Last year, we spent considerable time in figuring out a way to evolve the direction of solution for Pharma Industry. Over 100 practitioners from different organizations came together at the Hub of Operational Excellence and charted out a direction for Pharma Industry in dealing with today’s environment. This is now documented in a game changing book, ‘The Path – Leveraging Operations in a Complex and Chaotic World’.
Starting this year, we have already started looking at another industry that has played a dominant role in India’s growth story during last decade, the IT Industry. We may not be beginning our study at more opportune moment than now, since, Indian IT industry is at cross roads and under severe stress to do justice with its past performance.
Two months into the analysis, we realize that there are hosts of similarities in the nature of problems faced by the two industries, though there are undeniably vital differences too. And it gives us a feeling that the similarities could help in not only resurrecting IT industry, but also so many things that Pharma Industry can learn further.
First, both industries are poster boys of Indian government. Most of the earnings for IT industry is from abroad (read Dollars) and so is more than 50% earning of top 10 Indian Pharma Companies. These two industries are known to have placed India on the global map.
In developed nations, IT is equated to technology and Pharma is equated to high end R&D. Indian Industry is not known for deep world beating R&D and technological capabilities. It is therefore, surprising how India dominates in these industries.
The two Industries from India dominate on the lower end of the value chain, but do solve major global problems. The rise of Indian IT Industry had started with the Y2K problem, when across the world, organizations ran into a panic to avoid the possibility of colossal infrastructure failure. The only way the problem could be avoided was by employing large number of engineers to reconfigure date formats in critical software systems across the world. The job was trivial but the scale of implementation was huge. Fortunately, India had the right demographic dividend to pitch in, with huge number of people at much much lower cost. The Y2K gave birth to the Indian software service sector and is now the major contributor to the 100 billion Indian IT industry.
While Indian engineers were writing codes and manning IT infrastructure around the world and India became the major outsourcing destination for IT services; healthcare sector has been going through a tectonic shift. For over a decade now, the cost of healthcare has become heavy burden on exchequer in developed and western world. Pharma world works on blockbuster model where innovators are given 20 years of exclusivity to leverage their drug discovery; and this model has been the crux of the problem. From the beginning of 21st century, several of these drugs were coming off patent, in fact from 2010 to 2015, drugs worth over USD 100 billion are going off patent. This gives an opportunity to countries and organizations around the world to seek cheaper alternatives to these drugs by encouraging alternative suppliers. Again with demographic dividend and availability of vast number of graduates from pharma and chemical engineering, India got the advantage to supply dramatically low cost version of these patented drugs, called as Generics. Thus India became the global leader in churning out cheaper but legal copycats. There has been growing demand on Indian companies to increase their capacities to meet patent cliff, that would occur around 2014-15. And, India is being called as the contract manufacturing site for generic drugs.
Thus we see that both Pharma as well as IT industries from India solve major global problem and have earned their global presence. Both the businesses earn high margins. The fundamental business model of Indian IT Industry and the top Indian Pharma companies has been centered around US and Europe. Moreover, looking at historical trend, IT industry has been growing at above 20% and US market for Indian Pharma companies growing at more than 25%. As a result, both industry have been expanding capacities unabated. In fact, a study reveals that organizations have built capacities to the tune of 4 time the current demand in Pharma Industry.
However, the recent macro economic conditions have let to developments that are making both the industries to worry about achieving the next level of growth. Due to changes in the respective industries, the margins are reducing dramatically and organizations are getting into a confused state. It seems that the falling advantage of high margins along with the rise of localization issues is making business a bit jittery and unpredictable.
There is another side to the story. Till recently, both Indian industries have been taking advantage of cost arbitrage and earned higher margin in global market. This opportunity has been very lucrative with unbelievable level of margins compared to that in domestic market. Now, both industries are facing competition from companies abroad. The industry leaders (the technology/consulting companies in IT Industry and the Innovators in Pharma Industry) from abroad have quickly replicated the model of Indian organizations and leveled the cost based advantage. As a result, Indian companies are now forced to look at the Rupee market for future growth. Alas! that is not easier than it appears.
for quite sometime, Indian companies had significant market protection. However, the rush of dollar has been so lucrative that till recently, these industries had neglected Indian market. The domestic IT market is opening up in a big way thanks to e-governance initiatives and large mainstream businesses realizing the benefit of IT as strategic discipline. At the same time local Pharma Industry is also opening up thanks to the increased disposable income and changes in life style of the consumers. But it seems that they are being royally challenged by companies from abroad, who are now establishing their presence in India and competing with Indian organizations on cost basis. The challenge faced by Indian companies in their backyard is getting scary, as the incoming organizations have deeper pockets and domain expertise.
On the performance side, both Industries have deep paradoxes. The demand outstrips supply. And yet the operations have low utilization levels. IT companies are struggling to improve utilization above 60%. Actually, if you look deeper, in several categories of skill sets, the utilization levels are poorer than 50%. Walk into a Pharma plant and you would find utilization as below 33% in Formulation with that in API plant a bit better but no better in absolute terms. Economists and industry experts will tell you that when the margins are high nobody gives attention to utilization. However, with the pressure that both industries are facing abroad and in India, organizations have a started looking at operational improvement.
Unfortunately, when you ask them what specifically they are doing about operations, you would find them confused. Of course some are waiting for the external environment to improve and ride the high tide. But there are others, who genuinely want to find a way to improve and leverage their Operations.
Operations is not a new discipline. However till recently it has been meant as the back end of the business with least visibility and importance. So no wonder that many organizations struggle to define their operational strategy and their ongoing process of improving operations. There is no clear and actionable definition. For some it is cost reduction, for some it is quality improvement, productivity gain… yet for others it is safety and environment. And then, most of them get confused switching between one to another. The most widely harbored mental map about operations is ‘fire fighting.’
This need not be the case now! Some forward looking organizations have figured out how to leverage their operations on an ongoing basis and make it a competitive edge even during dynamic changes in the market and industry.
We already have ‘The Path’ capturing on how Indian Pharma companies are turning around the corner. And, we see that there are similarities in the way IT Industry can reveal hidden benefits in Operations and build a competitive advantage.
When I talk to my friends in IT Industry, they have a slightly different structure of ‘Operations’ as a function. And it behooves on us to look into this definition and then comeback on how ‘Operations’ can be improved using generic principles. We will have this discussion covered in one of the forthcoming postings.
31 March 2014