The downside to downsizing

pharmafile | May 24, 2004 | Feature | |   

It used to be that the pharmaceutical industry was virtually recession-proof. When times were bad, the unemployed had more time to be ill, and their prescriptions were free. A coal miners' strike was a bonanza for the industry.

The pharma industry has not suffered quite the same fate as mining, but the current over-regulated environment has conspired to make things far more tricky than they used to be, and corporate communicators now tell anyone who cares to listen, that 'we are thinking smarter'. Industry profits have suffered a variety of squeezes, and part of the smart thinking is how to stay the apple of the investors' eye whilst the downward pressure on profitability continues.

I would hazard a guess that there are not many card-carrying members of the Communist Party working in the pharmaceutical industry, and this is largely because it is a bastion of the capitalist system and subject to the forces of the free market, which currently thinks that jobs are not for life.

One of the scariest words in the capitalist system is 'downsizing'. It may not even be a proper word, and it certainly did not figure in my 1990 Oxford pocket dictionary. But we all probably know what it means. If you are a senior manager, it means workforce reduction in an attempt to do the same for less cost; if you are lower down the food chain, it means that the company says it is trying to save money, and my job does not/may not exist any more.

For several years there has been a strong tendency to adopt a downsizing strategy to deal with economic pressures in the pharmaceutical industry. The industry is typical of many commercial organisations in that there is both a R&D segment that tends to burn cash, and a sales and marketing segment that exists to generate cash. At the most simple level, if a division of a company is not generating cash flow, then it always seems a softer target for downsizing.

Does downsizing work?

My premise for this article is that despite the theoretical flawlessness of a downsizing exercise to increase profitability, there is almost no evidence to suggest that such exercises have succeeded.

Furthermore, based on available evidence, it can be suggested that rather than making organisations fitter and leaner, amputation leads to irreversible disability. Very little published data exists on the effect of downsizing exercises within the pharmaceutical industry, and examples quoted either relate to other scenarios, or to anecdotal evidence.

At the end of 1984, the UK pharmaceutical industry suffered an attack of Pearl Harbour ferocity which de-listed a significant number of prescription medicines and doctors were no longer allowed to prescribe them through the NHS.

There is little doubt that this was an attempt to reduce spending on drugs, and companies found that if they reduced the price of blacklisted products, they could almost magically be reinstated. There were some in the industry, who with 20:20 hindsight said that they could have predicted this event, but there is no evidence that any company took any proactive role before the first round of blacklisting. For those companies with sunken flotillas of products, the knee-jerk reaction to reduced profitability and less products to sell, was to downsize the salesforce. This probably marked the beginning of the modern sales representative and having to sell to non-traditional customers.

In the late 1980s the intensity of merger and acquisition activity increased, and the merger of the Beecham Group with Smith, Kline and French (because that is what it seems to have been) was the starting gun for consolidation in the pharmaceutical industry. The public face of consolidation was that resources and expertise could be pooled, and there could be savings in both cost and time due to synergistic activities, ultimately improving profitability.

However, there was inevitable duplication of function, and the combined organisations would be smaller. As well as the mergers, there have been companies that have not fared well: products have failed in research (eg, British Biotech) and the market (eg, Bayer and Roche).

Planned income streams have failed to materialise and the obvious conclusion in such circumstances is downsizing. It may also be realised that in order to make themselves more attractive as acquisition targets, companies of various functions have slimmed down to make themselves appear more cost-effective.

Outcome may not be cost-effective

These are all very broad brushstrokes, and belie what happens within the organisations.

Downsizing is traumatic and affects corporate culture, individuals within an organisation (both those who leave and those who remain), and rarely is there clear evidence that apart from a transiently reduced payroll, that the outcome is cost-effective.

In 1998, T.A. Hickok wrote that the most prominent effects of downsizing in any organisation will be in relation to cultural change: noting the relation to saved costs or short-term productivity gains. It is self-evident to anyone who has worked in more than one pharmaceutical company, that each has its own (may be subtly different) culture.

Survivors of downsizing surmise that power and influence within the company has shifted away from rank-and-file employees in the direction of senior management; rather than feeling like bigger fishes in a smaller sea, there is concern that their sphere of influence may have contracted, and there is reluctance to interact with those perceived as the instigators of the downsizing.

Boiling Frog Syndrome

There is a shift in emphasis, away from the well-being of individuals to that of the organisation. One interpretation is that part of the intentional aspect of downsizing in the midst of culture change is the infliction of pain on some to get the attention of all.

Several authors (eg, Laplante, P.A., Staying Clear of Boiling Frog Syndrome) quote the 'Boiling Frog Syndrome'. The analogy is simple: try to drop a frog in boiling water, and it will try to escape immediately. However, if you put a frog in water that is cold initially and then slowly warm it up to boiling, the frog will not sense that the water is increasing in temperature, and will remain until it boils to death.

The point is that within a changing organisation, employees may adjust unwittingly to adverse changes, but fail to realise that cultural inertia prevents them from escaping when there is still time. One may ask why does this happen: when the writing is on the wall, is it that hard to interpret?

The answer may be that those caught in adversity may refuse to believe that things could get any worse. This is well recorded in history, and survivors of persecuted groups sometimes offer this as an explanation of why they did not flee, protest or fight back.

What about the victims of downsizing?

What happens to individuals caught up in downsizing? The simplest group to consider is the victims. Unfortunately, in trying to lose those employees considered less vital to an organisation (ie, those who may be considered to not effectively contribute to the bottom line), there may be lack of insight by senior managers about critical functions: there may have been specialist training that does not exist anywhere else in an organisation, and may take time and effort to replace.

Highly trained individuals may be attractive to other organisations, and once their skills and knowledge about an organisation are lost, there is no going back. Similarly, those more perceptive and mobile individuals with desirable and portable skills may choose not to hang about to ponder their own fate, and there is always a danger that the talented will jump when there is a threat of change. Conversely, it is those who are less marketable who will cling on the wreckage in the hope that they will survive.

A downsized employee may easily feel that they have been treated unfairly, especially if there has been lack of transparency in the downsizing episode. It is possible that a dowsized person may (correctly in some cases) see themselves the victim of a personal vendetta. There is a documented case in the recent literature of a company sales representative who reported their ex-employer to the Prescription Medicines Code of Practice Authority (PMCOPA) for breaches of the code, and not only won but also succeeded in demonstrating how she had been treated improperly; it will be interesting to see if that case ever gets as far as an industrial tribunal.

Employees who feel that they have been treated unfairly may see great merit in disrupting the activities of their former employers. This may range from simple bad-mouthing to revealing complex commercial information and sabotaging of systems. This shift away from the care of the individual cannot be underestimated, and no amount of severance pay can compensate for a perceived personal slight.

In the aftermath of downsizing, one thing that often sharpens feelings of unfairness both within and outside organisations is discovery that those who implement downsizing (for apparent reasons of money saving) are themselves awarded significant financial rewards and golden parachutes without there being any clear and validated evidence of benefits (except to themselves) for their organisation.

Increase in sickness absence and mortality?

Those who implement and authorise reduction in workforces consistently claim the benefits of decreased costs and apparently increased profitability. However, what is rarely revealed are the less visible consequences. A recent study published in the British Medical Journal examined whether downsizing was a predictor of increased sickness absence and mortality among employees.

This study was not specific to the pharmaceutical industry, but looked at municipal employees in 10 Finnish towns (most of the literature relating to downsizing comes from the public sector). Nevertheless, there is no reason to believe that the data cannot be extrapolated. The investigators found an increased rate of medically certified sickness absences and increased risk of death after major downsizing among people who remain in work. Cardiovascular mortality was twice as high in this group compared to a group not exposed to downsizing. The proposition was that the data should be interpreted within the framework of work stress. Even without this evidence, it is commonly reported that survivors never feel the same about the workplace.

The levels of loyalty drop, and there is always the fear that management may have acquired the taste for blood and demand a repeat performance. It is entirely reasonable to see reduction in workforce implementation as an overt show of strength against which little action can be taken except on an individual choice level. The company is left with a worried, depleted workforce, who is constantly looking over their shoulders wondering what will happen next. Newcomers discover on their first day that all is not well, and may acquire the worries of existing staff.

Are there any benefits to downsizing if you are an employee? If you survive and you can keep your head, then it may be that your own position could be consolidated; there must be a certain critical number below which the organisation ceases to function.

Within the pharmaceutical industry, there are certain individuals who may even be a legal requirement: beyond the chief executive, certain qualified persons are needed for compliance with European law (although these functions could be contracted out). Cynics would add that it is not what you know, but what you know about who you know. It may be that the plan works, and the survivors find themselves treated as more valued employees. If you are one of the departed, then things are different, and there is nothing quite like a hanging at dawn to clarify a man thinking.

Keep frogs alive and well

The Pharmafile directory is full of individuals who have found themselves with no option but to make it on their own, and some have done a first rate job of it: for these individuals who work as independent consultants, or set up their own companies (possibly to await their own downsizing exercises), the enforced change came as blessing in disguise and it makes you wonder what it was about their previous employment environment that stopped them from becoming shining stars.

My basic conclusion is that there is little value in downsizing (especially when applied to the pharmaceutical industry). It has rarely achieved a useful long-term outcome, and there is more likelihood of engineering a resentful, sick, under-qualified, group of survivors. If you need to save money, stop wasting it on fruitless exercises trying to research products of dubious value, conducting studies of negligible merit, and promoting to customers who cannot and will not prescribe/purchase.

If a workforce role cannot be seen as being of permanent value, then either do not appoint, use a fixed-term contract, or (more commonly) contract in the expertise, but only for as long as you need it. Remember, it's your duty to keep frogs alive and well.