Reining in manpower costs vital for pharma’s well-being

The Indian pharmaceutical industry is facing a rising manpower cost challenge as employee cost has grown faster than revenue over the last decade, amounting to 15-20 per cent of revenue in the year ended March 2019.

Only a small part of this is explained by increasing business complexity. A larger part reflects the absence of a scientific basis for adding headcount. This has led to lack of economies of scale in manpower costs.

The issue is more pronounced for the Indian pharmaceutical industry in particular, as compared to most other sectors. This is so because manpower cost has grown at a compounded annual growth rate of 20 per cent over the past decade (2008-18) while the sector has witnessed a revenue growth of around 14 per cent only.

A scientific assessment of manpower cost is crucial for pharma companies. However, such programmes are usually difficult to execute due to challenges associated with speed, accountability and sustainability of results.

As a result it is important to keep in mind some key points, while undertaking such an exercise. For starters, establish the “true” baseline or get a complete picture of cost by including hidden or latent costs, for example, outsourcing contracts. Additionally, ensure commitment from senior leadership on goals and objectives of the effort.

Taking along everyone

It is important to take people along, adopting a “for business and by business approach” as employees’ productivity is defined by the goals, resources and constraints they work with. It is key to get active involvement of each employee’s function and other relevant functions to identify issues that reduce productivity.

Companies need to look at the “Art-of-the-possible”, which involves using a lean toolkit comprising seven key levers. These include reorientation of axis of organising work, process streamlining, work-load reduction, offshoring activities to India, reducing duplication, spans and layers simplification, and finally, role right-sizing.

But such developments need to have review meetings involving top management like the Managing Director and Chief Executive Officer, backed by a strong project team to monitor progress and ensure commitment to action.

In the past year, companies in the Indian pharma industry have been under severe pressure to reduce costs given the pricing and competitive situation in most of their export markets. As the industry moves to the next level of cost competitiveness, many companies will start looking at this oft-ignored topic of manpower cost to drive their ongoing cost-control agenda.

A study of manpower costs for Indian pharma companies over the last 12 months up to September 2019 reveals that for most companies cost increase has been high — between 5 and 15 per cent for most and 20 to 35 per cent rise in cost for a few. In our experience, by targeting this cost, you can achieve cost savings of at least 10 to 15 per cent and a productivity improvement of 15 to 35 per cent across key business areas. However, what is more important is the long-term benefit derived from reduced organisation complexity — this leads to faster decisions, better accountability, higher employee morale and better regulatory compliance.

Vikash Agarwalla is Managing Director and Partner, Mustafa Rangwala is Principal and Garima Agarwal is Consultant with the Boston Consulting Group. Views are personal