percent of the total value of the transformation is captured in the first year in successful transformations. Realizing quick wins is the key to gaining momentum. The sooner value is captured, the faster it can be reinvested in other transformation initiatives, and the faster people in the company come to understand the potential of what is afoot, spurring them to capture it. Many transformation programs start delivering value after only 18 months, by which time employees are already skeptical of the programs’ worth. In contrast, the successful transformations we examined captured 35 percent of the total anticipated transformation value already in the first year.
To decide where to focus initial efforts, companies will need a fact-based assessment of the improvement potential within the business and should prioritize initiatives that will move the needle the furthest. But feasibility matters too. At the outset, an initiative that is relatively simple to implement and produces results fast will trump more complex ones.
This type of thinking prompted a global generics company to prioritize initiatives that could grow sales. To do so, the company initially worked to reduce what turned out to be unacceptably frequent stock-outs caused by supply chain issues. As a result, earnings rose 150 percent within 12 months. After three years, they were three times higher.
5. Continuously renew the initiatives pipeline
Roughly 25 percent of total transformation value added in the first year came from new initiatives, rising to 28 percent of total value in the second year. Life sciences companies tend to plan and design the entire transformation meticulously before execution begins. Planning and structure are good and are second nature to many of those accustomed to working in such a heavily regulated industry. But during a transformation, considerable value also lies in adaptability—being able to add new initiatives when others are completed unexpectedly fast and replacing those that seem unlikely to capture the required value. For the successful transformations we analyzed, some 25 percent of the total value added in the first year came from new initiatives. In the second year, new initiatives accounted for 28 percent of the total value. At the same time, it is also critical for the organization to focus on the initiatives that drive the most impact. Companies therefore need to be ready to reprioritize initiatives on an ongoing basis, ensuring that non-value-adding initiatives are stopped at the right time.
A biopharma company driving a site-specific procurement transformation managed to exceed its target for cost savings by 20 percent within the first year by deploying agile sprints that allowed for parallel testing, development, and implementation of improvement initiatives across multiple indirect and direct spend categories. More important, each time an initiative failed to deliver expected cost savings and/or efficiency improvements within the allocated time, the transformation office introduced a new initiative.
The five principles outlined in this article can help leaders in life sciences companies set in motion a transformation program that builds on its own momentum to deliver a step change in performance and equips the company to sustain those improvements. High aspirations are pursued across the company by an army of well-trained employees, while the prioritization of quick, significant wins and a constant flow of new initiatives build and maintain the energy that can sustain a transformation. For many companies struggling with productivity, adhering to the principles could prove key to a transformation that ensures they continue to deliver innovative therapies that improve patients’ lives.