Chris Begley knows who the king of business is.
It’s cash flow.
Begley, the CEO of Hospira Inc., a pharmaceutical company
spun out of Abbot Laboratories in 2004, knew his company
would have to pay homage to the king if it was going to survive and thrive on its own.
“When you’re part of a $20 billion operation, cash flow is not
king,” says Begley. “You’ve got plenty of cash. When you’re
becoming a new company, cash becomes king.”
Without a spigot at the mother ship to turn on for cash when
it was needed, Hospira would have to figure out ways to generate it on its own.
“So instead of thinking about business from simply a P&L
[profits and loss] standpoint, we transitioned the organization
to thinking about cash flow,” says Begley.
He was also going to have to keep a close eye on spending, reducing costs wherever possible. If he didn’t do these
things, the growth of the company would be limited.
“We knew that we had to improve our margins and cash
flow to fund the R&D and international expansion to fuel
the top-line growth,” says Begley. “Before the separation,
sales in those product areas were flat, margins had
declined, products had become commodities.”
Begley instituted a program to educate managers about
the importance of cash flow while at the same time cutting
costs and reducing spending. The results have been
impressive.
While net sales in 2006 were $2.7 billion and relatively
flat during the last three years, the company has generated $1.4 billion in cash flow from operations in that time
frame.
This cash has been used to fuel R&D investment that has
averaged 15 percent growth annually and to repurchase
$300 million of stock. It’s also enabled the company to
float $2 billion in investment-grade debt this year to
acquire a pharmaceutical company that doubled Hospira’s
international sales volume.
Here’s how Begley has conquered the challenges of cash
flow at Hospira.
Educate your managers
Begley wanted to make sure that managers across the
company, regardless of their individual responsibilities,
understood the effect that their decisions and actions had
on cash flow.
For an inventory planner, for instance, it’s easy to have a
tendency to plan for a lot of inventory so the service levels are high and they don’t get grief from the marketing
people because they’re not getting their products to customers on a timely basis.
“Better understanding that service level is important, but
inventory level is important too, because that drives cash
flow,” says Begley.
To illustrate how various factors can affect cash flow,
Begley and his team invented a game that takes individual
scenarios, a business problem or an opportunity, and plays
them out to find out how they affect cash flow.
“We did not take the game out to all of our employees but
we did take it out to all of our managers because what we
wanted them to understand, for example, was if you
reduce your inventory level without jeopardizing your
service level to your customer, the amount that you
reduce inventory — let’s say you reduce it by $10 million
— that’s $10 million in cash that can then be spent somewhere else,” Begley says. “So it was taking them through
scenarios like that so that they could see the impact as
they were making decisions.”
Begley says the cash flow game works better than using
abstract concepts or business school case studies,
because it puts real-world scenarios in front of employees
who may not have a background in finance.
“Remember, we’re taking it to all of our different managers,” says Begley. “If you don’t have a business background and you start talking about cash flow, it can get
really confusing. I know, and have seen people at very high
levels in organizations not understand the difference
between a P&L impact and a cash-flow impact. That’s a
simple concept for a person who has a business degree or
a finance degree or an MBA, but if you have an undergraduate degree in music and you’ve been in business for
20 years as an inventory planner, it’s harder to make that
connection.”
Cut costs
Cash flow can be complicated, but there are aspects of it
that are incredibly simple. For example, eliminating
expenses frees up cash. Don’t spend any more money than
you absolutely have to, because even small expenditures
can add up.
“We use a term we call financial fitness that we use in
our everyday speaking and that means that we spend
every dollar as if it were our own,” says Begley.
Hospira does just about everything short of counting
paper clips to cut costs. The entire company uses one kind
of inexpensive pen to save money. Executives fly coach on
a contract that reduces expenses and pares back charges
for their lodging when on the road with a similar arrangement.
“We have a corporate agreement with an airline company and
we use that agreement,” says Begley. “We don’t have a corporate plane that we fly around in. We try to minimize our travel
expenses. We have a set group of hotels that we’ve negotiated
with. We use those versus staying at luxury hotels. What’s
important when you stay at a hotel is it’s got a clean bed and
the shower works. Four Seasons are great, but you don’t need
to be staying at a Four Seasons.”
The cost-consciousness extends to virtually every corner of
the company. In some cases, convenience gives way to cost
considerations.
“We have a printer initiative,” says Begley. “Everybody ends
up with a printer on their desk, and those printers cost money,
they take maintenance. We’ve gone to having a number of
large, high-speed printers located on each floor.
“Everyone sends everything that needs printed to those printers. What does that mean? Everyone’s got to get out of their
seat and get the document when they print it, but it does save
money from an overall IT standpoint.”
Begley uses the same kind of scrutiny when it comes to big-ticket items. When Hospira had to make a decision about an IT platform, he and his team looked at ways to cut costs without sacrificing efficiency.
“Abbott had installed SAP, the new modern enterprise system
on the front end of the business, meaning the commercial piece,
pricing etc., but had not figured out how to afford to implant it
in the middle section or the back end of the business, the manufacturing piece,” says Begley.
Hospira would have had to implement an SAP-customized
solution, a project that would have taken several years, cost
plenty of cash and missed a tax advantage. So instead of implementing its own customized legacy system, Begley turned the
situation on its head and opted to adapt Hospira’s processes to
an off-the-shelf SAP platform rather than endure the costs and
time to build one to conform to its processes.
“The only way we could do that in two years — because we
had to get it done in two years because of the tax rule as it
relates to the separation — was to take an off-the-shelf SAP
system and modify our business processes to fit the SAP system,” Begley says. “The reason that people can’t afford the
time or the expense is because everyone wants everything customized.
“What everyone gets hung up on is we’ve done it this way for
20 years and I don’t want to change it. So we held back and
said we’ll get a new system, a robust system we can grow with,
but we’ve got to change our processes, we can’t customize it.
Well, lo and behold, we got it done in two years and now we
have SAP implemented and people around the Chicago area
marvel at the fact that we got it done that quickly.”
HOW TO REACH: Hospira Inc., www.hospira.com