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MedTechCo’s rapid expansion had a negative impact on its profitability due to a perfect storm of disruptive forces:
- The rolling up of multiple acquisitions posed organizational challenges, as many of the acquired companies continued to run on their old IT systems, maintained separate sales forces, and were run by managers who failed to conform to MedTechCo’s goals. Lacking a lean and flexible organizational structure, taking costs out was proving to be extremely challenging.
- Meanwhile, “the Amazon effect” was having a pronounced impact on customers, who increasingly preferred an ecommerce model that enabled them to gather information and place orders directly. Capitalizing on this new preference, ecommerce players entered the market, introducing more competition.
- Finally, MedTechCo had launched a previous cost-transformation effort that failed to achieve its objectives, but which left a trust deficit in its wake. Incremental cost improvements made a modest impact, but margins remained razor-thin.
Adding to those challenges, MedTechCo’s investments in sales and marketing did not map to the profit potential of its various customer segments. The university market, for example, yielded considerably less profit margin than the industrial market, which would argue for spending more on the latter, but MedTechCo was not taking that into account.
Needing a blank-sheet approach to these core issues, the company turned to Bain, which has deep expertise in cost transformation, including a leadership position in zero-based redesign (ZBR). Over the course of a five-month engagement, MedTechCo made remarkable strides in reinventing its business model, reducing costs, and improving productivity. Roughly a year and a half later, the company had not only significantly reduced its SG&A expenditures but had also increased sales and EBITDA, with the potential for further gains as it scales its new approaches across other parts of the company.
MedTechCo’s operations in this key region were complex, and its efforts to rein in costs were plagued by intra-country disputes between leaders. The Bain team knew that zero-based redesign could not only achieve the necessary expense reductions but also foster trust and collaboration between senior executives. Bain worked closely with MedTechCo to identify and take action on several initiatives:
Build an activities-based factbase. While the more traditional approach would be to build a cost factbase, Bain worked with MedTechCo to focus on the costs of various activities, such as serving a customer for a given product in a specific country, understanding the marketing costs of a customer journey, assessing supply chain costs, and so on. This provided essential data for regular meetings designed to diagnose the critical steps needed to return to strong profitability. In conjunction with this effort, the Bain team assembled approximately 20 of the company’s leaders at an offsite as a way to strengthen relationships and build trust, an invaluable exercise that enabled them to evaluate activity spend cubes, work systems and processes, and agree on appropriate cuts and adjustments. This enhanced transparency helped individual teams make better decisions about high- and low-value activities.
Clarify customer profitability and adjust service levels. Another key component of the ZBR effort was to develop a deep understanding of customer, product and regional profitability, and determine what products and levels of service to offer. The goal was to prioritize what actually sells, and remove long-tail products from inventory. As part of that effort it was imperative to redesign certain activities by, for example, shifting away from a high-touch, high-overhead sales model that overserved some customers in favor of a more efficient e-commerce model.
Execute multiple pilot projects. The Bain team designed a series of “launch and learn” pilot projects in the commercial and fulfillment business segments—for example, deploying sales reps on new selling patterns in one geography (which entailed scaling back monthly visits to quarterly for certain customers, but increasing the frequency of visits for other, higher-profit customers) and replacing certain long-tail products on the web site with higher-selling alternatives. As customers responded favorably the company was able to deploy these new approaches more widely, giving MedTechCo’s senior leaders confidence to pursue additional cost reduction and streamlining initiatives as they began to drive the execution on their own.
Develop a transformation road map. Armed with data from Bain’s diagnostic and analysis efforts regarding MedTechCo’s product and service profitability levels and relevant operations and activities, its leaders were reassembled to refine that understanding into a transformation road map. The road-mapping session resulted in an ambitious two- to three-year plan to transform a broad array of expenses and business processes, and encompassed a high-level timeline of activities, priorities, and definitions of success.