| Pharmaceutical CFOs are driving change |
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| Friday, 28 March 2008 | |
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Two separate Ernst & Young surveys underscore important changes in the role of the chief financial officer (CFO) and finance function in driving the success of pharmaceutical companies. With many multinational pharmaceutical companies welcoming a new CFO to their organisation over the past two years, the survey results emphasise the key role the CFO will play as companies move away from a focus on driving top-line revenue growth to one on managing for return. Global cost reduction key issue To achieve this change, 74 per cent of respondents in an Ernst & Young global survey of senior pharmaceutical industry executives agreed that CFOs will need to shift their time from low value functions such as defensive monitoring and reporting to a focus on partnering to help shape growth strategies that enhance business performance. Carolyn Buck Luce, global pharmaceutical sector leader at Ernst & Young, pointed out that CFOs and the finance function were driving the business transformation that is now at the forefront of the industry. “In an era when pipelines are erratic, patents are expiring, and pricing is under pressure, the role of the CFO and finance function will become pivotal in driving improved returns, enhancing reputation and creating value,” she predicted. Ernst & Young’s global survey showed that a large majority (92 per cent) of respondents rated global cost reduction as a key issue for their business, with 25 per cent saying cost reduction has been a focus for more than two years and 35 per cent saying it has been a focus “for as long as I can recall.” Over half (56 per cent) felt it was the CFOs role to lead cost reduction initiatives and that competitive pressures (58 per cent), profitability (58 per cent), and the need for better returns for investors (33 per cent) were the key drivers for cost reduction. Increased regulatory and compliance requirements Along with managing for return, the CFO and the finance function are also critical to a company’s ability to achieve the right balance of risk and opportunity, and optimise risk as a key driver of value. In fact, the survey reported that the top three drivers that are transforming the role of CFO are increased regulatory and compliance requirements (46 per cent), increased corporate governance obligations (36 per cent) and increasing risk management responsibilities (32 per cent). “The risk profile is critical because the external environment is growing more risk averse while the changing nature of the business requires the industry to, in fact, take on a lot more strategic and operating risk to drive value,” added Buck Luce. Thirty-two per cent of respondents feel that the CFO of their organisation does not have enough understanding of the wider issues their business faces. Outsourcing More pharmaceutical respondents are considering outsourcing and shared service models for certain internal functions than those in other industries. Sixty-four per cent of respondents are currently considering outsourcing certain internal functions as part of a cost-reduction measure versus 46 per cent of respondents from a cross-industry population. Respondents were least comfortable in outsourcing clinical trials (36 per cent), followed by sales and marketing (33 per cent). Similar to the changes on a global level, a survey of pharmaceutical CFOs in India, conducted by Ernst & Young, found that they foresee a change in their roles. Within the survey, however, there were distinct differences in the responses from CFOs of India-based subsidiaries of major multinational pharmaceutical companies (MNC) compared to those from CFOs of India-headquartered pharmaceutical companies (IPC). Most notably, human resource challenges are more acute for MNC CFOs, with 67 per cent ranking employee attrition as a key concern versus only 25 per cent of IPC respondents. Moreover, three-quarters of MNC respondents say they are unable to attract the best talent compared to one-third of IPC respondents. Unsatisfied with current risk mitigation measures “The differences in the concerns of CFOs in Indian-headquartered companies versus India-based subsidiaries of multinationals are significant. As the market matures, we expect these differences will start to disappear,” said Murali Nair of Ernst & Young’s health sciences practice in India. Consistent with the global survey, respondents in both groups cited bottom-line pressure as a key concern (76 per cent overall), however the focus of their cost-cutting efforts varied. CFOs of India-headquartered pharmaceutical companies are more concerned about cutting costs in the supply chain (67 per cent) compared to 44 per cent of MNC CFOs. Fifty-eight per cent of IPC respondents report being unsatisfied with current risk mitigation measures compared to only 11 per cent of MNCs. CFOs from Indian pharmaceutical companies agree on the following top four drivers of change: improving shareholder value, responsiveness to business needs, globalisation, and cost pressures. This is in contrast with the global survey results for MNCs where compliance & risk are major change drivers. Increase time spent on partnering Although 81 per cent of respondents have implemented enterprise resource planning (ERP) systems, 50 per cent of MNCs and 67 per cent of IPCs either do not or only partially extract performance measures from their ERP systems. Forty-two per cent of Indian pharmaceutical company CFOs feel that the “ability to maintain and drive growth” is a key challenge over the next three years. To address this challenge, 70 per cent MNC CFOs and one-third of IPC CFOs would like to increase time spent on partnering. The findings are published in Progressions, the Ernst & Young bi-annual global pharmaceutical report presenting a collection of articles and viewpoints from pharmaceutical industry and Ernst & Young executives on key industry trends. To read more on the evolving role of the CFO and the transformation of the finance function in the latest issue of Progressions “Transforming Finance for Peak Performance: Part I”, please contact This e-mail address is being protected from spam bots, you need JavaScript enabled to view it to order a copy or visit the Ernst & Young website for excerpts of articles. Related articles
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