Buffeting Winds - Examples of Protections

Here we discuss six illustrative cases of ‘buffeting winds’ with their R&D protective responses. We discuss, for the most part, autonomous protections used to prevent and respond to insults. Interventional mechanisms are much more varied and controversial, and are left to the imagination of our expert in charge of personal destruction (e.g., arbitration, negotiation, lawsuits, public relations). This is just a preliminary starter set. Actual responses must be customized to actual circumstances, and are much more nuanced than these illustrative examples.

Illustration: We build rings of protection around the core Franchisee budgets. The first budgets cut are 'sacrificial budgets'. These are 'infrastructure' budgets or a senior funding agent pet projects. Next we sacrifice commercialization budgets: which cuts near and dear to the funding agent's desire for early returns. The next to the last ring of protection is Franchise Operations. Protection of Franchisee budgets is our highest priority.
There are two overarching themes:

  1. Protect the core operations of the franchise, and
  2. Never waste a crisis.

We respond, often overwhelmingly, with the intent of rebuffing the insult and achieving both reparations and further protections for R&D. Our defense objective is to stop insults before they happen, and this means that insults suffered are evidence of a need for even greater protections. We must come out of every thrust and parry stronger in our defense.

We discuss six common corporate insults:

Each of these are hot-linked to their discussions below. Use your browser's Go Back button to return to this listing.


Mergers & Acquisitions

With Mergers & Acquisitions we refer to our company acquiring another company and senior management mandating integration of the acquired R&D assets. Our franchise-run company being acquired by another company almost certainly triggers the Nuclear Option.

If we have a robust franchise operation, integration of external R&D is conceptually easy. The acquired organization is subdivided into Investible Units+, based on expertise in the underlying science or technology, and each Investible Unit starts at the beginning (Pre-Game+). They have 18-24 months to show they have blockbuster+ potential and that they can live up to the standards of the franchise.

Recall, though, there are many hurdles in Pre-Game and these individuals did not come to you voluntarily. We expect high levels of attrition based on the uncertainty inherent in our act of artificially subdividing the acquired R&D organization. We should be willing to mix and remix players and technologies as we gain greater experience with each other in this shotgun marriage. Our original collection of Investible Units will look nothing like the set that emerges at the end of 18-24 months.

Our headquarters franchise structure will probably not be at the scale required to integrate a large bolus of new entrants. We know what to do, but have neither the experienced personnel nor the resources to pull it off. Definitely these unplanned weddings will not be allowed to squeeze out previously planned acquisitions. We will not let this unplanned work diminish our high standards of quality. And we don’t want to ramp up franchise operations+ for this potentially one-time event.

The answer is that pile of stuff. The franchise has certain flexibility in capacity for new members. It’s unknown how many of our planned acquisitions will succeed. There is a certain amount of semi-skilled labor involved in franchise operations, which we can safely farm out to other firms or to individuals in the acquired firm. The limiting factor is found in the quantity and timing of expert services, which are not by-the-way amenable to central planning. We push our franchise operations to the limit, and not beyond. Investible Units from the acquired company are, in the end, expendable.

Across the Board Cost Cutting

This is the one corporate event that most often insults R&D, and the one for which we spend the greatest amount of time in defensive preparations. We refer here to the scenario where R&D is fully living up to its commitments, and yet is hit with a mandate to arbitrarily cut costs due to difficulties encountered elsewhere in the corporation. It’s time for retaliation.

Our greatest protection for R&D is the arms-length+ relationship of the franchisee+ vis-á-vis the corporation. The corporation has limited visibility into the finances and operations of the franchisee. They are separate legal entities. They are out of reach of arbitrary cost cutting exercises, short of a breach of contract.

We can imagine other protections. Layers of budgets give an illustrative approach. We do everything possible to wall off funding for franchisees and franchise operations from overall R&D funding. These are our core budget, a third rail not to be touched. This means we use sacrificial budgets (e.g., speculative bets, parks & services aka CEO pet projects). This means we cut commercialization activities (i.e., spending of most immediate benefit to the corporation). We willingly gut all other R&D spending in our zeal to protect core franchise operations.

Sacrificial budgets are put in place in anticipation of these cost-cutting exercises. We feign outrage at the cuts, and use the occasion to demand both reparations and even greater protections for core R&D funding.

Cuts to commercialization activities most immediately impact corporate plans. We intend to retaliate while the cost-cutters are still in power. They must be made to answer for the disruptions to R&D caused by arbitrary cost-cutting measures. That revenue forecast they have in their budget is just not going to happen.

The trick is to cut commercialization activities in a way that does not harm the franchisees, who receive milestone and other progress payments. This we accomplish by first cutting commercialization activities for sub-blockbuster+ products, which are chiefly for the benefit of the corporation. In extreme cases, we move blockbuster commercialization activities, and the rights to the blockbuster product, away from the corporation, by exercising escape clauses built into the purchase agreement. Recall we are dealing with separate legal entities (i.e., the corporation vs. the franchisee) in an arms-length transaction, which imposes obligations and penalties on both parties.

We refer to corporate actions that fall short of cutting into core franchise operations or breaching franchise contracts. Insults to franchise operations are treated with much greater severity. At the extreme, we engage escape clauses to cut the corporation off from R&D products while obliging them to continue funding of R&D for those products. We employ structured fees and penalties that offset gains to the corporation from cost-cutting. We have a legal war chest+ that is plentiful and at-the-ready to defend franchise contracts. An attack on core operations triggers a response that is severe, sustained, and interventional: we unleash the dogs of personal destruction.

Rushed Commercialization

Rushed Commercialization is a mortal sin. This is the corporation reaching into the R&D box, plucking out a choice morsel, and placing that choice into the commercialization box. This act alone is a declaration of war, and we deploy all our R&D protections immediately and in full force. This is an insult to the franchise arrangement that essentially brings the relationship to a halt. No further progress can be made between R&D and the corporation until this breach has been sealed, reparations made, and further protections installed.

Our autonomous decision mechanisms in R&D are sacrosanct. Decision time tables are deliberately arranged to instill effective evidence gathering, and to avoid destructive behaviors (e.g., decision deadlines). Decision time tables are integral to our push for greater effectiveness in evidence gathering. Decision authorities need to protect their decisions from arbitrary end runs, or their authority will quickly become nugatory. Rushing the time-line undermines the franchise operation at its core. It’s time to unleash the dogs.

We reduce corporate meddling by blinding what’s inside the R&D box. All they can see is an amorphous cloud of research, out of which products occasionally surface. Naming or designating prototypes is forbidden in our contractual arrangements with the franchisees. We no longer allow the corporation to get anxious about the progress of any particular research pursuit, because they can’t even see particular pursuits.

In the event prevention fails, we take back the morsel by exercising the escape clause for Right of First Refusal. The corporation no longer has first rights to the product. We either get the product back, or we tie it up in endless litigation. The franchisee continues development of the prototype (it obviously wasn’t yet ready for prime time), and we give them a ‘prior commitment’ aka a kitchen pass for their next interim evaluation. We dip into our legal war chest to ensure the franchisee comes out whole.

We work with government regulators to de-certify (or otherwise impair) the corporation with regards to the plucked morsel. We take back the accelerated time-line with bureaucratic or regulatory delays and obstacles. Often commercialization belongs to R&D and we use that lever to even further delay or stop work on the usurped morsel. Many unforeseen obstacles suddenly start appearing. The corporation cannot be allowed to think it can gain from this rushed commercialization.

We build a coalition with our outside investors, engaging them in the fight. We point out that their greatest return comes from following the game plan; that a rushed time-line endangers future milestone or progress payments. Although initial payments from the corporation may seem appealing, our child is not yet ready for post-graduate work. Failure will result in greatly reduced returns over the life of the product.

Reorganization

A new CEO comes on-board and naturally wants to put his lieutenants in place, including the head of R&D. The new head of R&D is ‘old school’. You know the type.

I have no need for World Class R&D. I discovered the Acme blockbuster+ product. I’ve run multi-billion dollar research units. I know how it’s done. You have theories. I have results. Disguised Pharmaceutical Industry Quote (2010). Personal Communication

These individuals then begin their own mass replacement of lieutenants to ensure their view of R&D becomes the accepted view. “This freedom to pursue the science where it leads is just a waste of time. The science has matured: we’re switching over to a factory model of R&D.”

We see the entrenched interests from the previous administration lined up against a hostile takeover by the new administration. Existing protections may be able to stave off insults for franchisees already in various stages of membership+ (e.g., pre-game, mid-game+, and commercialization). We protect franchise operations from our new R&D brethren the same as if the insults had originated from outside R&D. However, the enemy is in the camp.

We have met the enemy and he is us Pogo

There can be no new franchise members. The new R&D leadership is fully within its right to shut down future franchise memberships (or to hand-select new members). Natural attrition will eat away at the vitality of the franchise arrangement.

We can protect existing franchise operations, our membership benefits, but our brethren in commercialization will be overrun. They will no longer be ‘us’. Reorganization and replacement of the R&D leadership with a hostile team often signals+ the beginning of the end for World Class R&D.

The new R&D leadership must be made to understand that the existing R&D is in effect a separate legal entity: a constellation of many separate interests. These interests do have someplace else to go, they’re the best of the best, and the new R&D leadership should make them feel at home despite the change in command. Franchise success, which has been proven, will redound to the benefit of the new R&D leaders. Subtle signals that show an attitude of ‘my way or the highway’ can trigger the Nuclear Option, emptying out the corporate R&D pipeline, and making any further work by the new R&D leadership difficult or impossible.

This scenario makes plain the need to define triggers for the Nuclear Option very precisely. Do not define them in terms of classes of insults, rather in terms of the vitality of the franchise. For example, after a reorganization we will be forced to document in great detail what we expect from corporate commercialization under the new leadership: a handshake and shared interests are no longer sufficient. Franchisees will treat their own corporation as though they were dealing with an external company. It may be possible to make it work, and to avoid the Nuclear Option. The independent Franchise Oversight Committee+ keeps an eye on the situation, on the vitality of the franchise, and decides whether or not to bring to a vote the need to pull the trigger.

Product Liability Case

It was a perfect storm. We did everything to manage risk & uncertainty according to the World Class R&D book, but Mother Nature did not cooperate. We have a major product liability case on our hands. The first instinct of many corporate denizens is to meddle. They send in their quality experts; they send in their Sigma experts. Obviously researchers do not understand risk mitigation+, and the corporate denizens are going to teach them. They put in new systems, controls, processes & procedures, and checkpoints. Effectiveness gets sacrificed on the altar of Cover Your Backside (CYA+).

Our first line of defense is the arms-length legal relationship with the franchisees. Corporate safety experts can be invited, but they do not show up unannounced. There is no contractual mandate that they should be allowed on the premises. Corporate safety or risk experts have no direct influence over evidence gathering practices.

Decision mechanisms, though, are fair game. Recall we make a deliberate, fact-filled decision to graduate franchisee products into full commercialization: to move responsibility for the product away from the research units and into the corporation. Product safety is often a critical consideration in this decision and evidence is deliberately gathered to excuse the product from most predictable safety concerns. However, we seek continuous improvements in the quality of these decisions and a major product liability case is suggestive of a decision that could have been better.

The question at hand is whether or not we should have been able to foresee the liability, or was this merely new science – a case of unk-unk. Decision making always has room for improvement, and in this we support corporate inquiries. Once the determination is made, though, that the event was essentially unforeseeable, a case of Mother Nature just not cooperating, then all our franchise protection mechanisms are put at the ready. No changes are needed, nor are they allowed simply to assuage the needs of safety experts to ‘do something’.

We hand the R&D product to commercialization with the confidence that it can be made into a safe consumer product. We do not expect ‘experts’ in commercialization to second guess our evidence for product safety. But franchisees welcome these inquires, because it’s in their own best interest that commercialization proceed as quickly as possible (e.g., for milestone and progress payments). In the end, though, it’s the corporation that owns the product and is subject to future product liability risks. They have every right to stop commercialization of any product due to product safety concerns.

The protection for the franchisee in these situations is in the form of a buy-back provision. They have the option to buy back their product from the corporation (typically at a greatly discounted price) should commercialization be discontinued. Recall we protect the corporation from deliberate deception in these cases by maintaining a separate comprehensive intellectual property repository+ for all franchisee scientific evidence. Should the franchisee decide to buy back their product, then it’s up to them to prove the safety claims false and to reopen bidding for the vindicated product on the open market (which can once more include the corporation).

Outsourcing

Outsourcing is simply where we take work done by employees (in) and give it to non-employees (out). Outsourcing in R&D is fine except in those 98% of cases where it is done for the wrong reason. Uninspired and uninspiring managers who cannot motivate their people to higher levels of creativity, innovation and effectiveness fall prey to the seductive siren of the consultancy who offers faux productivity in the guise of efficiency, speed, reduced costs or reduced errors. And of course what c-level official isn’t in favor of cost reductions to improve short term earnings? Bonuses are waiting after all.

Outsourcing fits into World Class R&D thinking only to the extent it increases R&D effectiveness, i.e., there is a direct connection between the outsourcing activity and increased flow of blockbuster products. Every activity, initiative, project, improvement, change effort, etc., including outsourcing, can be designed to increase effectiveness. It’s just really hard so we don’t often make the effort. We settle. To repeat, merely freeing up researcher time or increasing the number of tasks that can be performed by a researcher are faux measures of effectiveness (or productivity).

We set up an outsourcing mechanism that allowed molecular biologists to go from finding one valid target per week to 30. Don’t know if that meant anything though. DIA Pharmaceutical Industry Survey+ Participant

What is it in the outsourcing strategy that will directly drive us to greater levels of effectiveness? If outsourcing does not increase R&D effectiveness, then it’s highly suspect as being an arbitrary cost-cutting exercise, and is open to all the same protections we employ for that class of insult.


Home Page August 2010

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Reorganization, A New Head of R&D

The announcement came out for a major pharmaceutical company that major cuts to R&D staff were planned in order to save money. I called the head of R&D, explaining how the money could be saved, using the 30-70 rule, without having to lose the R&D talent. I was politely rebuffed. Later this major pharmaceutical company was purchased by another company and all  its R&D staff were let go. They were essentially 'that pile of stuff'. The initial hatchet job on the R&D staff was to improve the financials of the company to make it a more attractive acquisition target.

The head of R&D for this company was relatively new to the position, having risen from a much lower position. The appointment wasn't obvious. Could it be this individual was selected with the intention of wielding the hatchet? Almost certainly this was not in the job description. More likely, c-level individuals were convinced this individual would be compliant after being given the large bump in position and salary. The new head of R&D could be counted on to be a team player.

What this incident illustrates is the challenge we face in protecting R&D from the buffeting winds of Wall Street. Wall Street does not understand and will never have the patience for discontinuous discovery+. Short term cost-cutting exercises will always win out over the need for long-term investments. In order to win against Wall Street, you need the protections of the U.S. legal system. We need to have R&D protected within its own legal boundaries and structures.