The Bottom Line: Revenue Management Trends and Best Practices

When a President becomes your brand ambassador...

Do you know whose stents were used during former President Bill Clinton's recent surgery?

http://www.cnbc.com/id/35368365/Clinton_s_Stent

March Madness (HCR Version)

It’s that time again when everyone is scrambling to figure out the odds of success and who the big winners and losers will be. There have already been fouls called, full court presses, and significant upsets. No, I am not talking about collegiate basketball, but instead another wide ranging and impactful event called health care reform. With the signing into law on Tuesday of what was essentially the Senate bill, we have reached the semi finals in this tournament. In the next few days the finals will determine if a reconciliation bill gets passed or not.

 

Analysts and legal experts have been attempting to determine who will come out ahead depending on particular aspects of the new law. Prior to passage of the final law and creation of the reconciliation bill, Hogan & Hartson's Alice Valder Curran did an analysis at Rainmaker of various items impacting drug and device manufacturers, including the med device excise tax, increases in Medicaid base rebate percentages for innovator drugs, and expansion of the 340B program. These items will impact each manufacturer differently depending on their product mixes, distribution/utilization channels, and commercialization strategies among other things.

 

After determination of wins and losses comes the equivalent of game film and stat reviews. This process has already started where manufacturers are deciding how to change their game plan to respond to the enacted laws. Some responses, such as the increase in Medicaid base rebate percentages will have operational implementation aspects as well as cost and accrual tasks. Other items, such as the new fees, will have more of a forecasting and estimation impact than a direct operational impact. Of course, any item that significantly changes costs, margins, or relative competitiveness will indirectly impact future operational plans as manufacturers work to maximize returns in the new reform environment.

 

This season of health care reform is almost done. Regardless of the imminent final outcome of the reconciliation bill, many of the players in health care reform are already signaling a readiness for a rematch on many of the issues brought into play in this first season, so stay tuned.

Would Columbus be Allowed to Set Sail Today?

There are a lot of success stories from companies down to their last dollar trying something desperate and finally getting it right. There are very few instances of companies doing well and the founder having the vision to change tack and take the company to the next level.

You will enjoy reading Mark Leslie’s account of leading Veritas from a $4M initial investment to a $1B company in 11 short years: http://www.sandhill.com/opinion/daily_blog.php?id=62.

Mark is on Model N’s board as well and it is encouraging to see the common traits of capital efficient and patient investments and a laser focus on innovation and the needs of the marketplace. In addition to Revenue Management solutions purpose-built for specific verticals, Model N is now adding analytics to the transactional platform to elevate the strategic need for holistic Revenue Management.

Timing is good because price transparency and global visibility comes up in every conversation with executives. Contrast how Columbus travelled five hundred years ago. No GPS. No radar. No idea what it will take to get to India. Ended up on the other side of the world. Would a CEO of a global business today consider this “good execution”? Is this an example of “predictable growth” that shareholders demand from public companies today?

But, a half a millennium later, a lot of Life Science manufacturers are in the same boat (pun intended). No idea which country has higher contribution margins and why. No radar to tell them where the next storm is looming. No idea which sales rep in which country is giving away discounts on a deal that will have a ripple effect across other geographies. Bravery is to be applauded, but trust me, today’s shareholders are a lot less forgiving than the Queen of Spain was five hundred years ago.

Check out this Boston Scientific presentation and see how an industry leader is using Revenue Management Intelligence to get full visibility and insight into their pricing and margins. Smart money is on companies like Boston Scientific who want GPS, radar, and satellite-fed weather maps before they set sail to find new riches.

 

Revenue Management Intelligence Rocks Rainmaker 2010

Model N's sixth-annual RAINMAKER Revenue Management Conference is winding down at the Ritz-Carlton, Laguna Niguel in Dana Point, CA. More than 350 attendees from the Life Science and High Tech industries spent three days in the sun (mostly) talking about navigating change in a rapidly evolving business climate.

Model N's Revenue Management Intelligence framework, which delivers retrospective, opportunity, and predictive analytics, had everybody excited, especially after hearing BSC's experience with Model N's retrospective Performance Analytics application.

On the high tech side, Atmel and Dell had well received sessions on transforming sales orgs with BI and managing multi-channel incentives respectively. Check back for more news and stories from this year's RAINMAKER.

The Big Reset - Good Read

Good post by Walter Armstrong - "The Big Reset"

How come executives from drug or device manufacturers are never quoted in these articles? If "outcome-based" medicine is the way to go -- then current silos of the health care value chain will need to be taken apart. More vertical integration will be required -- from the manufacturer to patient -- so that efficacy can be measured and incentivized.

Also curious to hear how much money payors have been spending to maintain the status quo. I don't agree with Peter Tollman's comment: "The revenues of the industry haven't declined yet, but projections say they will. Growth rates have gone down significantly, so it's certainly not a growth industry anymore. That's a very long journey."Growth is stagnating because  manufacturers have not figured out how to break through the current morass of globalization, patent cliff, price transparency, etc. As the population ages in the developed world, drug and device companies are facing a gold mine in the coming decades. Question is which ones will be visionary enough to put themselves in a position to capitalize.

More on this soon...

Semiconductor 2010: Divergent Opinions

I would fall over in a dead heap if all the pundits and organizations that forecast the semiconductor sector ever agreed on the outlook for the industry. However, there is usually a somewhat unified higher level vision of what is going to happen over the ensuing dozen months or so.

At this point in time, there doesn't seem to be much of a unified vision as to what 2010 holds. There is the optimistic camp that sees low inventory levels, promising new products, rising stock prices, etc. and forecasts a banner growth year, at least over 2009. There is the pessimistic camp that looks at high unemployment rates, tight capital, and strained capacity and forecasts that 2010 might only be slightly better than 2009.

The only thing these two camps seem to be able to agree on is that neither has a very high level of confidence that their position is correct. This rapidly moves beyond the theoretical to the practical for people running companies. They must decide whether it's "off to the races" or "hunker down and survive." 

I believe this uncertainty will continue to be the major driver for the semiconductor industry for the foreseeable future. From a people perspective, this will translate into a reticence by CEOs to commit to permanent headcount additions and their continued use of contract personnel and consultants at all level in the organization.

You Know it is Strategic if the CEO is Repeatedly Mentioning it to Investors

October 20, 2009. Ray Elliot, newly appointed CEO of Boston Scientific on the company's quarterly earnings call:

“We have programs in place to improve our margins and this is an ongoing area of intense focus with respect to price management and mix utilizing a corporate wide pricing improvement project and our new sophisticated pricing tool, Rainmaker.”

“One of the things I commented on the script is we put a new system into play that’s been worked on here for a long time that allows us to have visibility and sophistication around pricing. Part of it is to not leak profit loss on the current policies you have and that you’re maximizing profitability. So that system which is called Rainmaker is allowing us to have some huge opportunities analytically to try and protect against that.”

January 12, 2010. Ray Elliot, CEO of Boston Scientific at JP Morgan’s Healthcare Conference:

Price sophistication: we have spent millions of dollars and it's starting to come to fruition now on a system called Rainmaker. It's custom built for us and it has tremendous capabilities in contract and pricing management, and really in optimizing price. The times where price is tougher this is particularly important.

You can view his presentation from their website. The quote above is in the context of his new strategy on slide 13.

It is gratifying to see the CEO of a customer refer to the joint solution as a critical foundation block to his new strategy. We have always believed that Revenue Management is strategic. It is a differentiator in today's market.

These days the product life cycles are getting shorter and shorter. Competitors can bridge the product innovation gaps very quickly. It is very difficult for public companies to continue to increase shareholder value predicated on innovation alone. At some point, you need to invest in processes and systems that allow you to protect and improve the returns from your existing product portfolio. All of us are used to usual excuse by faltering sales leadership – “If I have the next feature on the product roadmap, I can easily meet and exceed my quota." Probably. But, BSC is an example of company investing on both sides – innovative products and innovative systems to efficiently run their business. First, they invested in the transactional platform that automates their pricing and contracting processes. Now they have layered analytics on this transactional data that is enabling the “O-Suite” to stay on top of their revenues – daily.

Is it healthy that your CEO knows the details of what your team did yesterday – prices quoted, discounts given, contractual performance enforced - before you do?

Eventually, yes.

Short term - it requires a lifestyle change. Something akin to an eat better, exercise five times a week prescription. You need to align incentives for sales teams, partners, and customers with performance, consolidate transactional data and contractual commitments under one platform so that insight is available in-line with the sales or revenue realization process, and have visibility into opportunities across all geographies and lines of business, all helping towards taking a preventive approach to revenue and margin leakage. We even have support groups.

Learn first hand. Join us at RAINMAKER and see Boston Scientific share their journey to a healthier enterprise.

Upgrade Systems Now?

In our consulting practice, we see a wide variety of systems in use to support various business, operations, and engineering functions. Business systems range from Quickbooks Pro to fully implemented ERP systems.  Yield management may be handled with Access databases or sophisticated yield analysis tools. Supply chain management may be handled with Excel spreadsheets or powerful supply/demand software.  And the list goes on... When a company is small, many things can be done somewhat manually.  As the company grows and becomes more complex, however, it is difficult to effectively use brute force to manage many different functions. Employee hours balloon, mistakes are made, and customer service levels erode.
 
There is no "zero impact" time to upgrade systems. It requires the involvement of key players throughout the organization to ensure that the potential benefits are achieved. Many companies reason that we can handle things manually now, so we'll wait until we can't and then upgrade. The problem with this strategy is that when things pick up, everybody starts working longer hours just to get the job done. Now on top of that, you expect employees to spend several hours per week doing the things to get ready for the changeover. Though the system will save time when up and running, it creates a greater load on people during the installation. I could go on and on about the consequences, but you probably get the idea. I offer up an alternative for consideration. We believe that it is more effective and less painful if the systems are upgraded before the environment is hectic chaos.  I think in most instances, the set-up and implementation will be better and employee attitudes about the system will be more positive. I liken it to changing the engine on a 747: it is much easier to change on the ground than in the air. 

High Tech: Are People Getting Hired?

At the risk of being redundant, the answer to this questions many times is "It depends." We're already beginning to hear the words "jobless recovery" bantered about for many industries. Generally, we do not believe this will be the case for the semiconductor industry going forward. There are currently positions being filled every day. It is not a large number, but there is hiring going on.  Most of these positions fall into one of two broad categories. 

The first category includes positions that are high level and strategic in nature. A company needs to replace a CEO or bring on a CTO to focus development. These type positions tend to be filled whether times are good or bad. The second type ties more closely to the level of business. As business strengthens (or appears that it might) companies may add technical resources (designers, apps engineers, etc.), sales staff, or operations personnel.

There is a great deal of caution these days in adding staff due to the uncertainly about the level and stability of future demand. For many fabless companies, this problem is exacerbated by dwindling cash with a dim outlook for future funding rounds. It is "hang on to what you've got" and try to stretch the current organization as much as possible. However, there are fabless companies with significant cash reserves and strong demand that are adding staff.

As with the "it depends" above, much of hiring depends on the supply chain segment, product technology, and end-market focus. 

Are We in the High Tech Upturn?

As much as everyone would like a simple yes/no answer to this question, more often than not, the answer is "it depends." For starters, the total supply chain has several segments, each having relationships to the others. The biggest chunks are semiconductor device companies (both fabless and IDM), manufacturing providers (foundry, probe, assembly, test) and equipment and materials suppliers. The device companies typically see the changes first, then the manufacturing providers, then the equipment and materials providers. Because there is lagtime in the system, the changes get amplified and the equipment guys (caboose) may not realize what's going on until after the device guys (engine) has already left the track. 

A second factor is which device segment you're involved in. During this downturn, the memory guys have been particularly hard hit because of a massive overbuild of capacity that led to price wars that scuddled all hopes of profitability. Other segments (e.g. microprocessors, logic, analog, discrete, etc.) were impacted to varying degrees.

The third factor is end market. The growth rate in PCs, cell phones, consumer products, automotive, etc. have different growth rates, inventory positions, etc.

All that being said, most forecasters are guardedly optimistic about the coming months for most market segments. Some fear there may be relatively minor correction after the end of the year, but generally see positive growth over the next couple of years. A word to the wise, as with car mileage estimates, "your results may vary."