How to Reduce Unnecessary Compliance Costs

July 1, 2010
James P. Catania
Volume 23, Issue 7
Page Number: 40–45

By identifying and eliminating non-value-added activities, drug manufacturers can avoid falling into the same cost-traps in the future.

For biopharmaceutical companies, the total cost of current good manufacturing practice (cGMP) compliance has become a significant percentage of the cost of goods sold. Some of the cost is driven by increasing regulation. What drives much of the cost, however, is the evolution of activities that might be unnecessary. Successful organizations adopt an approach to compliance that focuses not only on the costs of quality assurance (QA), quality control (QC), and regulatory affairs activities, but also on the underlying and often hidden factors that drive excessive cost throughout all functional groups in the organization. They do so by applying some basic activity-costing principles to compliance functions that provide these savvy organizations with opportunities to simultaneously reduce cost and improve compliance effectiveness.

James P. Catania

A MORE REVEALING WAY TO ANALYZE COMPLIANCE ACTIVITIES

Figure 1 shows the three basic activity–cost buckets into which an organization's activities can be separated.

When a percentage value-added analysis is conducted, compliance-related activities, particularly those associated with QA and QC, typically are categorized as business value added (BVA) activities. BVA activities are not directly involved in the conversion process (converting raw materials into product) but are essential because without them, the product can not be produced and sold.

This method of accounting for compliance can be useful but it conceals as much as it reveals. The activities and resources (costs) used to do what is actually necessary to meet regulatory requirements generally are only a fraction of the total spent by an organization. The problem begins with automatically categorizing all activities and costs associated with compliance-related functional groups as BVA. Many of the activities and associated costs are, in fact, non-value–added (NVA). These are NVA because they have nothing to do with the conversion process and they actually contribute nothing to achieving compliance.

Differentiating between BVA and NVA in compliance is challenging because it requires stepping back and looking at the function in a different way. Instead of automatically seeing compliance activities as BVA, we have to look more closely; and when we do, we find that many of those activities are in fact NVA.

NVA compliance activities arise in two ways:

  • they are driven directly by failure

  • they are driven by anticipation of failure.

The first step toward more cost-effective and improved compliance is to understand those two forms of NVA activities.

NVA ACTIVITIES DRIVEN DIRECTLY BY FAILURE

Quantifying the financial impact of the response to failures is relatively straightforward. We recognize this as what Philip B. Crosby called "cost of poor quality" (COPQ).1 Many organizations understand the application of a COPQ analysis in operations. But COPQ also can be applied to compliance activities. Any activity or cost related to investigating, reporting, or correcting any failure (deviation) can be seen as a COPQ. These include not only manufacturing-related failures, but also errors in development and dossier submission as well. All of these activities would then fall into the NVA bucket in Figure 1, instead of lying hidden in the BVA category.

Figure 1.

Putting these costs in the NVA category sometimes feels counterintuitive for those directly involved. Categorizing deviation investigation activities, for example, as NVA doesn't mean that they aren't important or that the business can get by without them. It simply identifies deviation investigation as an activity that would not have been needed had a failure not occurred.

It's important for those involved in this exercise to understand that the idea isn't to assign blame. The entire focus is on shifting perspective, digging deeply, and clearly understanding the events and issues driving compliance costs.

Some NVA activities and costs are obvious. Others are more subtle, but they must be captured to obtain a complete picture.

Some of the most frequently obscured NVA activities are those associated with process improvement. This, too, may seem counterintuitive. After all, how could improving something not be a value-added activity? The need for process improvement often indicates shortcomings in product development, technology transfer, validation, submission, or training. It actually is process correction.

Improvements that must be made to correct incapable processes and eliminate deviations or compliance failures certainly benefit the business, but categorizing them as BVA essentially means you've accepted failure and subsequent correction as something you can't run the business without. You can. By using operational excellence, Quality by Design, and quality risk management (QRM) methodologies from development through commercialization, you can get it right the first time and obviate the need and the cost of subsequent improvement. For compliance functions, the cost of process correction activities masquerading as process improvement can be considerable.

The first step in controlling these costs is to create an effective measurement process for COPQ. However, many organizations fail to track it accurately.

NVA ACTIVITIES DRIVEN BY THE ANTICIPATION OF FAILURE

Costs associated with the expectation of failure are more difficult to see and quantify. They arise when excess staff and equipment capacity are maintained because the organization is unable to predict when the next failure will occur but feels it needs to be ready. Such excesses are the hidden, indirect affects of COPQ.

It's important to be clear that NVA costs incurred in anticipation of failure differ greatly from the BVA activity of QRM to identify and mitigate potential failure modes. QRM is proactive. The anticipation of failure described here is passive. The organization doesn't know which process is going to fail or when it's going to fail but is staffed up, just in case. What's insidious is that this condition evolves over time to become the status quo, with the result that it looks and feels like something that has to be done to run the business.

The causes of failure anticipation and the hidden costs of the activities it leads to typically fall into three major categories:

  • over-reaction to past failures

  • low inherent process capability

  • over-estimation of risk.

In other words, these costly activities can result from a faulty response to the past, poor processes in the present, and an inaccurate view of the future.

OVER-REACTION TO PAST FAILURES

The evolution of unnecessary activities and excess infrastructure are often the remnants of reaction to past failures and incomplete corrective action where root cause and likelihood of repetition is unknown. Examples of activities driven by over-reaction to past failure include:

  • excessive sampling, inspection, and testing

  • shortened audit cycles for suppliers

  • excessive and complex documentation

  • excessive and complex review and approval routings

  • excessive equipment, spare parts, and service programs

  • meetings to discuss and manage all of the above.

Ironically, the risk of failure may actually have declined to the point that the excessive activities no longer are necessary, but the activity continues because it has become institutionalized. Often, those performing the activities aren't aware of the failure that drove the organization to this behavior in the first place. To them, the activity is simply the standard operating procedure (SOP), and therefore, they are now locked in it to be compliant. Even worse, unnecessary SOPs, activities, and documentation themselves become opportunities for deviation.

LOW INHERENT PROCESS CAPABILITY

A subtle, ongoing cost occurs when an organization accepts low process capability as status quo. Costs directly related to failure naturally are higher because the low capability process fails more often. Costs related to failure anticipation occur because, although the probability of failure is high, one cannot predict when a failure will occur. To cope with this high and unpredictable risk of failure, the organization keeps additional resources on hand, just in case.

OVERESTIMATION OF RISK

Even for organizations with reasonably capable processes, the costs of anticipating failure can be high simply because risk hasn't been rigorously assessed. Biopharmaceutical companies tend to over-estimate risk just to be safe. Overestimating risk naturally will lead to the same sort of NVA activities driven by failure whose root cause and likelihood of repetition are unknown.

TAKING A NEW LOOK AT COSTS

With the knowledge that the sources of many compliance-related activities may be hidden or poorly understood, you can then take concrete steps listed below to build an accurate picture of your real cost structure (Figure 2).

  • Deconstruct all compliance-related spending to understand exactly where you're spending your money.

  • Understand your actual risk profile for all quality and regulatory activity to determine the actual requirements and establish prudent but reasonable contingency plans.

  • Examine the capability of compliance processes as you would any manufacturing or business process.

  • Identify activities, resources, and costs driven by failure (direct COPQ).

  • Identify activities, resources, and costs driven by the hidden cost of anticipating failure.

  • Re-examine and challenge BVA to relentlessly eliminate NVA.

Figure 2.

By focusing current excess staffing capacity on identifying and eliminating non-value-added compliance activities, you can free capacity for growth and avoid falling into the same cost-traps in the future. Moreover, you will improve overall organizational competence because improvements in compliance-related activities have a collateral positive impact on manufacturing, engineering, maintenance, product development, planning, and procurement. It requires only that you take a fresh look at costs that have been unnecessarily accepted as inevitable.

James P. Catania is a managing consultant at Tunnell Consulting, King of Prussia, PA, 610.337.0820, catania@tunnellconsulting.com

REFERENCE

1. Crosby P. Quality is free. New York, NY: Penguin Putnam Inc; 1980.