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This article was first published in the April 2016 international edition of Accounting and Business magazine.

The Piramal group is an Indian multinational with a diversified business portfolio across healthcare, financial services and real estate. Since 1988 Piramal’s healthcare business has worked hard to establish itself as one of the world’s largest contract pharmaceutical manufacturing companies. 

Over the course of 25 years, it has created an extensive network of development and manufacturing facilities in North America, Europe and Asia. Those factories deliver a multitude of services covering the entire drug life cycle, from drug discovery and development to commercial manufacturing of off-patent active pharmaceutical ingredients, and finished dosage forms.  

Growth but gaps

Piramal’s primary business in Canada develops clinical-phase active pharmaceutical ingredients for the North American market. But while the Canadian division has enjoyed year-on-year growth and established itself as an innovator in production and development, all was not as it should have been. 

An internal audit discovered some unexpected gaps in the division’s internal control environment that were creating efficiency losses and business risks. The situation wasn’t at all up to the standard of Piramal group, and it was time to shake things up at the Canadian plant. This could be done only by someone leading the Canadian finance operation whose understanding of pharmaceutical manufacturing operations could turn things around. 

In November 2014, the company brought Kajal Palan on board as divisional finance chief to plug the holes. He had the job of implementing a new system of internal controls that would lead to continuous process improvement and greater accountability, which ultimately would generate new cost savings to be passed on to Piramal’s clients.

In addition to his ACCA membership, Palan is a Canadian CPA and MBA. His passion for the pharmaceutical industry started in 2001 when he joined the corporate office of a contract manufacturer as a financial analyst. ‘If you want to experience innovation that makes an impact on people’s wellbeing, then pharmaceutical, biotechnology and life science industries offer an exciting career,’ he explains. 

Since then, he has taken leadership roles in corporate business development, project management and finance. His extensive experience in the pharmaceutical manufacturing sector, combined with his acumen for leading organisational change management, would be critical in his new role at Piramal.

Overhaul

This wide range of experience was critical for Piramal’s Canadian subsidiary after it learned that its internal control environment was in need of an overhaul. Palan says that when he joined the company, the division had been struggling with inventory management, among other issues around line efficiencies and accountability. 

‘Management was aware of the challenges, but it really needed greater leadership in finance to execute,’ he says, ‘so my immediate mandate was to focus on internal controls.

‘Our Pharma Solutions business helps our clients to advance new drugs to improve the quality of life. Our footprint in Canada is relatively small, but we are strategically located to serve US biotech and pharmaceutical companies. Innovation and process efficiency is very important in our business – that’s essentially what we sell. Our clients expect us to maintain the highest standards in meeting regulatory requirements, process efficiency and quality.’ 

From an internal control perspective, Palan noted that an implementation of SAP software that had taken place in 2010 had failed to deliver the results intended. ‘We had numerous workarounds in Excel spreadsheets outside of the enterprise resource planning [ERP] system,’ he says.

It was an environment that created too many potential risks. ‘In an industry that is highly regulated and very capital-intensive such as ours, the risks are high,’ he says. ‘It only takes one thing to go wrong before it has a ripple effect.’

Palan gives an example of what the weaknesses in Piramal’s inventory control system could lead to: ‘Let’s say we order raw materials for a customer, and the project gets delayed. Since there’s no urgency now, let’s assume these materials don’t get inspected on time for their quality and efficacy, but the vendor gets paid on time. If we’re not holding hands internally, we would incur the costs of importing and storing this material.’ And those costs can be significant, he says. 

‘The implication was that we were not making provisions against those potential losses, and at the same time we were carrying a risk on our balance sheet,’ he explains. ‘What was also happening was that we were accumulating more and more inventory that was sitting in our warehouse for more than six months and sometimes over a year. Nobody was really looking at it – whether we needed it or what we could do with it. It was essentially tied-up cash.’ 

After discovering this and reviewing gaps in the processes, Palan says they now go through inventory line by line to determine if it’s still needed, who’s paid for it, if it’s useful, and when to write it off.  

‘And for project-specific raw materials, we make a decision whether we’re going to use the material or whether it needs to be 100% written off straightaway. When you do that, you can take it into your P&L on an ongoing basis as opposed to accumulating it on your balance sheet for an eventual surprise.’  

Checks and balances

Together with the site president, Palan implemented a plan of ongoing improvements in the internal control system that would add checks and balances to many of the processes, including a more rigorous management of inventory. While the internal auditors had already listed their concerns, Palan says that he needed to drill down deeper into the root causes of the control failures. 

‘I had an independent assessment done in some functional areas,’ he says. ‘One useful exercise was to shadow a few staff. This narrowed down our focus, enabling us to identify where we needed to make changes to personnel. Once we knew where the people changes needed to happen, this became the starting point for making process changes.’ 

This would in turn require greater leadership and involvement from the finance chief. In this instance, Palan says: ‘I had to roll up my sleeves and get into the details. For each area of weakness I identified an action plan. Each action had a name assigned of who was going to be responsible for the process improvement and reporting. This gave a sense of ownership. It also held people accountable. Each of these individuals had to provide a monthly update, which I then reviewed with departmental managers during our leadership meetings.

‘The ability to work in teams is crucial to solving problems. My role is to facilitate change, and to clear the path to get things done.’

During this process, the team reviewed gaps in standard operating procedures, identified areas where further training was required, and implemented additional checks where this was not being done before. 

‘We also learned that the Canadian division wasn’t following many corporate policies,’ he says. ‘For example, corporate had a clear policy of when slow-moving inventory should have been provided for in the financial statements.’ 

The result

While it’s still early days, Palan says the division has undergone a sweeping change of approach so that it now embraces process improvement. ‘In terms of success, we’ll only know when the next internal audit comes about, but to date we’ve improved training, we’ve bridged gaps, our reporting has changed, we have brought more transparency into the division and have taken more transparency to corporate as well. So based on what I have seen so far, I am very positive about our progress.

‘Ultimately, what I have created is the awareness of internal controls from a finance perspective. I think success will only be achieved once we create a culture that abides by the new processes and continues to improve them.’

Ramona Dzinkowski is a Canadian economist and editor-in-chief of the Sustainable Accounting Review