Life Sciences: A Tough Transformation

Two years ago, five of the 20 Best Companies for Leadership were life sciences companies. This year, there are none. What happenedand how can they return?

What's happening in life sciences (pharma, biotech, and medical devices) is nothing less than a major—and painful—transformation of an entire industry, right in the midst of the worst recession in a generation. "The sector has been hit by a double whammy," says Susan Snyder, senior consultant at Hay Group in the life sciences practice. "Life sciences companies are facing the need to reinvent the way they do business at the same time that their income is down, with the recession forcing insurers and government to reevaluate how dollars are spent."

To regain their footing, life sciences companies need to accelerate their own transformation and reinvigorate their businesses, says Snyder. The practices followed by this year's Best Companies for Leadership, such as a cross-functional approach to leadership, offer useful guidance.

The challenges are indeed formidable. Beyond the economic difficulties that every industry is facing, companies in the life sciences have a unique financial crisis all their own: the loss of somewhere north of $135 billion in revenue from products that will lose patent protection by 2013. By 2013, the equivalent of 18% of the industry's global revenue for 2008 will be gone, and filling that hole with meaningful new products is absolutely essential.

Replacing the Business Model

Moreover, the industry is facing a more fundamental challenge: the need to replace a business model that has sustained it for 20 years but whose viability is now fading.

"The old business model—centered around developing blockbuster drugs, huge margins, and intensive marketing to physicians by an ever-growing sales force—has run its course," says Matt Gurin, senior consultant and life sciences specialist at Hay Group. "The new model is still emerging, but it will be customer-driven, with a stronger focus on creating better solutions and not just new compounds." Another radical change: Sales will shift from a retail approach targeting individual physicians to a business-to-business model targeting larger entities such as insurers and prescription payers.

This shifting paradigm has profound implications for the ways life sciences companies do business—and the sector's leaders are keenly aware of that. Virtually all of them acknowledge the need to change old organizational structures, old ways of working, and old ways of thinking.

But the data from this year's Best Companies for Leadership survey, jointly undertaken by and Hay Group, suggest that the leaders of life sciences companies still have a ways to go in transforming their businesses. In this year's survey, fewer than 70% of managers in the life sciences agreed with the statement "My organization operates in a highly matrixed structure," compared with more than 96% of managers in the top 20.

There's a similar gap when it comes to employee mobility, with life sciences managers less likely to report mobility between job functions. Both results suggest that life sciences companies are lagging in developing the kind of cross-functional organizational structures, leaders, and work experiences required to compete in an increasingly complex, market-driven environment.

Cultural Shift for Leaders

The greater challenge for life sciences companies, however, may lie in how they think about leadership itself. A comparison of results for the survey question "What does your organization value most in its leaders?" is particularly revealing.

"These results suggest that the industry is holding on to the old model, a 'let's get this done' leadership approach that values activity, execution, and expertise over market insight and customer outcomes," says Hay Group's Susan Snyder. "But the qualities that will contribute to success in a transformed industry where companies will make what they can sell, rather than sell what they can make, are the collaborative, visionary competencies like strategic thinking, inspirational leadership, and teamwork."

Snyder acknowledges that these are major cultural shifts that take some time to achieve, even in the best business conditions. She notes that the industry has responded to leadership challenges before—investing to develop first-rate sales leadership, for example, with resulting increases in sales results. "With the changed business environment, though, they have to address not just functional but collaborative leadership," she says, "and lift their focus beyond the sales team."

Hay Group's Gurin also reports promising signs at several of the industry's leading enterprises, where influential leaders are working to bring change to the way their companies develop and market products. "A few global pharmaceutical companies have, for example, begun to reorganize R&D away from technical silos and into more nimble, cross-functional project and disease teams," Gurin says. Senior leaders are held accountable and compensated for developing products that come to market to fill unmet customer needs.

In the commercial organization, companies are moving toward customer segment and account teams that bring together sales, scientific affairs, and reimbursement skill sets as a whole for customers.

Development Challenge

Still, Gurin notes, very few companies have begun developing the leaders who can manage the matrix to inspire collaboration, remove roadblocks, and bring all the value of their companies to bear for patients. That kind of cultural shift is essential. "The companies that facilitate cross-functional organizations—and align their leadership culture to support it—are the companies that will lead the industry in its next phase of development," Snyder says.

She points out that several of the 20 Best Companies for Leadership are products of successful transformations in their respective industries—Accenture (ACN), Southwest Airlines (LUV), IBM (IBM), and Procter & Gamble (PG). "If the leaders in the life sciences finish what they've started, I'm confident we'll see one or more of them on that list in the near future," Snyder says.

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