New co. versus Old co. Adjacent revenue streams at a Fortune 50 life sciences company

Two examples to discuss

Media Giant and Big Pharma

Example #1 - New York Times - NYTIMES.com

Keeping a eye on technology trends

1995: then-CEO Russ Lewis approves a small budget and 4 FTEs to understand the internet's emerging impact

Early Aspirations for NYT Online

“The news group on my side of the business wanted to grow a second newsroom. Their feeling was that the Times newsroom created a newspaper, and that a journalistic entity that focused on the web was needed."

-MARTIN NISENHOLTZ

NYTIMEs.com LAUNCHED

Out of the gate the NYTimes.com team made almost all newspaper content online free. They basically repurposed the newspaper content in order to make it web-friendly. In addition, they innovated with different way to leverage the power of the internet and include features that could not be delivered within the newspaper version of the times. For example, they included discussion areas, tax-cut calculators and other interactive content.

nytimes.com scope narrows

“We’ve cleanly split the functions. Any journalism is done by the newspaper because they have the infrastructure and editing capabilities. What we create here is value added. In addition to providing news updates throughout the day, we create features and functions that enhance the news report. We also add other databases that we import from other sources. In a sense, we [NYTimes.com] are a software operation, and they [the newspaper] are a news operation.”

-MARTIN NISENHOLTZ

New Co. Business model experimentation

The NYTimes.com team perpetually considered and reconsidered their business model throughout the formative period. The content remained free (vs Wall Street Journal) and they eventually added a registration requirement (versus other ROS news agencies) to view the content.

Old Co. Fears

There was a constant pressure from the print business that would shape the direction of NYTimes.com. Since the online newspaper content was available at no charge, Old Co. assumed that NYTimes.com would have a negative impact on subscriptions to the printed version of the newspaper.

BUILDING THE BUSINESS UNIT

2 Guiding Principles

#1) to give the new business sufficient freedom to explore a new opportunity
#2) to protect the brand

Reporting structure

Mr. Nisenholtz reported to both the general manager and the editor of the newspaper. This was an unusual move, since The New York Times, like most news organizations, maintained a “Chinese Wall” between the editorial and business sides of the organization to ensure editorial independence. Superstar editor and diplomatic correspondent Bernie Gwertzman was assigned to direct editorial operations for NYTimes.com, which gave the organization instance credibility within the newspaper organization.

Organizational growth

Over time the NYTimes.com organization grew to a dozen people, mainly from the newspaper organization. There was an unintended consequence of this staffing plan. NYTimes.com began to inherit a perception of a being a credible part of the business and adopted the values of the newspaper organization. In fact, since it was not an independently run organization, Senior Executives did not worry about tarnishing the priceless New York Times brand.

Initial Profitability Goals

The Company established an informal goal that online operations were to be profitable within five to six years.

“We weren’t where we needed to be. We didn’t have the resources we needed to create the necessary infrastructure to get there. But when one works for a big company, you recognize the art of the possible. Given that it was going to cost a lot of money to do what needed to be done, I just didn’t think that it was possible.”

-MARTIN NISENHOLTZ

Transition to a separate business unit

What does this mean?

  • Revenue Accountability: All internet properties were organized under one P&L
  • Reporting Structure: Martin Nisenholtz now reported directly to then-CEO Russ Lewis
  • Organizational Culture: Established a functional management team (i.e., CFO, VP HR, Chief Council, VP Business Development)
“We wanted to really get across a strong message that we were a different business, a different company, and a different culture. We wanted to hire a workforce that valued different things than the workforce of The Times. So we made a lot of changes. We formed a culture committee, which was largely to figure out who we were or who we wanted to be and then what we needed to put in place to get there.”

-MARTIN NISENHOLTZ

Divergent operational models

Did not adopt legacy processes, systems and BUREAUCRACY

  • Location: Manhattan, 10 blocks from the New York Times.
  • Space: More collaborative with open spaces, teaming areas, and a central cafe.
  • Stock options: Critical to attract and retain key talent in corporate start-ups.
  • Staffing Model: Invested in building a world-class product and engineering staff. Hired heavily from the outside.
  • Hiring Policies: Customized to create a distinct culture.
  • Charge Back: Based on revenue, there existed a $5MM fee for NYT content.
“NYTimes.com runs on an IT infrastructure that is very different from the newspaper’s. Building it required developing new expertise. Because our projects are much smaller in terms of capital required than newspaper projects, it would have been difficult to get them prioritized if we were part of the newspaper. Being separate allowed us to move faster. At the same time, being part of The New York Times Company allowed us to take advantage of the better pricing that the corporation is able to get from vendors.”

-MARTIN NISENHOLTZ

Measuring the business

THe bottom line is...Break Even Point took over 6 years

“Financial performance was not the only measure. We always measured audience reach, traffic, and various measures of consumer satisfaction as well. Still, even though we had been in a loss position, hitting bottom-line targets was important.”

- Ellen Taus, CFO

Example #2: 126 year old, Fortune 50 Life Sciences company

Keeping an eye on technology trends

2008: then-CIO established a marketing technology innovation group to identify solutions that could lead to a revenue source adjacent to the traditional pill and vaccine model

EARLY ASPIRATIONS FOR digital health

Explore new methods of developing direct relationships through the application of technology with patients, caregivers, physicians and other healthcare professionals. Discover what needs exist and prototype solutions to bring forward for consideration to our brand and clinical research organizations.

CIO - Life sciences company

Partnered with the diabetes franchise

raised $1.5M from the EVP of commercial operations to research, develop and launch the first iphone apps for type 2 diabetes

Working with the SVP of the Diabetes and Obesity Franchise, and a full-time staff of one, we created a non-branded smartphone app that was designed to walk the Type II Diabetes patient through initial treatment with an emphasis on behavioral change. We repurposed content from a well-known clinical reference manual as well as the diabetes franchise's web assets.

Operationalizing the product

There were no organizational processes and controls in place for mobile applications or patient-facing services within the company, so we set forth in establishing company guidelines:

  • Promotional guidelines (i.e., no pharma rep detailing)
  • Establishing the brand
  • Creating a customer support process
  • Information security reviews
  • Privacy / HIPAA reviews
  • Medical device evaluation
  • Commercial / anti-kickback guidelines

Led to a flood of mobile application demand by RX & OTC brands

Mobile apps were launched for: Chemotherapy, Dosage calculators, Sun tan lotion, Allergy / Asthma, Custom-fit orthotics, and medical reference manuals.

Following the deluge of brand-specific mobile demand, this Pharma company recognized in 2010 as the 4th most innovative company in business technology, up from 94th the previous year. And the diabetes app team was in the process of conducting an outcomes research trial with BCBS Horizon using our technology and BCBS case managers in their employer population.

Digital Health Expands it's scope

The two co-founders of the digital health organization were invited monthly to meet with a steering committee comprised of the: SVP of Diabetes & Obesity, CIO, CSO, CFO, Chief Council, VP of Commercial IT, and VP of Consumer Care.

Following 6 months of watching the immature business evolve, the CSO, citing our mobile app in digital health, presented a business case to the board of directors to establish: (1) $100M evergreen Health Information Technology investment fund and (2) $100M for the establishment of a new division called the Innovative Venture Units (IVUs).

The initial operating model

  • The Corporate Venture Fund was established as a wholly owned subsidiary focused on digital health investment opportunities. Team members were initially parent company employees; a president and 4 managing directors that reported into the CSO.
  • The Innovative Venture Units (IVUs) were established as a new division within Sales & Marketing and also focused on digital health solutions. The approach whether to directly, indirectly or not support company brands was not determined. Team member were initially parent company employees; a general manager with a product, marketing, operations and sales leaders that reporting into the SVP of Business Development and Strategy.

OLD company fears

there was an underlying fear that the introduction of unbranded digital businesses would be perceived by regulators and clients as trying to create an unfair advantage by bundling product and services together.

CHallenges in years 1- 3

Year 1: validating business models

Initially we partnered with IBM's consulting group to evaluate various business models. We used IBM for two reasons: (1) "no one every got fired by hiring IBM", (2) we had entirely too much money, $23M in year one.

In order to continue funding within a fortune 50 Life Sciences company, upper management expected a at least a $100M revenue return within 5 years. So, quarterly revenue forecasting required a bit of gamesmanship. Forecasts needed to be enough to be valuable future business, but not so much as to be included in the top-level company forecast.

"Fierce Focus" Required

Under the leadership of a the veteran general manager, the business scope began to expand in an effort to maximize future revenue potential. This led to a lack of focus, where up to 9 product lines were proposed to launch in the first 2-3 years. Other contributing factors that lead to the scope creep were: IBM's "land and expand" sales model and lobbying at executive management levels contributed to this expansion.

A difficult request of a start-up

one condition of the investment was that we were to run an outcomes research study with UNC to measure the effectiveness of our readmission solution.

Year 2: product Pivots

The year started as a continuation of the previous, the massive budget request of $72M lead to an executive decision by the CSO and head of the venture fund to focus on three business units: hospital readmissions (US), weight management (US) and remote monitoring (Italy). We parted ways with IBM as part of the budget reduction to $28M for all three businesses and instead began a transition to using three venture funded vendors as a way to support the overall ecosystem and ensure a longer runway.

Year 3: accountability catches up

IVU reporting structure changed from the SVP of BD to one of his direct reports, which then lead to the splitting of venture units to three different presidents, which lead to very divergent paths.

  1. Weight management: under the previous GM, he acquired a pre-existing US company in an effort to scale and globalize the business. Maintained direct ties to the parent company as a subsidiary.
  2. Hospital readmissions: under a new company veteran with no commercial experience, she continued the path of formal separation from the pharma company. EXTERNAL HIRE
  3. Remote Monitoring - Italy: continued to work directly with the parent company and support the business in Europe.
Year 4: push to commercialize hospital readmissions

1st half of Year 4

Found it difficult being agile and meeting revenue target within the big company

  1. Subsidiary in name only: Employees still parent company employees
  2. Policies: Spearheaded the creation of operating policies
  3. Shared Services: Leveraged parent company HR, finance, procurement, etc.
  4. Equity: Shadow equity talked about
  5. Location: Housed within corporate headquarters.
  6. OIG Opinion: Legal held our actions to the opinion letter as boundaries to our conduct.
  7. Med/Legal: Medical and legal behaved as conservative as if we were part of the company.
  8. Engineering: Majority outsource to our vendors.

2nd HALF OF YEAR 4

A enabling organizational structure finally caught upTo the businesses

  1. Holding Company: IVUs were transferred until the holding company. It governed the businesses through legal & policies as well as held them accountable to revenue projections.
  2. Reporting Structure: Holding company was places under the CFO.
  3. Location: Moved to a separate office space a few miles away from corporate headquarters.
  4. No Shared Services: Completely separated all services to in-house resources.
  5. Engineering: Rebuilt the product and removed initial vendors to bring engineering in-house.

A word of caution with regards to picking a General Manager

The president would not comply to the parent company's methods of running the business. as a result, the individual was removed from thier position.

Reorganization under the cfo signaled a closer look at innovation spend. As a result spin-offs, acquisitions and strategic combinations became the norm.

The hospital readmission business was acquired by another investment in 2015

From this point forward, the business evolved into one that strategically combining assets to indirectly grow the core business.

Summary for Discussion

Consideration #1: velocity of the start-up is dependent on the velocity of the parent company

Why? Moving and learning fast is the life blood of a start-up. Waiting on the timeline of the parent company will lead to loss of opportunity.

CONSIDERATION #2: REPORTING INTO THE CORE BUSINESS HELPS IN THE BEGINNING, HURTS IN THE LONG RUN

Why? This prevents serving multiple masters in the outset as well as creates momentum and excitement about the new business with the existing commercial teams. However, as the governance model matures, the affiliation with the core business will create a drag. Think talent, hiring policies, regulatory concerns, etc.

Consideration #3: must feed the core business

Why? In order to create adequate runway for the business to gain commercial traction, it helpful to tie the fledging business's value to the additive value to the core business.

Consideration #4: Profitability takes 5-7 years

Why? The burn rate associated with leveraging the parent company's resources, salaries, regulatory check points, etc makes you spend much much more money.

Consideration #5: Pivots aren't as welcome as they are in start-up

Why? You don't have time to pivot. Public companies especially have little tolerance since they view profitability on a quarterly basis. Also, hick-ups in the core business can cascade to the new venture and potentially spell disaster for the fledgling company.

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