The Bottom Line: Revenue Management Best Practices

New Action... Maybe?

noreply@blogger.com (Ron Jones) — Fri, 04 Feb 2011 19:44:00 +0000

The last two years have been pretty ugly for many folks in the semiconductor industry. The economy in the US continues shaky at best with growing deficits, high unemployment, states on the verge of bankruptcy . . .
As we've continually said, many companies have been very conservative with cash, hiring and new product development. Though many people have been increasingly optimistic about the future, the uncertainty has caused them to not act.

During this period of insecurity and conservatism, there has been a compounding demand for people and investment. Though companies may have a tough time justifying investment based on concrete improvements, they know they can't avoid it forever.

Though it must be treated as anecdotal, we've seen a significant change in activity over the past several weeks. We've noticed a step up in action with recruiting, consulting, investment, due diligence, systems selection, etc. I've talked to a number of folks that are still on the bench that say they've just started getting calls about job opportunities.

Like a New Year's resolution, what better time to make the plunge than the beginning of a new year. It seems like many companies have reached the point of deciding they must do something, even if it's wrong.
We can only hope this continues beyond anecdotal to something resembling the norm. It's been a long dry spell and some rain would sure be a welcome relief.

Here's to a Great 2011

noreply@blogger.com (Ron Jones) — Thu, 23 Dec 2010 21:35:00 +0000

It is tough trying to sum up 2010 in a few words.
The industry will probably have record revenues, but you don't hear too many people celebrating. Some companies are doing well; others, not so well. Some people are doing well; others, not so well. This can, of course, be said of every year, but 2010 somehow seems much different. The uncertainty in what the economy and the government may do have instilled a conservatism throughout the industry that seems to suppress feelings of joy. If the industry continues doing well in 2011, maybe confidence will return and we can feel better about the future of our industry.

View from the Valley - Nobody Goes to Jail

noreply@blogger.com (Ron Jones) — Tue, 30 Nov 2010 00:52:00 +0000

Moore's Law is probably the most widely known characteristic of the semiconductor industry. Many are amazed at how uncannily accurate the law has proven to be. Since the law has for years been used to set long term development goals, there is an alternate view that the law has become a self-fulfilling prophesy. Either way, it's had an amazing run.

Gordon Moore laid down the basics of his Law in his 1965 paper. It has since been tweaked by Dr. Moore, himself, and interpreted by many. He observed, "The number of transistors that can be placed inexpensively on an integrated circuit has doubled approximately every two years."

To those of us in the industry, we don't give it a second thought. I would guess, however, that each of us may have a little different interpretation if we dig deeper. First, it applies only to the IC chip itself. It doesn't involve packaging and it doesn't involve speed or other IC performance. Second, it describes an "inexpensively" cost factor. It is not what a scientist can achieve in a laboratory, but rather what can be done in a commercial environment. Third, there is the dimension of time that is not precise. Fortunately, this evens out over a period of many years.
Historical progress has always caused me to focus on two main drivers for Moore's Law: wafer size and minimum feature size. In the back of my mind, I assumed you needed both to stay on target. When I started in the industry, wafer sizes were 1" and are now 12" (300 mm). Each diameter step approximately doubled the wafer area, and thus the number of chips, for around same processing cost. Over the past 35 years, geometries have gone from 8 micron (8000 nm) to 45 nm, roughly doubling the number of transistors per square inch every two years.

For the last couple of years, we have been facing a practical decision: to go to 450 mm wafers or not. There is no doubt that our industry has the technical wherewithal to design, build and operate 450 mm capacity. The pesky fly in the ointment is the word "inexpensively" in Moore's Law. I have broadened this to include "total cost," which includes not only the cost of manufacturing the chips, but the cost of designing and building the equipment and developing the processes. There is significant data to indicate that the semi fab tooling industry has still not fully recouped the investment in going to 300 mm.

For our industry to remain healthy, a move to 450 mm must allow the fab tooling vendors to recoup their investment and make a profit. Remember, these same vendors must also continue development to allow jumps to new nodes, which have been the main driver in the past. There is certainly a case that can be made that a move to 450 mm, with all its intended effort and cost, will dilute the focus and funding on node jump development to the point that no net gain will be realized.

The industry as a whole may well be better off by staying at 300 mm and driving node development in the x, y and even z dimensions. No matter what, the semiconductor industry will continue to make progress so that new generations of transistors will be less expensive than their predecessors. Whether we are able to maintain adherence to Moore's Law remains to be seen. But if we don't quite follow the Law . . . at least nobody goes to jail.

Caution - Is Stability Possible?

noreply@blogger.com (Ron Jones) — Thu, 30 Sep 2010 17:16:00 +0000

The semiconductor industry has suffered from feast-famine cyclicality for over 40 years. The underlying driver is the fear-greed cycle, known well in psychology, finance, and other endeavors. In the past, I've compared this phenomenon to a football game with 4 quarters. There is no need to restate the quarters as most of you have been through more cycles than you would care to remember.

This cycle somehow feels different than any I've been through over the past 40+ years. Companies are growing their revenues, but are trying to do it with productivity, rather than adding new people. Since we do recruiting, I don't much care for a jobless recovery, but there is a positive side in that this time around we might keep ourselves from going from all out hiring to massive layoffs. There is some reaction to current business trends in capital spending, but some companies have made plans and are staying the course. I was particularly interested in the announcement by TSMC last week that they would continue with a very aggressive capital expansion plan in 2011, despite industry concerns over a potentially softening market next year. This type of move has typically only been made by a few companies, most notably Intel, in past cycles.

In every cycle I can remember, the postmortem states that we understand what happened and why and we're not going to let it happen again. Maybe, just maybe, we might do a better job of managing this cycle than we have in the past. Maybe there is a chance of better stability than we've seen before.

I don't want to get overly optimistic; however, as the fear-greed cycle is buried deep within the human DNA and is always ready to jump out and get us again.

Fixing the Life Sciences Supply Chain

noreply@blogger.com (RM) — Mon, 09 Aug 2010 23:37:00 +0000

Health care reform has dominated discussion both within the Life Sciences industry and among the general public over the past year and will continue to be debated as the new legislation is slowly implemented. Front and center in this ongoing discussion how to contain spiraling costs. With pharma expected to fork over bigger discounts on their government business and as new taxes and fees are levied on both pharma and med tech, manufacturers will see some of their fat -- at least in comparison to other industries -- margins start to erode.

Historically, supply chain efficiency has not been the highest priority for manufacturers given the high margins they become accustomed to. It may start to get more attention now as the entire health care industry -- from health care providers to manufacturers -- look at ways to improve value and reduce costs. Supply chain expert Lora Cecere of the Altimeter Group has an excellent post in her blog that covers this in more detail:
http://www.supplychainshaman.com/supply-chain-excellence/it-will-take-more-than-a-band-aid/

View from the Valley - Semicon: Then and Now

noreply@blogger.com (Ron Jones) — Fri, 06 Aug 2010 18:13:00 +0000

July is Semicon West time. Below is a quick look at what we saw and heard as well as a look back at Semi West over the years.

Semicon: 1971 to 2010

I went to Semicon West, as I have for the last bazillion years. Though most things stay the same, each show seems to have a bit of its own personality. The show this year seemed particularly open and spacious. There were wide aisles and lots of sitting areas with benches. This seemed like a thoughtful touch by the organizers, until Larry pointed out that the outer reaches of the show floor were blocked off and the common space was probably so the show didn't feel smaller.

The mood was generally upbeat, with most manufacturing equipment vendors reporting robust backlogs. At the same time, there was a tone of worry in several of the presentations voicing that the market may be overheating, with some evidence of double booking. There's still an underlying fear among some that the current strength in the market may not have staying power.

It's hard to believe that it's been almost 40 years since the first show at the Fairgrounds in San Mateo. Back then, everyone parked on the dirt around the horse track and walked into buildings that would house the pie judging contest and 4H exhibits during the fair. It was a couple of buildings with a relatively small collection of exhibitors. Companies booked rooms at the Villa Hotel on the El Camino to host hospitality suites... many of which were more memorable than the event itself. The show grew and blow-up buildings were added to house assembly and test. They were usually pretty hot inside and on at least one occasion, didn't stay blown up.

The show outgrew the Fairgrounds and moved to the newly expanded Moscone Center in San Francisco in 1992. Early on, there was lots of griping from Silicon Valley folks who didn't want to have to drive ALL the way into the City, find parking, etc. The show grew too large for Moscone and assembly/test was moved to the San Jose Convention Center. This upset many of the vendors that served both fab and assembly/test as they had to either ignore one segment or pay to have two booths. After several years, Moscone West was completed and the show once again reunited. At the peak, Semicon used the entire Moscone complex. Over the past several years, the show has been shrinking. The Solar segment has taken over the West Hall and Semicon has collapsed back into North and South Halls. What will next year bring... I guess we wait and see.

Why Potato Chip Makers are Smarter than Silicon Chip Makers

noreply@blogger.com (Kamal Ahluwalia) — Thu, 20 May 2010 17:25:00 +0000

Good read

Margins continue to be top of mind for chip industry. Competing on price is clearly not an option. The comparison between the two chips is not entirely ridiculous. "Design Registration" is akin to Frito-Lays getting the corner shelf space at Walmart or Safeway.

30 of the top 150 chip companies have standardized on Model N's Revenue Management suite to globally manage their pricing, concessions, opportunity tracking, margin protection, etc. Check out the Youtube channel to listen to some of the chip makers who are not playing the russian roulette with their prices. http://www.youtube.com/user/revenews

1.1 Trillion Reasons to Address Revenue Leakage

noreply@blogger.com (Kamal Ahluwalia) — Tue, 18 May 2010 00:41:00 +0000

A recent IMS Health study indicates a worldwide $1.1 Trillion drug and device business by 2014. We have been talking about taking Revenue Management global with our recent product release, and a recent Pharma Commerce article provides further proof that manufacturers cannot simply focus on the US market.

Pricing pressures are being felt across all segments. I particularly liked the quote in another Pharma Commerce article about a recent IMS Health survey by IMS' Murray Aitken: “While the 32 innovative products launched last year brought important new treatment options to patients . . . they drove only a limited increase in drug spending.” So a healthy drug pipeline -- a scarce commodity these days -- is no longer sufficient to increase margins and shareholder value.

All signs point to a strategic need for drug and device manufacturers to look at their revenue-centric processes and systematically eliminate the revenue leakage. Our experience indicates a 4-12% of the revenue is wasted every year. If we are looking at a trillion dollar industry by 2014, even a marginal improvement can fund plenty of research for new blockbuster drugs. In fact, a strategic investment in Revenue Management is the equivalent of reaping benefits from a blockbuster drug -- without having to go through the ordeal of clinical trials.

Are We Getting Smarter?

noreply@blogger.com (RM) — Tue, 18 May 2010 00:39:00 +0000

Customer demand in many product sectors is strong. This is good news for many semiconductor companies that have been limping along with negative cash flows and shrinking balance sheets. The growing demand also has the potential to drive up ASP's as well as unit volumes. At the same time, the growing product demand is putting strains on foundry and OSAT capacity, particularly in higher tech products. Capacity is being added by many manufacturing partners, but equipment lead times are long. Many companies are beginning to commit to hiring that they have had on hold for more than a year. There is certainly the temptation to start double ordering and reckless hiring.

There are those that still fear there may be a slowdown in the second half of the year. Taking a philosophical view, a little speed bump might not be such a bad thing to keep us from getting too exuberant and doing some of the things we do in every upturn that look so dumb when we look back after the crash. We always say we're going to get smarter every time we go through a boom/bust cycle. Maybe the clinging conservatism we see this time might actually help us achieve our dream of getting smarter. Only time will tell.

‘Revenue Management’ Comes to the Rescue of Pharma’s Complex Pricing Environment

noreply@blogger.com (Kamal Ahluwalia) — Thu, 13 May 2010 20:39:00 +0000

Love the ripples that a little analytics create...

http://pharmaceuticalcommerce.com/frontEnd/1460-model_n_rainmaker_contract_management_life_sciences_chargeback.html#

Will Health Care Reform Become More of An Operational Burden than the DRA?

noreply@blogger.com (RM) — Tue, 27 Apr 2010 22:45:00 +0000

Preliminary results from an ongoing Model N industry survey of health care reform (HCR) impacts suggest it might with more than half of respondents saying it will -- at least in the short term.

While HCR has the potential to bring up to 30M new customers into the pharma market, it will do so in phases that won't end until around 2020. In the meantime, some of the operational issues start much sooner. Increased Medicaid rebates discounts and 340B-eligible facilities expansion start in the very near term and the market share fee on manufacturers' government business kicks in next year.

While the rebate increases in themselves do not pose a huge problem, especially for manufacturers with flexible automated rebates systems, they do represent an immediate margin cut that won't be made up in volume for a few years. In addition, manufacturers have to be careful about how this and 340B might affect their commercial business strategies and any business development plans they may have. These issues are why many manufacturers are lowering guidance, at least for the short term.

The market share fee is also problematic. It is not straightforward, with several layers of revenue threshold exemptions and rebates. And it is not like there is an enormous amount of industry transparency into government programs market share data. Determining how much cash to set aside to pay the fee is certain to add to a new wrinkle to revenue planning.

CBI and Model N are hosting a free webinar tomorrow featuring life science legal experts King & Spalding and manufacturer Hospira to examine some of these impacts. More info on the webinar can be found here.

Would Columbus be Allowed to Set Sail Today?

noreply@blogger.com (RM) — Wed, 14 Apr 2010 00:24:00 +0000

There are a lot of success stories from companies down to their last dollar trying something desperate and finally getting it right. There are very few instances of companies doing well and the founder having the vision to change tack and take the company to the next level.

You will enjoy reading Mark Leslie’s account of leading Veritas from a $4M initial investment to a $1B company in 11 short years: http://www.sandhill.com/opinion/daily_blog.php?id=62.

Mark is on Model N’s board as well and it is encouraging to see the common traits of capital efficient and patient investments and a laser focus on innovation and the needs of the marketplace. In addition to Revenue Management solutions purpose-built for specific verticals, Model N is now adding analytics to the transactional platform to elevate the strategic need for holistic Revenue Management.

Timing is good because price transparency and global visibility comes up in every conversation with executives. Contrast how Columbus travelled five hundred years ago. No GPS. No radar. No idea what it will take to get to India. Ended up on the other side of the world. Would a CEO of a global business today consider this “good execution”? Is this an example of “predictable growth” that shareholders demand from public companies today?

But, a half a millennium later, a lot of Life Science manufacturers are in the same boat (pun intended). No idea which country has higher contribution margins and why. No radar to tell them where the next storm is looming. No idea which sales rep in which country is giving away discounts on a deal that will have a ripple effect across other geographies. Bravery is to be applauded, but trust me, today’s shareholders are a lot less forgiving than the Queen of Spain was five hundred years ago.

Check out this Boston Scientific presentation and see how an industry leader is using Revenue Management Intelligence to get full visibility and insight into their pricing and margins. Smart money is on companies like Boston Scientific who want GPS, radar, and satellite-fed weather maps before they set sail to find new riches.

When a President becomes your brand ambassador...

noreply@blogger.com (RM) — Mon, 29 Mar 2010 16:56:00 +0000

Do you know whose stents were used during former President Bill Clinton's recent surgery?

http://www.cnbc.com/id/35368365/Clinton_s_Stent

March Madness (HCR Version)

noreply@blogger.com (RM) — Thu, 25 Mar 2010 11:57:00 +0000

It’s that time again when everyone is scrambling to figure out the odds of success and who the big winners and losers will be. There have already been fouls called, full court presses, and significant upsets. No, I am not talking about collegiate basketball, but instead another wide ranging and impactful event called health care reform. With the signing into law on Tuesday of what was essentially the Senate bill, we have reached the semi finals in this tournament. In the next few days the finals will determine if a reconciliation bill gets passed or not.

Analysts and legal experts have been attempting to determine who will come out ahead depending on particular aspects of the new law. Prior to passage of the final law and creation of the reconciliation bill, Hogan & Hartson's Alice Valder Curran did an analysis at Rainmaker of various items impacting drug and device manufacturers, including the med device excise tax, increases in Medicaid base rebate percentages for innovator drugs, and expansion of the 340B program. These items will impact each manufacturer differently depending on their product mixes, distribution/utilization channels, and commercialization strategies among other things.

After determination of wins and losses comes the equivalent of game film and stat reviews. This process has already started where manufacturers are deciding how to change their game plan to respond to the enacted laws. Some responses, such as the increase in Medicaid base rebate percentages will have operational implementation aspects as well as cost and accrual tasks. Other items, such as the new fees, will have more of a forecasting and estimation impact than a direct operational impact. Of course, any item that significantly changes costs, margins, or relative competitiveness will indirectly impact future operational plans as manufacturers work to maximize returns in the new reform environment.

This season of health care reform is almost done. Regardless of the imminent final outcome of the reconciliation bill, many of the players in health care reform are already signaling a readiness for a rematch on many of the issues brought into play in this first season, so stay tuned.

Revenue Management Intelligence Rocks Rainmaker 2010

noreply@blogger.com (RM) — Thu, 25 Feb 2010 16:30:00 +0000

Model N's sixth-annual RAINMAKER Revenue Management Conference is winding down at the Ritz-Carlton, Laguna Niguel in Dana Point, CA. More than 350 attendees from the Life Science and High Tech industries spent three days in the sun (mostly) talking about navigating change in a rapidly evolving business climate.

Model N's Revenue Management Intelligence framework, which delivers retrospective, opportunity, and predictive analytics, had everybody excited, especially after hearing BSC's experience with Model N's retrospective Performance Analytics application.

On the high tech side, Atmel and Dell had well received sessions on transforming sales orgs with BI and managing multi-channel incentives respectively. Check back for more news and stories from this year's RAINMAKER.

The Big Reset - Good Read

noreply@blogger.com (RM) — Mon, 08 Feb 2010 18:02:00 +0000

Good post by Walter Armstrong - "The Big Reset"

How come executives from drug or device manufacturers are never quoted in these articles? If "outcome-based" medicine is the way to go -- then current silos of the health care value chain will need to be taken apart. More vertical integration will be required -- from the manufacturer to patient -- so that efficacy can be measured and incentivized.

Also curious to hear how much money payors have been spending to maintain the status quo. I don't agree with Peter Tollman's comment: "The revenues of the industry haven't declined yet, but projections say they will. Growth rates have gone down significantly, so it's certainly not a growth industry anymore. That's a very long journey."Growth is stagnating because manufacturers have not figured out how to break through the current morass of globalization, patent cliff, price transparency, etc. As the population ages in the developed world, drug and device companies are facing a gold mine in the coming decades. Question is which ones will be visionary enough to put themselves in a position to capitalize.

More on this soon...

Semiconductor 2010: Divergent Opinions

noreply@blogger.com (RM) — Tue, 26 Jan 2010 15:27:00 +0000

I would fall over in a dead heap if all the pundits and organizations that forecast the semiconductor sector ever agreed on the outlook for the industry. However, there is usually a somewhat unified higher level vision of what is going to happen over the ensuing dozen months or so.

At this point in time, there doesn't seem to be much of a unified vision as to what 2010 holds. There is the optimistic camp that sees low inventory levels, promising new products, rising stock prices, etc. and forecasts a banner growth year, at least over 2009. There is the pessimistic camp that looks at high unemployment rates, tight capital, and strained capacity and forecasts that 2010 might only be slightly better than 2009.

The only thing these two camps seem to be able to agree on is that neither has a very high level of confidence that their position is correct. This rapidly moves beyond the theoretical to the practical for people running companies. They must decide whether it's "off to the races" or "hunker down and survive."

I believe this uncertainty will continue to be the major driver for the semiconductor industry for the foreseeable future. From a people perspective, this will translate into a reticence by CEOs to commit to permanent headcount additions and their continued use of contract personnel and consultants at all level in the organization.

You Know it is Strategic if the CEO is Repeatedly Mentioning it to Investors

noreply@blogger.com (RM) — Wed, 20 Jan 2010 18:14:00 +0000

October 20, 2009. Ray Elliot, newly appointed CEO of Boston Scientific on the company's quarterly earnings call:

“We have programs in place to improve our margins and this is an ongoing area of intense focus with respect to price management and mix utilizing a corporate wide pricing improvement project and our new sophisticated pricing tool, Rainmaker.”

“One of the things I commented on the script is we put a new system into play that’s been worked on here for a long time that allows us to have visibility and sophistication around pricing. Part of it is to not leak profit loss on the current policies you have and that you’re maximizing profitability. So that system which is called Rainmaker is allowing us to have some huge opportunities analytically to try and protect against that.”

January 12, 2010. Ray Elliot, CEO of Boston Scientific at JP Morgan’s Healthcare Conference:

Price sophistication: we have spent millions of dollars and it's starting to come to fruition now on a system called Rainmaker. It's custom built for us and it has tremendous capabilities in contract and pricing management, and really in optimizing price. The times where price is tougher this is particularly important.

You can view his presentation from their website. The quote above is in the context of his new strategy on slide 13.

It is gratifying to see the CEO of a customer refer to the joint solution as a critical foundation block to his new strategy. We have always believed that Revenue Management is strategic. It is a differentiator in today's market.

These days the product life cycles are getting shorter and shorter. Competitors can bridge the product innovation gaps very quickly. It is very difficult for public companies to continue to increase shareholder value predicated on innovation alone. At some point, you need to invest in processes and systems that allow you to protect and improve the returns from your existing product portfolio. All of us are used to usual excuse by faltering sales leadership – “If I have the next feature on the product roadmap, I can easily meet and exceed my quota." Probably. But, BSC is an example of company investing on both sides – innovative products and innovative systems to efficiently run their business. First, they invested in the transactional platform that automates their pricing and contracting processes. Now they have layered analytics on this transactional data that is enabling the “O-Suite” to stay on top of their revenues – daily.

Is it healthy that your CEO knows the details of what your team did yesterday – prices quoted, discounts given, contractual performance enforced - before you do?

Eventually, yes.

Short term - it requires a lifestyle change. Something akin to an eat better, exercise five times a week prescription. You need to align incentives for sales teams, partners, and customers with performance, consolidate transactional data and contractual commitments under one platform so that insight is available in-line with the sales or revenue realization process, and have visibility into opportunities across all geographies and lines of business, all helping towards taking a preventive approach to revenue and margin leakage. We even have support groups.

Learn first hand. Join us at RAINMAKER and see Boston Scientific share their journey to a healthier enterprise.

Upgrade Systems Now?

noreply@blogger.com (RM) — Tue, 05 Jan 2010 14:47:00 +0000

In our consulting practice, we see a wide variety of systems in use to support various business, operations, and engineering functions. Business systems range from Quickbooks Pro to fully implemented ERP systems. Yield management may be handled with Access databases or sophisticated yield analysis tools. Supply chain management may be handled with Excel spreadsheets or powerful supply/demand software. And the list goes on... When a company is small, many things can be done somewhat manually. As the company grows and becomes more complex, however, it is difficult to effectively use brute force to manage many different functions. Employee hours balloon, mistakes are made, and customer service levels erode.

There is no "zero impact" time to upgrade systems. It requires the involvement of key players throughout the organization to ensure that the potential benefits are achieved. Many companies reason that we can handle things manually now, so we'll wait until we can't and then upgrade. The problem with this strategy is that when things pick up, everybody starts working longer hours just to get the job done. Now on top of that, you expect employees to spend several hours per week doing the things to get ready for the changeover. Though the system will save time when up and running, it creates a greater load on people during the installation. I could go on and on about the consequences, but you probably get the idea. I offer up an alternative for consideration. We believe that it is more effective and less painful if the systems are upgraded before the environment is hectic chaos. I think in most instances, the set-up and implementation will be better and employee attitudes about the system will be more positive. I liken it to changing the engine on a 747: it is much easier to change on the ground than in the air.

High Tech: Are People Getting Hired?

noreply@blogger.com (RM) — Fri, 23 Oct 2009 17:22:00 +0000

At the risk of being redundant, the answer to this questions many times is "It depends." We're already beginning to hear the words "jobless recovery" bantered about for many industries. Generally, we do not believe this will be the case for the semiconductor industry going forward. There are currently positions being filled every day. It is not a large number, but there is hiring going on. Most of these positions fall into one of two broad categories.

The first category includes positions that are high level and strategic in nature. A company needs to replace a CEO or bring on a CTO to focus development. These type positions tend to be filled whether times are good or bad. The second type ties more closely to the level of business. As business strengthens (or appears that it might) companies may add technical resources (designers, apps engineers, etc.), sales staff, or operations personnel.

There is a great deal of caution these days in adding staff due to the uncertainly about the level and stability of future demand. For many fabless companies, this problem is exacerbated by dwindling cash with a dim outlook for future funding rounds. It is "hang on to what you've got" and try to stretch the current organization as much as possible. However, there are fabless companies with significant cash reserves and strong demand that are adding staff.

As with the "it depends" above, much of hiring depends on the supply chain segment, product technology, and end-market focus.

Are We in the High Tech Upturn?

noreply@blogger.com (RM) — Tue, 13 Oct 2009 15:18:00 +0000

As much as everyone would like a simple yes/no answer to this question, more often than not, the answer is "it depends." For starters, the total supply chain has several segments, each having relationships to the others. The biggest chunks are semiconductor device companies (both fabless and IDM), manufacturing providers (foundry, probe, assembly, test) and equipment and materials suppliers. The device companies typically see the changes first, then the manufacturing providers, then the equipment and materials providers. Because there is lagtime in the system, the changes get amplified and the equipment guys (caboose) may not realize what's going on until after the device guys (engine) has already left the track.

A second factor is which device segment you're involved in. During this downturn, the memory guys have been particularly hard hit because of a massive overbuild of capacity that led to price wars that scuddled all hopes of profitability. Other segments (e.g. microprocessors, logic, analog, discrete, etc.) were impacted to varying degrees.

The third factor is end market. The growth rate in PCs, cell phones, consumer products, automotive, etc. have different growth rates, inventory positions, etc.

All that being said, most forecasters are guardedly optimistic about the coming months for most market segments. Some fear there may be relatively minor correction after the end of the year, but generally see positive growth over the next couple of years. A word to the wise, as with car mileage estimates, "your results may vary."

The Issue Around Pharma Bundled Sales

noreply@blogger.com (RM) — Thu, 01 Oct 2009 10:39:00 +0000

One area of continued focus by pharma regulators is on drug manufacturers’ discounting strategies and their impact on prices the government pays for particular drugs. In particular, they have focused on the concept of a Bundled Sale, typically where the discount on one drug is conditioned on the purchase of another drug. The main government contention is that in a bundled sale the economic benefit (net price) from the purchase of a particular drug is placed on a different drug (or a different time period), skewing the reported commercial price and used as the basis for the government price for those drugs. Actions by pharma that affect the prices reported to the government have been fertile grounds in the past for the Justice Department and State Attorneys General to file fraud and false claim acts cases with settlements in the $100M to $2B range.

The government response to the issue of bundled sales for the largest purchasing programs (Medicare and Medicaid) has been to require the manufacturer to reallocate the discounts proportionately to the value of each drug sold in that arrangement during that period prior to calculating and reporting those drugs’ prices. Three factors are bringing this issue into new focus:

· The “clarification” of the definition of bundled sales triggered by the Deficit Reduction Act (DRA) of 2005, which greatly
expanded the scope of arrangements that could be considered bundled sales

· The increased use of innovative multi-product discounting as a part of many pharma competitive strategies

· Industry consolidation is placing more drugs onto single agreements and increasing the potential for bundled arrangements

What has been the pharma response so far? Most have gone through an evaluation of their agreements to determine what their potential bundled sales exposure is. Companies with exposure have either opted to change their agreements (and commercial strategies) to reduce or eliminate their bundled sales exposure or to reallocate the discounts. Both options have
their issues. For many companies, potentially changing commercial strategies to something less effective is not an option. For those that have gone down the route of reallocation, they have often had to implement custom or manual processes to perform the reallocation that are inefficient or have issues providing adequate audit and compliance controls. To address these problems, Model N recently introduced an automated discount reallocation solution that is integrate into its Revenue Management Suite.

Is Whistleblowing the New Path to Financial Independence in the Pharma Industry?

noreply@blogger.com (RM) — Tue, 08 Sep 2009 13:50:00 +0000

Every year we survey drug manufacturers to benchmark their ability to manage revenue for optimal financial gain and minimize regulatory risk. Here are some disturbing data points:

For the second year, 33% of companies surveyed track compliance less than once a year or never
35% of companies monitor compliance on less than 50% of contracts
17.4% of contracts are non-compliant
42% of companies cannot determine compliance %
The most common tool to track compliance is still Excel spreadsheets
Most respondents are confident in their ability to comply with government programs and their ability to respond to audits
Over the last couple of years, fines levied by the OIG are nearing $10B in aggregate

Ergo: If there is an audit, odds are discrepancies will be found.

Govt. will pay $102M to 6 whistleblowers that helped False Claims Act investigation against Pfizer

This could become a disturbing trend for drug manufacturers. With 50% of all revenues coming from government business, this lack of visibility and control over pricing and contracts represents a huge exposure for drug manufacturers. If you search for whistleblower cases on Google, it is interesting to note that whistleblowers are considered to be courageous and often lauded for doing the honorable thing. Couple this with the promise of a financial windfall, and CFOs, CROs, and Audit Committees cannot be sleeping easy these days.

Insiders claim that drug companies accrue millions of dollars on their balance sheet for such audits and the almost inevitable fines and settlements. In other words – settlements are acceptable cost of doing business. Really? How do you quantify the impact on your brand equity when the headline on WSJ includes “fraud”, criminal, and felony” next to your company’s name? Or worse, put in the same category as AIG.

At a time when reform is top of mind for the entire health care value chain and legislators, manufacturers do not want to be made an example by Department of Justice to deter the rest of the industry.

Options: Fix it. Get the help of experts who can address the people, processses, and technology issues spanning pricing, contracts, channel incentives, and regulatory programs and deploy systems that provide visibility, control, and auditability. The result is not only reduced risk from audits, but more importantly improved margins from best-in-class Revenue Management. Check out the case study by Gartner on Astellas Pharma. There are several more examples of companies who have turned Revenue Management into a strategic imperative and are reaping the benefits.

Last week, DOJ gave 2.3 billion more reasons for drug manufacturers to do the right thing.

Will it have an impact? What do you think?

Better than Expected Bad News is Good News

noreply@blogger.com (RM) — Thu, 27 Aug 2009 13:52:00 +0000

Gartner has lifted its 2009 revenue forecast for the world semi industry to -17%, up from it's previous prediction of -22.4%. In this economy, less bad is good!

Gartner cited economic stimulus money in China and price reductions in consumer electronics as having a positive influence on demand, but also indicated that price reductions from the device manufacturers themselves were a contributing factor.

I'm curious to understand what semiconductor and component products are being discounted and why. To move obsolete inventory or discount products that are nearing obsolescence, it makes sense. But to try to use price to stimulate demand is a short-term fix at best that has long-term negatives for prices and margins across the board. But that's what we get when prices are so tightly coupled to manufacturing economics. Until the industry can move more towards a value-based pricing model, pricing and margins will continue to get excessively battered in both good times and bad.

KKR & Silver Lake Partners Leverage Revenue Management to Increase Gross Margins at Avago

noreply@blogger.com (RM) — Mon, 24 Aug 2009 15:41:00 +0000

Bruce Richardson's blog about Avago's IPO

We have been talking about the non-linear impact of gross margins on the market cap of semiconductor and component companies for three years now. Avago's IPO provides a fantastic example of how private equity firms - KKR and Silver Lake Partners - can turn a valuable asset into a highly profitable asset.

For more reading on why CFOs need to pay attention to the strategy that has worked for multiple companies, read this White Paper for CFOs.