Fistful of dollars Featured

8:00pm EDT May 26, 2007

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