Memo: To all drug company CEO’s

SUMMARY: The heart and soul of any company is its people.  The drug industry cannot innovate with people who care more about their status within the organization than customers and patients.  While layoffs are part of an industry consolidation CEO’s have to make sure that the people being told they no longer have jobs are not the linchpins who put in the time to get it right because they know what we do is too damn important in the lives of too many people.  You can’t quantify someone who cares but you can ensure that their voices are heard.  Please share this with colleagues.

MEMO

To:  CEO’s of Pfizer, GSK, Amgen, Lilly, Novo, BI, J&J, Roche,Merck and BMS

Subject: The future of our industry

As the U.S. economy continues to struggle, Americans continue to suffer through the worst labor market in a generations.  The economy continues to lose jobs and pharma is still announcing job cuts.  There are circumstances in which layoffs are necessary for a firm to survive. If our industry is disappearing or permanently shrinking, layoffs may be necessary to adjust to the new market size, something occurring right now in because of changes in healthcare and empowered patients who are having more of a say about when they go to a doctor and what treatment options they choose.

Over the past three years our industry has faced a lot of challenges from the changes that are taking place within our  healthcare system and from blockbuster drugs coming off patent.  This has in turn led pharma and biotech companies to shed jobs via layoffs at record rates.

However, downsizing, right-sizing, or restructuring (choose your euphemism) is an accepted weapon in the modern management drug company arsenal and it’s often a big mistake. In fact, there is a growing body of academic research suggesting that firms incur big costs when they cut workers. Some of these costs are obvious, such as the direct costs of severance and outplacement, and some are intuitive, such as the toll on morale and productivity as anxiety (“Will I be next?”) infects remaining workers. But some of the drawbacks are surprising. Much of the conventional wisdom about downsizing—like the fact that it automatically drives a company’s stock price higher, or increases profitability—turns out to be wrong. There’s substantial research into the physical and health effects of downsizing on employees— research that reinforces the seemingly hyperbolic notion that layoffs are literally killing people.

It’s difficult to study the causal effect of layoffs—you can’t do double-blind, placebo-controlled studies as you can for drugs by randomly assigning some companies to shed workers and others not, with people unaware of what “treatment” they are receiving. Companies that downsize are undoubtedly different in many ways (the quality of their management, for one) from those that don’t. But you can attempt to control for differences in industry, size, financial condition, and past performance, and then look at a large number of studies to see if they reach the same conclusion.

When you layoff people you like to think that only the poor performers are the ones that are being shown the door but this is not accurate.  Often the people who are being cut are the ones who really care and who would rather do their jobs really well than worry about being politically connected within your organization. In short the people who you are telling no longer have jobs are the very people you need to innovate and meet the new challenges of a new era in drug discovery and marketing.

[pullquote]If our industry is to innovate we need to do more than invest more money into R&D we need to ensure that the good people who care about what they do, the people who put in 70 hour workweeks and work on weekends, are the ones who are retained.[/pullquote]

Make no mistake about it some people are the innovators because they care enough to challenge others to what is best for patients and customers.

The ones that should be shown the door are the managers who refuse to rock the boat even when they know that going along with the status quo is the wrong thing to do.  These are the people who just want to come to work and collect their paychecks rather than take a stand to do what needs to be done and say what needs to be said.

As bad as the effects of layoffs are on companies and the economy, perhaps the biggest damage is done to the people themselves. Here the consequences are, not surprisingly, devastating.

Layoffs literally kill people. In the United States, when you lose your job, you lose your health insurance, unless you can afford to temporarily maintain it under the pricey COBRA provisions. Studies consistently show a connection between not having health insurance and individual mortality rates. Other data demonstrate that even fairly brief interruptions in health-care coverage lead people to skip diagnostic screening tests such as mammograms and colonoscopies. Ironic for an industry that wants to be seen as caring.

There are a number of myths that have taken hold to justify managers’ urge to downsize. Many of them aren’t true. For instance, contrary to popular belief, companies that announce layoffs do not enjoy higher stock prices than peers—either immediately or over time. A study of 141 layoff announcements between 1979 and 1997 found negative stock returns to companies announcing layoffs, with larger and permanent layoffs leading to greater negative effects. An examination of 1,445 downsizing announcements between 1990 and 1998 also reported that downsizing had a negative effect on stock-market returns, and the negative effects were larger the greater the extent of the downsizing. Yet another study comparing 300 layoff announcements in the United States and 73 in Japan found that in both countries, there were negative abnormal shareholder returns following the announcement. 

Layoffs don’t increase individual company productivity, either. A study of productivity changes between 1977 and 1987 in more than 140,000 U.S. companies using Census of Manufacturers data found that companies that enjoyed the greatest increases in productivity were just as likely to have added workers as they were to have downsized. The study concluded that the growth in productivity during the 1980s could not be attributed to firms becoming “lean and mean.” Wharton professor Peter Cappelli found that labor costs per employee decreased under downsizing, but sales per employee fell, too.

Another myth: layoffs increase profits. Even after statistically controlling for prior profitability, a study of 122 companies found that downsizing reduced subsequent profitability and that the negative consequences of downsizing were particularly evident in R&D-intensive industries and in companies that experienced growth in sales.

If innovation is the key to our industry thriving again than it has to no only start with people it has to start with the right people.

Stop hiring empty suits from other pharma companies who want to reorganize departments and bring in people who are ass kissers.  As CEO you  need to take a more active role with HR to ensure that you are retaining your best people. You also have to keep in mind that a lot of these good people are not the ones who rate highest on their performance reviews because managers are told “only X% of  people can be top ranked as top performers.

The facts seem clear. Layoffs are mostly bad for companies, harmful for the economy, and devastating for employees. This is not news, or should not be. There is substantial research literature in fields from epidemiology to organizational behavior documenting these effects.

The damage from overzealous downsizing will linger even as the economy recovers—and as it does, perhaps managers will learn from their mistakes. If pharma does not listen and keeps on the same track than we are cutting our own throats and in the process our industry will suffer.

 

2 thoughts on “Memo: To all drug company CEO’s

  1. Excellent article. Momentarily it changes the notion that industry makes profit with layoff. Actually the layoff rewards the CEO and others who are in the inner circle. I have seen too many times the good people get laid off because of the poor management of the organzation by senior level management thus causing loss of the competent personnel who gave their personal time to grow and care the organization. Hopefully American corporate will wake one day and find that they need to lead with their hardworking employees than just throw them out. I have seen at every organization a buzzword that “Employees are our Asset” and then we turn around and throw them out as “Dirt” to fill our greed..

  2. Pingback: Memo: To all drug company CEO | Health Economics

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