Bigger Than Big

By Edward Cone  |  Posted 2004-06-18 Print this article Print

Bigger Than Big

Given the need for billion-dollar improvements, Scalet faces these key questions: What does efficiency really mean, when profits are already huge? When is a big overhaul big enough? And just what kind of changes can he make, by applying information technology, that will produce a meaningful impact on Merck’s profitability?

After all, Merck is already known for efficiency, at least among drug manufacturers. Charles Popper, who was Merck’s CIO for most of the 1990s, says some of the credit for that efficiency should go to the project-approval committee and portfolio management processes he set up to help business and technology managers work together to balance the costs, risks and benefits of systems investment.

But Scalet is reevaluating the Popper-era approach to governance because he is not convinced it has been consistently effective. "Yes, there was a process in place that was being used, and used effectively in most cases," he says. While Scalet agrees Merck has been "somewhat frugal," he sees the returns from its systems investments as uneven.

Scalet must perform a tough balancing act. He must wring efficiencies from his operation without starving crucial initiatives. "The question is, how do I drive operational excellence, but not to a point where we’re impeding new product development, impeding the scientist’s ability to get stuff done?" he says.

Among his priorities:

Accelerating clinical testing. Merck has long recognized the potential of information systems to accelerate drug development but hasn’t always achieved the results it sought. Industry executives point to years of largely fruitless effort Merck invested in a proprietary product development system that was supposed to speed the collection of clinical testing data. But more recent efforts, including a system called the Clinical Trials System, are showing potential. If Merck could bring another product with Zocor-like sales to market 30 days sooner, it would reap more than $400 million in additional revenue.

Standardizing and consolidating systems. At International Paper, Scalet standardized on SAP and folded in the order-management and financial systems of companies the paper maker acquired. Scalet sees "inherent opportunities" for consolidation at Merck because multiple versions of software have been deployed at different locations. Consolidation can result in big savings. JohnsonDiversey, a $3 billion-a-year cleaning-services company, for instance, has consolidated 40 enterprise systems to 15. That has saved $60 million a year and reduced its spending on information technology as a percentage of annual sales from 5% to 3.2%.

Employing more off-the-shelf software. Merck has a strong tradition of custom-developing software, and Scalet says some of that continues to make sense for bleeding-edge areas like research and development. But Merck probably can’t afford to do as much of it anymore, and the company must learn to use packaged software more intelligently.

Scalet won’t put any numbers on how much such moves could save Merck. But whatever he does needs to have impact beyond just savings on how the company manages its information technology. The company spends about $1 billion a year on deploying and operating its information systems.

Dozens of former employees and industry experts support the idea that Merck already has rigorous processes in place for approving projects and controlling costs. But Merck veterans also say that rigor sometimes devolves into bureaucratic rigor mortis.

To cut through hidebound ways, Merck isn’t alone in looking outside its industry for an efficient operator of information systems. Pfizer took the same tack two years ago, recruiting Chuck Williams to be its chief technology officer. He came from paper-and-pulp-products maker Georgia Pacific.

Both Williams and Scalet "came out of an industry that was used to squeezing out efficiencies and getting the most out of an I.T. investment,’’ says Jim Sabogal, director of the pharmaceutical industry business unit at SAP. "Paper companies are used to very low, single-digit profitability, whereas pharmaceutical companies panicked when they got anything less than double-digit profitability.’’

"The paper industry understood operational excellence very well," Scalet says. "As the pharmaceutical industry evolves over the next 5 to 10 years, it will certainly do better."

Next Page: The frugal leader.

Senior Writer and author of the Know It All blog

Ed Cone has worked as a contributing editor at Wired, a staff writer at Forbes, a senior writer for Ziff Davis with Baseline and Interactive Week, and as a freelancer based in Paris and then North Carolina for a wide variety of magazines and papers including the International Herald Tribune, Texas Monthly, and Playboy. He writes an opinion column in his hometown paper, the Greensboro News & Record, and publishes the semi-popular weblog. He lives in North Carolina with his wife, Lisa, two kids, and a dog.

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