Top 400 Asset Managers: Outcomes revolution in investment management and pharmaceuticals
Mitesh Sheth outlines what investment managers can learn from the transformation taking place in the pharmaceutical industry
I was recently invited by Sanofi, the fourth largest healthcare company in the world by prescription sales, to talk to 500 of their UK and Irish employees about my experiences with innovation in the investment management industry. As I prepared for the presentation, talked to Sanofi’s leadership team and participated in their workshops, I came to realise the massive parallels between the pharmaceutical and fund management industries. Both industries are in the middle of an outcomes revolution.
Investment outcomes in investment management
I was first drawn to investment management, having been a pension fund consultant and manager researcher at Towers Watson in 2005. I joined David Jacob, head of fixed income at Henderson, determined to design better investment products and solutions for institutional clients. I felt strongly that clients shouldn’t care about index benchmarks, narrow asset class definitions, regional boundaries and deceptive strategy labels (like hedge funds) in achieving their overall investment outcomes – be that income, capital preservation, beating inflation, long-term growth, and so on.
We built a risk budgeting and capital-allocating ‘investment strategy group’ at the centre of the investment process. This allowed us to engage with our clients (and their ultimate clients) around their goals, risk appetite and time horizon in designing and delivering investment outcomes. With a focus on outcomes, we brought together high yield and investment grade analysis, developed market and emerging market analysis, as well as cash bonds and derivatives expertise to give clients access to the fixed income universe against their choice of benchmarks and targets.
I still believe clients should begin with the end in mind. Our starting point should be: where am I today; where do I want to get to and by when; how much risk am I willing to take (what return volatility would be uncomfortable and what’s my maximum drawdown); and what cash flow (or liquidity) do I need along the way. This is true for a pension fund, an individual investor, a family office, a sovereign wealth fund – in short, anyone.
Background to the pharmaceutical industry
The pharmaceutical industry has changed a lot over the past few decades but at its core it still develops, produces, markets and distributes drugs licensed as medicines. Drug discovery and development is very expensive as only a fraction of all compounds investigated are ever approved for human use. To cover these costs a company needs to discover a new blockbuster drug (one which generates revenues in the billions) every few years.
The industry has been growing at a rapid rate since the 1970s, as legislation allowing for stronger patents has come into force in most countries, helping pharmaceutical companies to generate significant profits from their patented products. In recent decades, a handful of large companies have dominated manufacturing of medicine around the world, supported by numerous mergers and acquisitions.
Pharmaceutical companies have been great cash generators for shareholders over the past 20 years, and IMS Health values the global pharmaceutical industry at over $800bn (€620bn). But while healthcare ought to be simple at its core, layers of management regulation, processes, policies, business models and acquisitions have complicated pharmaceutical organisations and the healthcare industry over the years – creating a global problem today that itself appears to defy definition.
Drivers of change
The market capitalisation of the largest pharma companies is expected to come under significant pressure in the coming decade. Over the next few years patent protection on historical blockbuster drugs will continue to run off. Regulators are demanding more affordable and cost-effective therapies. In addition, there is an industry-wide research-and-development pipeline gap meaning there are no big blockbusters on the horizon.
Furthermore, there is a growing demand for personalised healthcare challenging the current business model, with new competitors with new business models emerging and gaining in strength.
To add to its woes, the industry’s image has been damaged by accusations of disease mongering, bribing doctors, false claims and illegal marketing, not to mention the high profile court cases. Bestselling books such as Bad Pharma (2012), Side Effects (2008) and Big Pharma (2006) have built on the public’s impression of big businesses putting profits over patient welfare. Even Hollywood portrays pharma as a global, shadowy force (not unlike the way in which the investment industry is portrayed).
The industry has survived a continuous series of regulatory, scientific, social and political challenges in the past. However, the changes it faces today from regulation, competition, commoditisation, technological advances, austerity and public perception are significant on their own and even more disruptive when considered together, demanding a more radical response.
Parallels with fund management
These forces of change are very similar to those facing the fund management industry (global assets under management are estimated by IPE to be around €39.2trn):
• Historical blockbuster products are being commoditised;
• Intense competition is putting pressure on margins;
• Disillusioned clients and customers are frustrated with fund manager self-interest;
• Regulators are ever more intrusive, demanding more transparent charging, better management of conflicts and clearer marketing;
• Technological development is spawning new products, new business models and new avenues for client communication;
• Economic austerity, low growth and on-going cost cutting mean clients and end-customers want more for less.
Pharmaceuticals, like fund management, are B2B businesses in that the customers are essentially not the end-patients but the intermediaries – the healthcare professionals, doctors, consultants and pharmacists. These intermediaries are facing change and disruption of their own with intense regulation, flat budgets, pressure to cut costs and growing patient demands, much like the pressures on IFAs, platforms, banks, insurance companies, pensions consultants and funds.
With this roller coaster of changes and resultant uncertainty about the future, the only constant that pharmaceutical and fund management companies can hold onto is putting the end-customer (patient) at the centre. Both industries need to transform from being product centric to customer (service) centric; from pushing drugs and funds to helping customers improve their health and wealth.
Pharmaceuticals and fund management are in the midst of an ‘outcomes’ revolution. This is a huge undertaking and it cannot be achieved through a series of incremental steps or a long list of initiatives. Such fundamental changes call for a focused and radical response, leveraging one’s strengths.
Historically, large pharmaceutical companies have reacted to market pressures by cutting costs, and on the face of it this time is no different. If you look deeper though, there is a realisation among senior leaders that cost cutting is short term and incremental, and it will not address the fundamental shift they are experiencing in the competitive landscape.
They know that their entire business model needs to be looked at differently.
Sanofi (and the other major pharmaceutical companies) have recognised the need to shift from being a product marketing company to becoming a customer relationship business.
They believe that while having great products was enough to drive success in the past, this nowadays creates diminishing returns. They know that their future success will be determined not just by how many drugs are sold, but how well their products, services, tools and education have helped to improve or maintain a patients’ health and wellbeing.
Their revenues will still come from product sales, but the reason why customers will want to buy from pharmaceutical companies is changing. They need to offer their customers more for less and create an ecosystem of products and services around the end-patients’ health outcomes.
For example, in 2012 Sanofi and Agamatrix launched a new type of blood glucose monitor, which also connects to a smart phone. This allows patients to track glucose levels continuously and give them access to a telephone hotline and other support services, which earns Sanofi considerable customer loyalty. This shift to integrate products with innovative monitoring technology and personalised support services was possible because Sanofi listened to the needs of patients with diabetes.
With any change in strategy it is critical to diagnose your problems honestly and to leverage your strengths to differentiate your business. Pharma companies continue to build a stronger product portfolio through deals, partnerships, alliances and virtual R&D to access a broader universe of research companies.
However, they know not to stop here. Their sales people know their customer and they have unparalleled access and information. The best pharma companies are determined to build on this to be the partner of choice for their customers and to go beyond that in building a relationship with the end-patient too.
Pharma companies are breaking down silos (diabetes, oncology, generics, and so on) to use key account management techniques to ensure their customers do not get lots of different sales reps trying to get a share of their limited time. Instead, they are working on a single point of contact which understands the customer’s needs and offers support, education, services and products to help meet patient health outcomes. They are learning to think and care more about the customer and the patient (their needs, their experience and their long-term relationship) rather than just focusing on the disease, the drugs and their profits.
There is a significant effort being made to transform how medicines are presented, marketed and sold with a better understanding of stakeholder needs, demonstrating clear value for healthcare professionals and end patients. Sales reps are increasingly becoming a conduit of best practice among healthcare professionals, making links and introductions between stakeholders. The best are helping their customers – the intermediaries – deal with their challenges, as well as the steps, processes and tools to get to where they need to.
I am most impressed with the acknowledgement that this requires a major shift in attitude, behaviour, people and culture. Significant training of senior leaders, middle managers and other employees is underway. Employee-led customer-centric innovation is a powerful way of achieving this kind of culture change. In the past pharmaceutical innovation was limited to product development much like in fund management. Pharmaceutical companies are starting to use innovation more broadly across their employee base to improve business efficiency and customer service too. This requires giving employees permission to take risks and experiment with new ways of working without the fear of failure.
Taking a blank sheet of paper to fund management
The vast majority of investment management companies are not structured around their clients’ needs and outcomes. They are built around fund, asset class and regional silos that operate independently with limited dialogue, interaction and collaboration. A handful of houses have created successful outcome teams or divisions – with LDI or multi-asset specialists – though even there the challenge remains to apply this way of thinking to the rest of the business.
Senior leadership in investment management houses does not yet accept that the investment management business model needs to be overhauled. There is no overall drive to move the business from being product marketing to client relationship centric, and no corresponding plan to shift attitude, behaviour, people and cultures. Innovation remains a product manufacturing activity.
As an industry we need to look at the end investors and clients, rather than just being focused on the intermediaries and consultants, and start to ask ourselves how we can work together do a better job for them.
Some of the more dynamic, agile and client-centric investment managers are starting to realise this and are taking it seriously. Here are some lessons we can all learn from the disruption facing the pharmaceutical industry and their response:
• Our clients’ focus on outcomes will affect our whole business model not just a single multi-asset product area;
• A central risk-management, risk-budgeting and allocation team is essential in responding to clients’ needs and designing/delivering investment outcomes;
• Break down silos between funds, between equities and fixed income, between manufacturing and distribution, between back/middle office and the front office and between the corporate/board and the business to work together to deliver better outcomes for the end client;
• Focus on our strengths, rather than being all things to all people. Build alliances and partnerships with specialist investment boutiques and complementary players;
• Rebuild trust by putting the end-customer at the centre of our business. Help the clients and intermediaries deal with change and work together to deliver better solutions for the end customer;
• Train sales people to behave more like well-informed, trusted advisers. They must be able to listen and draw out client’s unarticulated needs. They must be able to offer advice and assistance to help our clients reach their overall strategic goals;
• Foster a client-centric, employee-led innovation culture beyond product manufacturing;
• Give our employees permission to take risk and experiment with new ways of working, without the fear of failure.
Finally, it is all too easy to stick to what we know and who we know. If the investment management industry wants to adapt, innovate, transform and engage, we need to include people with different perspectives, with different experiences and expertise; intentionally draw on customer insights, employee ideas and other industry perspectives.
I think if senior leaders in investment management commit to becoming fit for the future they will be blown away by how many middle managers, employees and clients volunteer their time, ideas and enthusiasm to solve these complex industry challenges.
If we get it right, our clients will be more successful in meeting their investment outcomes and our employees will thank us for investing in them and for helping them to do
the best work of their lives.
Mitesh Sheth is founder of Mitesh Sheth Consulting Ltd