Steve Sapletal director West Monroe Partner
New business units need to forge their own paths and adopting parent company practices is rarely the best approach.
Though the state of the global economy is gradually improving, one thing has stayed constant: organizations are looking to maximize the value of their business unit portfolio. This is no truer in any industry than Big Pharma, where main players like Johnson & Johnson and Quest Diagnostics are shedding parts of their businesses to drive revenue by dropping low-performing divisions. As this trend quickly becomes an industry norm, life sciences and pharmaceutical firms are faced with the tough decision: how to successfully manage complex divestitures and create a new entity without wreaking havoc on the existing business.
The Clone Wars
Divestitures, rather than typical mergers or acquisitions, present a unique set of challenges to organizations, making them highly complex. A common challenge for pharma stakeholders when initiating a carve-out is overcoming the common “if it isn’t broken, don’t fix it” mentality, which plagues many corporate institutions. As a result, organizations often take the “clone and go” approach when undergoing divestitures—implementing the mother firm's set processes and systems within the new company without even considering other options. Though this method is a viable strategy for kick-starting the new unit, it's far from the only or even optimal option available.
Using the clone and go method to inform the new entity's business processes and best practices gratuitously simplifies the process. The details that may seem small at the time of a divestiture may have the biggest impact on the success of a carve-out—and may conversely cause the move to flop. Whether it's the people involved, the type of new entity formed, or the success rate of former processes and practices, executives must look at the transition from every possible angle before determining what approach to take.
The best example is when a large pharmaceutical corporation carves out a single business unit, which could be represented by anything from one full product line to a standalone item. Included in the divestiture may be the 100–1,000 employees employed by this unit (from the larger corporations' 20,000+). When deciding which internal systems to implement within the new venture, choosing to “clone” or integrate the home organization's likely hundreds of internal systems would be burdensome—financially and operationally—on such a small scale. Doing so would hold up and slow down operations, frustrate employees, and worse, cripple new business.
Managing the Transition
Regretfully, with so many major drug companies carving out parts of their business, the clone and go approach will not end any time soon. Firms looking to successfully manage the transition should do a comprehensive strategy analysis before undergoing a divestiture. Here's how:
- Ask the right questions. Successful divestitures treat the carved-out business unit like a new entity. This means looking into every detail before defining strategy and business objectives. Think about the true costs associated with the move or whether divested staff is capable of successfully running the new business unit. Determine mission critical business processes, systems, how to deal with legacy technologies, and whether out-of-the-box solutions meet new business needs.
- Understand your situation. For some organizations, clone and go might be the natural progression. But it's only after you've asked the right questions that you can understand and determine whether that's the case. Take a survey of your people, processes, and technology. Are any current employees transitioning with the new business? Are key processes segregated, or are they highly intertwined? Is there ample technology to support the move? How might this impact the customers?
- Evaluate objectively. Once you determine the state of the business, deciding whether or not to clone the original enterprise's business strategy will seem like a no-brainer. Thoughtful evaluation and planning can be the difference between an efficient exit and an expensive nightmare.
A business transaction of this scale is challenging within all sectors, but especially for the pharma industry given complexities like regulatory pressures and patent problems or the intricacies of board member approval. With this in mind, and once the means necessary to support new business ventures are understood, life sciences organizations should look to options beyond “clone and go” to support their divestiture activity.
Steve Sapletal ([email protected]) is director in West Monroe Partners’ Minneapolis office, specializing in complex integration solutions for mergers and acquisitions.