A lesson learned: how downsizing will allow the life sciences industry to grow

SteveSapletalThis is a guest post by Steve Sapletal,  a director in West Monroe Partners‘ M&A practice. Do you have a response to Steve’s post? Respond in the comments section below.

Reorganize, realign, refocus: When divesting is the key to improving margins and profitability

Large medical device companies have been buying complementary businesses over the last five to seven years in order to grow the bottom line while achieving better margins and improving profitability. But, while these organizations have been quick to acquire, many have since realized that operating these complementary organizations requires an entirely different business focus, customer support and operating model. Sometimes, this realization comes too late, resulting in employee and customer retention issues, shrinking revenues and profit margins instead of the bottom line growth and collaborative opportunities the deal promised initially. In these instances, large medical device companies’ best bet is to consider consolidating operations or selling non-strategic parts of their business to refocus on their core operations.

One organization doing just that is Quest Diagnostics. In late 2012, Quest Diagnostics announced that it would launch “a major management restructuring aimed at driving operational excellence and restoring growth.” This restructuring was intended to simplify the organization by divesting non-core and underperforming assets and refocusing capital deployment.  Since then, Quest Diagnostics has reorganized numerous times, shuffled many of its products and services, realigned employees, eliminated duplicative roles and layers of management and adopted a simple “back to basics” approach.  Quest has also sold parts of the business, including HemoCue, to shift attention back to its core operations in diagnostic information services.

Divesting companies takes time, energy and resources and has an immediate impact on profitability. But, it also allows medical device companies like Quest to dedicate the right resources and capital to its strategic objectives going forward. It is a tough decision to divest a portion of the business, especially given shareholder pressures to increase share value, but is often the right one for medical device companies looking for long-term survival and prosperity in an industry ripe with competition.

When should a large medical device company consider refocusing on core operations?

Acquisitions always look good on paper and in a financial model, but achieving full integration and deal value is not a paper exercise.  When completing multiple deals within a year, organizations tend to experience new layers of management and reporting structures, duplicate core IT systems and redundant business processes. After a period of high transaction activity, Quest realized that it had three extra layers of management between the CEO and front line employees that were unnecessary –representing between 400 and 600 employees – far beyond what one would deem a well-run organizational model.

Additionally, Quest, like many of its peers, had to respond to new market pressures regarding reimbursement for laboratory diagnostic services by shuffling their product and services portfolios to stay profitable.  Internally, Quest needed to simplify operations and improve processes to be able to respond more quickly to customer requests and make decisions faster. Many of these bottlenecks were the result of previously acquired businesses not being fully integrated into overall operations. While there is never a perfect time to go through the process of refocusing your business, waiting too long to consolidate or divest can ultimately stunt your business’s growth in the long-term.

What’s next?

Selling business units and consolidating divisions doesn’t guarantee operational excellence. Putting the right organizational structure in place is only step one towards achieving your strategic objectives. From there, medical device companies should pay careful attention to broken, inefficient or outdated systems and technologies. Address these problem areas to ensure they promote productivity and design the right processes to complement these systems. Careful planning is important, but successful execution is vital.

Look for Quest to spend a large chuck of time, resources and dollars to stabilize the business before strategically buying another large business outside of its core competency.

About the guest-author:

Steve Sapletal is a director in West Monroe’s M&A practice. He can be reached at [email protected].

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