Life used to be so good for the big pharmaceutical companies. With the advent of high-profile “blockbuster” drugs and spiralling healthcare spending in industrialised countries, annual double-digit sales growth and operating margins of 25 per cent became commonplace. It is still a pretty attractive industry to be in – if you can stomach the risk and the lengthy product development cycles – but life has become rather tougher of late.
Cheaper generic rivals, multi-million-dollar lawsuits (Merck is just the latest big player to wind up in court, over its Vioxx painkiller) and a less promising pipeline of new drugs have served to dent both the industry’s public image and its reputation as a stellar investment opportunity.
No wonder cost efficiency and consolidation are high on the agenda. The past 20 years has witnessed nearly 40 sizeable mergers to create “big pharma” – the global elite of international companies that together account for around half of the $550 billion in annual retail drug sales. Among the names to disappear as independent firms in recent times are Ciba-Geigy, Sandoz, Hoechst, Rhône-Poulenc, Warner Lambert and Pharmacia & Upjohn.
Last year’s takeover by the French firm Sanofi-Synthélabo of Aventis – a Franco-German company twice its size – created the world’s third-largest pharmaceutical group (behind Pfizer and GlaxoSmithKline) and the biggest in Europe. Aside from the benefits of greater scale in R&D, sales and marketing, Sanofi’s board promised €1.6 billion in synergy savings.
From its headquarters in Paris, Patrick Le Laouenan leads Sanofi-Aventis’s combined purchasing operations. CPO Agenda met him recently to talk about the integration of two rather different functions.
What was the business logic for Sanofi’s takeover of Aventis?
The main reason was to reach the critical mass we needed to be a big player in the global pharmaceutical industry. Our CEO, Jean-François Dehecq, wants to grow faster than the industry average of 9-10 per cent a year, so that we can pay for the commercialisation of new products. Like other pharmaceutical companies, we spend a large amount of money on research and development – typically 16-18 per cent of sales revenue ever year – and it costs around €800 million to commercialise a molecule and bring it to market. To optimise that spend, you have to have critical mass. We have had many joint ventures with other companies, but it’s better to be able to manage the costs ourselves. Although Aventis was double the size of Sanofi on many of the key metrics, such as turnover and number of employees, the two companies were about the same on operating profit and market capitalisation. And we were quite complementary in terms of therapeutic products. So there was a compelling logic in the financial markets too.
At what stage were you informed about the board’s plans?
The information was kept confidential, so we learnt of it really at the same time as the rest of the company and the market.
What did you do over the next few weeks to help support Sanofi’s bid?
We had already started working to prepare ourselves. At the end of 2003 we felt that something was going to happen. We didn’t know whether it would be an acquisition, a merger or an absorption, but we needed to prepare ourselves in any event. At the annual meeting of our purchasing executive committee in early January 2004, for example, we conducted a SWOT analysis based on a theoretical threefold growth in purchasing’s spend coverage. Two weeks later, once we knew it was a takeover bid for Aventis, we began to collect information from the market, in terms of its spend, development of purchasing and so on. We had some contacts at the company and through external benchmarking groups, but we didn’t know each other, really, so we gathered some information in case the bid was successful. But we didn’t do any more specifically to support the company’s bid. Only the finance people were really involved in this first phase of the process; purchasing got involved later on, along with many other functions.
At what stage did purchasing get involved in earnest?
At the beginning of the integration process, which started in September last year. In late June and early July we had begun talking to Gil Breault, the CPO at Aventis. But it was at a very informal and general level – organisation charts, processes and systems, that kind of thing. We couldn’t begin to exchange confidential information about contracts and suppliers until the deal closed at the end of August. We knew that the market was being promised €1.6 billion of synergy savings, but it was only once the integration process started that we knew exactly what share was going to be purchasing’s responsibility.
A corporate integration steering committee was established at the top level of the company to co-ordinate the integration process centrally. We set up a purchasing integration committee and appointed officers to that from each company in the group. This was organised into four workstreams focusing on synergy, governance and people, programmes, and process and systems. In the synergy workstream, for instance, there were six core groups looking at major purchasing categories such as cost of goods sold (COGS)/manufacturing items, clinical studies, sales and marketing, scientific consumables, information systems and telecommunications, fleet and administrative services. These were then split into 70 sub-groups by business or geography. This process lasted for six months and was done entirely using internal resources. We set the ground rules and guidelines and then left it to the local teams to execute them.
What differences did you find in the way purchasing was organised and carried out in the two companies?
There were many differences. In terms of organisation and structure, purchasing was much more centralised at Aventis than at Sanofi, particularly on the COGS/manufacturing side. Sanofi is a very decentralised company, and, in fact, decentralisation is a mantra of our CEO. Local business needs drive our priorities, which means that both manufacturing and commercial operations purchasing are devolved.
The second big difference was in culture. At a corporate level, Aventis’s purchasing leadership was based in Germany, in Frankfurt, and was probably more international in its outlook, owing to its size, than Sanofi, which was very French. But, at the same time, it was probably not sufficiently out in the field. We discovered that many local buyers at Aventis had never met anybody from the corporate function before. That surprised us. Local buyers were waiting for guidelines and operational instructions, such as master contracts, from head office. That was not our way of thinking in Sanofi. Our approach was very much about going out to see people and getting things done locally. That meant you had to know your buyers. We did that spontaneously.
Overall, Sanofi was more “upstream” orientated – focusing on sourcing suppliers, the quality of supplier products, negotiation and renegotiation – whereas Aventis was more “downstream” orientated and had invested a lot in tools, processes and systems such as e-procurement, where it was using Ariba.
How did that difference manifest itself in practice?
Well, take spend coverage. At Sanofi, our definition of coverage was the percentage of spend that had been subject to good purchasing practices, through the buyer being involved early in the process. Aventis’s definition of coverage was the proportion of spend that had gone through its e-procurement system. In other words, you take your total spend, subtract “maverick buying” – defined as the proportion of spend not transacted through purchasing – and that equals coverage. While we tracked maverick buying as an indicator, it was of little interest to us and that is not the definition we use today. Coverage must happen upstream.
This was the main difference between the two purchasing cultures. In our initial discussions after the merger, we seemed to be talking about the same concepts and using the same terminology, but in fact there was a huge gap between us. We didn’t discover that until many, many weeks after starting the process and it caused a big cultural shock between Sanofi and Aventis.
Did you find much difference in coverage, according to your definition?
We had difficulty in estimating the coverage in Aventis, because the KPI (as defined) did not exist. So we had to estimate it, as an average. We then had to take an average for both companies. But we concluded that there was a 25 percentage point gap. I can’t disclose the actual figures, but in Sanofi coverage was much more than 50 per cent and in Aventis it was less than 50 per cent.
How do you explain that?
It was partly about experience. At Sanofi we had been working across all of the company’s spend since 1994, when I joined. In Aventis they had only started the process since it was formed by the merger of Hoechst and Rhône-Poulenc in 2000. The merger of those companies was probably still not fully achieved four years later, because it’s difficult to combine German, American and French cultures.
How did you begin to pull the two functions together?
We knew pre-merger that we could not simply apply our thinking to another organisation that was double our size. When we compared the two functions, we found that Aventis had a very complex organisation. For instance, it had category managers, as we did, but it also had what it called “spend teams”. These were composed of buyers, internal customers and stakeholders, including finance and audit, to ensure that decisions were taken properly. These teams were very formalised and met regularly. But they were conflicting with the category management teams, because their roles intersected. On top of that, they also had key account managers – a lead buyer in charge of a key supplier such as Accenture. To me, that organisation was a bit complex.
The concept of spend teams still existing after four years showed the buying community was not very mature. If you are mature, you don’t need to keep things so formalised. When I started at Sanofi, I had spend teams of this kind, but they disappeared after a year or so.
We scrapped these spend teams because we wanted to simplify the structure. In some cases, they had three or four people who were supposed to be responsible for a particular area. And in practice that can mean that everybody is responsible yet nobody is. Simplification makes it clear who is in charge. One person is responsible. People at Aventis understood the need for this, and it was a welcome change.
How many jobs have been lost in purchasing since the merger?
Not too many. The people that we lost in this process were mostly those in Germany who didn’t want to relocate from Frankfurt. Our CEO made it clear early on that the head office of the new organisation would be in Paris, and not shared with Frankfurt and Strasbourg where Aventis was based. So we lost some senior people as a result of that. Overall, we had 250 purchasing people in Sanofi and about 500 in Aventis and now we have 750 buyers. So it’s almost the same number. That purchasing workforce allows us to increase the coverage further.
What does the new purchasing organisation look like?
At the top, we have a central leadership council, headed by me, that includes directors at the corporate level and from our major countries and zones. For Sanofi-Aventis, our four key countries in terms of sales are France, Germany, the US and Japan. We also have two “zones”: the rest of Europe (the UK, Italy, Spain, etc) and intercontinental, which encompasses Asia, Latin America, Africa and the Middle East.
Category management is decentralised, and category managers set the overall strategy and get involved at the operational level when required by the businesses. We also have purchasing “zone managers” whose job is to act as an interface between corporate policies and the local organisations at the country level. Manufacturing purchasing, for example, is a decentralised operational structure and is part of the global network of buyers.
At the corporate level, purchasing reports to the senior vice-president, general affairs, while at the operating level there are two structures: in manufacturing divisions, buyers report to a head of manufacturing; while in the commercial and R&D divisions they report in to finance.
Are there any plans to restructure the purchasing organisation further?
Not so far. But, as I see it, there may be further decentralisation in the future, depending on how the functions mature. The more mature you are, the less you need to be centralised.
What are the key objectives for purchasing post-merger?
Savings is the main one. Generally in a merger, the benchmark for purchasing savings runs at 25-30 per cent of the announced synergies. We did not escape these expectations. These savings are coming from a mixture of “quick hits” price harmonisation – which has been done – and global volume leverage, which we are now focused on. These synergy savings are measured and reported separately from “business as usual” activities. We track them through a tool we use called, appropriately, S@VE. The announced timing for achieving the synergy savings is 18 months – so by 2006 – and currently the progress is in line with our expectations.
Of course, all of these savings have to be accepted by finance as hitting the bottom line. If it’s not a regular purchase, then it’s harder to convince them. The KPI we use is the difference between the price we end up paying and the best offer we got from suppliers. If the buyer has been involved early in the process upstream, then we consider that the best offer is a very good proposal. If we can lower that offer, maybe it’s not strictly a saving, but it would have cost the company if the buyer didn’t take care of it. If you don’t count that, buyers will think that their efforts don’t matter to the company and won’t bother to do it.
Coverage is also important. Our objective for 2005 is to increase the coverage of purchasing by 10 percentage points.
Are you targeting particular categories for that?
The two main segments are clinical trials and marketing. Like any pharmaceutical company, these are both very big spend areas for us. In clinical trials we are particularly targeting phase IV – the post-product launch trials. A lot of these trials are done by subcontractors, so it’s outsourcing. We have to negotiate the fees with them. At Aventis, this was not really achieved, so we can improve our coverage here. The second area is marketing. At Sanofi, we were involved in all aspects of marketing – creative, media buying, symposiums, and so on; whereas at Aventis, that definition of marketing was not always the same.
How will you increase coverage in clinical trials and marketing? Is it a case of applying the Sanofi process to the combined company?
Well, it’s not only a question of applying a process. We have to do many things. First, we have to train our people, and our development programme includes how we can sell our function to internal clients. For example, how can I convince a product manager at the local level to come to purchasing for help? We have a mandate, but it has to be used as a last resort. What we do is to coach our young buyers and meet the internal clients with them, use case studies and success stories with them. You still have to get those people to really understand the added value of purchasing.
There are some competency gaps in this area of soft skills. But now we are focusing on making sure we harmonise the vision of purchasing across the buying community, so all buyers understand the importance of working upstream and getting involved early. We are also putting a lot of emphasis on creating a network where buyers can capitalise on collective intelligence and meet regionally on a regular basis to share those success stories and lessons learnt.
The challenge is to make sure that our buyers don’t just try to apply one approach. The local business decision is key, and it may not make sense for the business to wait a few months while we negotiate a bigger volume deal if the net result is a 5 per cent saving. Similarly, purchasing can lose a lot of political capital if it tries to drive specification harmonisation too hard; it may be the right thing to do in packaging, but perhaps not in services. It’s a mistake to
try to force those things on internal customers, and we have to be extremely sensitive to that.
Does purchasing have a role beyond savings and the coverage needed to achieve them?
Our CEO is clearly waiting for savings; it’s the main issue. But he also wants to be sure that the company is compliant with legislation such as Sarbanes-Oxley. When purchasing is involved upstream in the process, he can be sure that our ethical approach has been applied. Our contribution to the top line is also important, and time to market is a critical measure here. It takes an average of 12-15 years from discovering a new molecule to launching a product. And out of 10,000 molecules that get invented or discovered, only one will actually be commercialised. So it’s a long process and anything that can be done, including by purchasing, to reduce that, even if it’s only by six months, is critically important. Being first to market in this industry is everything; we are obsessed with that.
Top management is also waiting for any kind of help from us in terms of demand management. We know that the main saving we can make is by reducing the volume of consumption in the company. That requires change management among buyers, because they think they are only there to optimise the cost of whatever somebody else has defined. I think that is a wrong
way of thinking. Today, top management is asking whether we can convince our internal clients to change their needs, particularly in terms of reducing the amount of overspecification.
What has been the hardest thing you’ve had to do in the past 12 months?
In the post-merger phase, we spent a lot of time on trying to get the right person into each position. In some cases there were two good people for the same job. That was not easy; it was a long and tough phase. And sometimes you make mistakes, so you have to continue to evaluate people in their jobs. That work is still ahead of us.
Has the merger had any noticeable impact on purchasing’s profile or reputation in the company?
It’s too early to say, but in six months’ time I am confident the profile will be back at the same level we had previously at Sanofi.
What advice would you give to other CPOs in a post-merger situation?
The result you want from purchasing after a merger is 1+1=3. In other words, not just the sum of the two functions but something more. That task is made easier by the fact that purchasing people immediately want to work together because the job is about looking for and finding synergies. Greater scale is attractive to them in a way that isn’t necessarily the case for other functions.
Timing is important: you have to go fast to take advantage of the opportunities in your supply markets. If you don’t, six months later you will have lost the momentum. You need to execute, adjust your strategy and tactics, and then execute again.
A final thing is to accept that neither party has a monopoly on best practice. In our case, there were best practices everywhere, so we had to take the best where we found it. That requires listening and humility from people. That can be hard when you have been competitors before.
Sanofi-Aventis at a glance
• No. 1 in Europe; no. 3 worldwide
• Annual sales of €25 billion in 100 countries
• Procurement spend: €12 billion
• R&D spend: €4 billion
• 100,000 employees (750 buyers)
• 5.3 per cent market share
Major therapeutic areas:
Cardiovascular, thrombosis, central nervous system, oncology, metabolic disorders, internal medicine and vaccines
Key products:
Lovenox (heart disease)
Plavix (stroke/angina)
Taxotere (breast/lung/prostate cancer)
Allegra (hayfever)
Stilnox (amnesia)
Eloxatine (colorectal cancer)
Delix/Tritace (high blood pressure)
Lantus (diabetes)
Interview by Geraint John
