India’s growth story blossomed in the 1990s post liberalization and with every subsequent year of strong economic performance, India Inc. truly became a force to reckon with on the global stage. While the ITeS sector deservedly was in the spotlight, another sector where India became a worldwide heavyweight was pharmaceuticals. The country’s pharmaceutical industry accounted for close to approximately 3.5% of the global pharmaceutical industry by value and approximately 10% by volume in 2016. While a significant portion of this value is dependent on exports, India’s domestic pharmaceutical market is also expected to reach close to USD 50 billion by the close of this decade.
This is reflected in the stellar growth of pharmaceutical organizations in the last two decades, but it hasn’t been smooth sailing lately. While external headwinds in the form of increased regulatory scrutiny have affected this export-oriented sector, pricing control by the Government of India also has strained the top and bottom lines of most domestic market-focused organizations. Both of these factors, in combination with the traditional lack of purchasing power of the under-insured Indian patient has caused multiple organizations to relook at both their growth and cost strategies. Collectively, India’s top 12 listed firms have had a slowdown in top line CAGR by ~3% over the last three years, while the broader healthcare index has remained static in the same period.
Shift to Thrift
One of the most significant cost items on the balance sheet of most pharmaceutical firms is their payroll cost, which currently accounts for approximately 15% of their revenue. This compares particularly unfavorably with respect to other manufacturing-sales organizations across India Inc. as represented below:
Analysis basis payroll cost versus India revenue for leading organizations across sectors
While this number represents both pharmaceutical organizations basis their India payroll costs and revenues, the disparity in terms of value chains of these organizations is dramatic. All Indian organizations in our basket for analysis have significant India-based manufacturing, R&D and corporate presence, leading to significantly higher India-based headcounts and payroll cost. Most foreign pharmaceutical MNCs in India are predominantly sales & marketing organizations with a very limited manufacturing/ R&D footprint. And yet, bifurcating this analysis by ownership does not significantly shift the picture of payroll costs as a percentage of India revenue with Indian MNCs at 23.6% and Foreign MNCs at 13.3% respectively.
Critically, this high proportion of payroll cost vis-à-vis the revenue is more reflective of people-intensive structures rather than salaries being higher with respect to other industries. Typically, pharmaceutical industry’s total compensation lags analogous sectors such as FMCG by approximately 35% and medical devices industry by approximately 25% on Total Cost to Company (TCC).
Mindful of these broad trends and unfavorable cost structures, many organizations in the sector have pared their India headcount growth to develop a leaner and more effective organization. Their efforts in this direction, along with increased focus on high value product portfolios, have led to a strong increase in the median revenue generated by full-time employees.
This critical productivity parameter is all the more heartening, when we look at them in conjunction with headcount numbers – indicating that this upswing on productivity was not operationalized solely by workforce rationalization. Furthermore, headcount addition in this period also has been focused on bolstering business critical functions – R&D, sales, manufacturing and quality – rather than enabling functions.
Despite these significant strides in improving productivity at an aggregate level, there still exists a gulf in value generated per full-time employee, when these numbers are analyzed through an ownership lens – a contrast that is only partially explained via differences in product portfolio of these organizations.
Bracing for the Leap
While the analysis thus far has focused on the here and now of the pharmaceutical industry in terms of productivity, human resources professionals also need to partner with their businesses in future-proofing their respective organizations. Cognizant of this, there has been a welcome change in organizational focus on demographics of their workforces on two critical parameters – gender and retention.
The pharmaceutical industry traditionally has been plagued by higher than India Inc. attrition numbers due to a strong frontline sales presence and niche talent requirements, especially in R&D. This leads to retention of talent being one of the top agendas of HR leaders. While organizations view attrition as a cost and talent issue, attrition can also cause significant complications in pay parity. This salary compression – a premium/discount that is provided to new hires over the current compensation of tenured hires, coupled with widely prevalent functional premiums we see in the sector can cause pay ranges to be exceptionally difficult to administer.
Another focus area for the industry has been attracting and retaining women in their workforces. Research has frequently highlighted the necessity and benefit of having a gender balanced workforce for the unique perspective and talent women employees bring on board. This is especially relevant for pharmaceutical organizations in India since a significant number of organizations have robust women healthcare portfolios. Despite this though, the aggregate gender ratios currently stand at 8% – i.e. 8 women for every 92 men.
The dip in female representation post the middle management cadre is an opportunity area for the industry, indicating a strong need for relevant interventions at specific life stages to retain this critical part of this workforce.
The pharmaceutical industry in India has traditionally maintained a strong internal focus with respect to talent principles. But with a significant number of Indian MNCs competing toe-to-toe with global giants and domestic market being witness to policy and lifestyle changes there is a sea change that is already underway, necessitating HR leaders rework their talent strategies to make it more efficient and effective.
This potentially translates to rewards philosophies that are globally-aligned; lean and agile organizational structures that add to marketplace successes; aligned pay ranges and pay-for-performance plans that protect the bottom line; capability development that is embedded in the organizational DNA; and people technology that eliminates lags in service delivery.
As the cliché goes, what got us here won’t get us where we’d want to be and heedful of this, organizations in the industry have begun concerted efforts in these domains. What remains to be seen is if these initiatives can be meshed into one coherent people strategy that will serve as a launchpad for business success in the future.
All analysis has been performed basis 20 leading Indian and pharmaceutical
~ - Aon Hewitt Level 2 denotes Entry Level Talent, 3 & 4 – Junior
Management, 5 & 6 – Middle Management, 7 & 8 – Senior Management
Gurdit Singh Sachdeva
Aon Hewitt Consulting
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