Value-Based Planning Uncovers True Drivers of Cost Across Life Sciences Organizations

Analyzing and allocating resources based on value to the overall organization could help large pharmaceutical companies boost their bottom line while getting a better hold on long-term strategic planning. This value-based planning approach is rooted in data and analytics to help leaders maximize value from their operating expenses by linking strategy to resource allocation, shifting the discussion from spend categories and levels to workload value and productivity, and removing the silos that currently prevent good budget management across a large organization.

Focusing on the bottom line alone, without being attuned to value, can result in a crash diet approach to budgeting. Margins are squeezed and company growth is put at risk.

Compared to most other industries, the majority of pharma and life sciences companies have had the privilege to focus on top-line and incremental growth to inform year-over-year resourcing decisions. Rethinking the bottom line is especially difficult for large, growing pharma companies with multiple franchises and competing brand priorities. But getting a better handle on the bottom line is becoming increasingly important. While pharma has been delivering innovation, investors are looking for better returns. The competitive landscape suggests a need for change, and executives across pharmaceutical and life sciences companies understandably want to deliver more value through better resource planning and budgeting.

We are increasingly guiding pharmaceutical and life sciences executives that have already implemented a number of cost transformation programs and have realized deal synergies, but are still struggling to manage operational expenditures. They need a firmer grasp of what is driving their costs, how they can build better agility to inform resourcing decisions, and how they can put in place a more sustainable model for delivering on top- and bottom-line performance.

Where value-based planning stands out

Traditional resource planning methods, like zero-based budgeting and driver-based forecasting, have existed for decades, but are often either too complex to implement or don’t empower the budget owners to come to leadership with solutions. Furthermore, executives who have applied these methods have expressed a lack of confidence on several fronts. They are typically unable to answer the following four crucial business questions:

• How do I have confidence that we are making the right trade-offs while empowering my leadership team?
• How do I ensure the resourcing mechanisms allow the shared services to be agile to support enterprise priorities and make the right distinction of “good enough” where needed?
• How do I sustain the impact from identified opportunities and enable the organization to maintain current views on “nice to have” vs. “truly differentiating” as markets evolve?
• How do I know we won’t go back to old ways and, instead, ensure business leaders will continue to bring solutions to fund-growing needs in year-over-year planning?

For pharma and life sciences leaders looking to get more out of their spend, value-based planning can empower budget owners to make trade-offs in a simpler way than traditional approaches.

There are a few key differences that separate value-based planning from other methods and make it a good option for pharma and life sciences companies. First, incorporating a deliberate “driver” view on budget breakdowns to move the conversation from financial categories to operational drivers of spend, such as the number of ad campaigns and launch activities for each archetype, allows businesses to understand what activities they can reduce or eliminate. And by analyzing the driver volume/mix, productivity, and unit cost, they can get the most value out of the full cost base to support the future workload.

Furthermore, directly linking the drivers and costs to strategic priorities and values allows budget owners to focus on the relative value across the portfolio. Leaders are also able to categorize opportunities into tiers based on value vs. risk, creating a forum for trade-off discussions between “must haves” and “nice to haves” across the business and brands.

Finally, and most importantly, value-based planning doesn’t direct particular outcomes, but instead it enables business owners to challenge their drivers of spending. This is an important process that empowers business leaders. It helps them move away from the typical cost programs that in many cases focus on margins irrespective of growth contribution.

Beyond linking costs, drivers, and priorities, another key to success is looking at the business through different lenses. For example, we have been successful with companies across industries at shifting the conversation around the return on investment (ROI) of marketing to be about working and non-working spend related activities that are driving marketing costs. We analyze how much spend is working to get content placed in front of an audience, which can tie to an ROI in most cases, vs. how much of the total spend is driven by internal processes and activities like agency fees, content revisions, and focus groups. The idea is not to benchmark and target a brand, but to enable the business leader to compare across brands and challenge where the ratio could be more efficient. For example, some mature brands could do less content revisions, or maybe there is an opportunity to optimize spending on agencies.

Setting priorities, making an impact

Creating tiered options empowers budget owners to address targets, manage evolving business needs, and reallocate spending to higher priority and higher value areas for continued growth. As a result, businesses have a set of opportunities based on business value and risk judgment to manage targets and future business needs.

Typically, Tier 1 areas are underpinned with concrete productivity analyses, allowing companies to do more with less and ensuring alignment with strategy. Tier 2 areas require further trade-off discussions that might incorporate delivery model evolution or evaluations about what can be done given the current risk appetite. Tier 3 areas are where the business can achieve monetary value but at the greatest risk for disruption—and may not be the company’s first choice for change.

Tiered opportunities empower the budget owner to address targets, manage evolving business needs, and reallocate to higher priority/higher value areas for continued growth. Creating tiered options has the potential to improve productivity by 15% to 25% of the spend.

How to get started

To implement value-based planning, company leadership must take several steps to ensure their organization is prepared to shift to a new approach that will incorporate a driver-based mentality in budget discussions, reviews, and target-setting. Among other changes, they must link disparate data sets—operational, financial, and organizational. They will establish a clear view of enterprise strategic and portfolio priorities and how they translate to resourcing trade-offs, especially for centers of excellence or shared service groups serving multiple business units. As changes are made, leaders must consistently communicate the impact across the organization.

Every company is different in structure and culture. As organizations shift to value-based planning, each business will be starting in a different place.

There are two main options for leaders implementing a new value-based planning approach. One strategy is to start with a pilot program to build momentum and proof of concept, and identify critical opportunity themes and drivers of spend. For example, one large pharmaceutical company we worked with successfully applied a value-based approach to a small segment of its business on a pilot basis and created flexibility in its operational expenditures of 15% to 20% on a roughly $2 billion base despite supporting a significant number of launches planned for the next five years. This is on top of savings from several prior cost transformations. Now, the company is looking to expand value-based planning as a way of working and planning every year.

Alternatively, some companies might start with the capability build first. They could overhaul the process, data, and tools being used in strategic planning and budgeting. Then they could define where data and analytics would explicitly tie drivers of work to costs, to start creating transparency at all levels.

There is not one right way, and it’s important to review the best options for your organization. Make sure your teams know that shifting the cost and planning conversation is empowering and will help them get the most value out of their time and effort.

Shaguna Punj, principal, PwC US; Rick Edmunds, principal, PwC US; Greg Rotz, principal, PwC US