Change Control: The Secret Process That Powers Pharma, Investing, and Life

In the pharmaceutical industry, every change—big or small—undergoes a rigorous process called Change Control. But what if we applied this same structured approach to investing and even our daily lives?

What is Change Control?

In the pharmaceutical industry, there is a concept called change control. In order to explain what change control is, some background information on how pharmaceutical companies introduce new things and change existing processes and products must be mentioned.

Required by pharmaceutical regulatory bodies, any introduction of new technologies, processes, materials, procedures, and products, as well as any changes to existing ones must be documented in a record called “change control” either on paper or digitally. The documentation of these records acts as evidence of the production of a pharmaceutical product. When regulatory bodies such as the FDA visits manufacturing plants at pharmaceutical companies for inspection, they have the right to request any documents that they want to see regarding the specific product under inspection. If the company wants to sell its product, it is crucial to maintain the quality of the records at a high standard.

What does it mean by good quality in these change control records?

But before I talk about the quality of the change control record, let me explain what a change control record consists of using a simple example.

Let’s assume that company A is planning to use a stainless-steel pan to cook one of its pasta dishes. In order to use a stainless-steel pan, a team from company A needs to write up a change control record (in short, change control or CC). This CC record is owned and generated by the team who wants to use the stainless-steel pan – let’s call them the Pasta team, as they need this pan for their specialty dish. So, the Pasta team needs to come up with background information, current state, future state, and justification. It goes like this:

Background information: Company A’s Pasta team makes vongole pasta using a Teflon pan coated with non-stick material B. Two cooks on the Pasta team prepare approximately 40 to 50 vongole pastas per day using four Teflon pans. With the current order load for vongole pastas per day, each Teflon pan has a shelf life of approximately six months. This requires semi-annual replacement of the Teflon pans. The annual accumulated expense for these replacements totals $800 per annum.

Current state: Vongole pasta is made using Teflon pans.

Future state: Vongole pasta will be made using stainless steel pans.

Justification: Using stainless-steel pans for vongole pasta will generate significant cost savings due to their longer lifespan compared to that of Teflon pans. The average shelf life of stainless-steel pans is approximately 15 years. Thanks to the durability of stainless-steel, these pans can withstand significantly higher temperatures for longer periods than Teflon pans. The overall benefits of using stainless-steel pans outweigh potential drawbacks like added weight and regular maintenance.

Then, the CC is endorsed by the Change Control Review Board (i.e., by head and sous chef).

When this CC record for switching pans is approved, it then goes through a process called Impact Assessment (IA), where various teams – including the Steak, Garnish, Dessert, and Appetizer teams – evaluate how the change affects them. If they identify any impact, they propose necessary action items before the Pasta team can fully implement the stainless-steel pan.

Each of these action items must be completed individually. After verifying that all actions are completed, only then can the Pasta team use the stainless-steel pan.

So, you see, such a simple change needs to go through an extremely structured and systematic process to be implemented. An issue is identified, written down, analyzed, and assessed for impact before execution. This way, the problem-solving can be done efficiently with minimal mistakes. In short, by using Change Control, we become capable of controlling a problem that may seem unsolvable.

Change Control in Life

This change control construct can also be applied to our daily life. We go through life and face numerous challenges. Some of them are controllable. Some seem just untouchable. Some may be completely out of our control. But whatever the challenge is, it is much better to write it down on paper and just dig deep into discovering what the core of the problem is.

I often find myself trapped in thoughts that cause stress. Those thoughts include:

“I want to become a great investor.”

“How can I achieve 25% return on my investments per annum?”

“How can I make enough money so that I can go see my family whenever I can?”

“What should I do now to retain all my hair even when I am 80?”

“How can I live a good life?”

“How to live well and die well?”

And so on.

Some of these questions I have are within my control, while others are not. But at least for me, it helps – far more than not doing it – when I start to write down my answers to my questions.

If there is something that I want to achieve, I write it down. That’s my future state in change control. Then I write down my current state. What I am going through now is the background information. Why I want to achieve the future state is the justification. I then write down the action items that need to happen for the future state to be realized – they are impact assessments. When all of these are written down, I start my work on each of the action items, one by one.

Doing this gives me a sense of clarity and assurance that my challenges can actually be solved if I follow the steps I laid out.

In Charlie Munger’s term, this can be called “inverting”. In Poor Chalie’s Almanack, Charlie Munger mentions that it is important to utilize a “latticework of mental models” when analyzing a complex problem. He takes big ideas from various disciplines and morphs them into a framework that he can use to solve investing problems. These disciplines don’t stop at finance. For Charlie Munger, they included the ideas from psychology, biology, engineering, and more.

When he learned about the works of Carl Jacobi, he took the concept of inversion and applied to his life. To learn how to be successful in life, he learned how to be miserable in life. To learn how companies succeed, he learned why they fail. To become wise, he avoided stupidities.

Defining the future state, working backwards by assessing the impact of the future state to the current state, and executing the identified action items to achieve that future state are, in my opinion, the exact application of Charlie Munger’s inversion mental model in real life. It turns out, surprisingly, that this method is extremely practical. Pharmaceutical companies cannot operate without it.

Change Control in Investing

The concept of change control is also used in investing. Nick Sleep and Qais Zakaria, renowned value investors from London, use it to analyze companies and to interview CEOs.

In Richer, Wiser, Happier by William Green, it is mentioned that Nick and Zakaria ask the following questions when studying companies.

1.  What is the intended destination for this business in ten or twenty years?

2.  What must management be doing today to raise the probability of arriving at that destination?

3.  What could prevent this company from reaching such a favorable destination?

They call this the “Destination Analysis”. It involves discovering the must-dos for the company to reach its full potential. They start from the intended destination and work backward, mapping out step-by-step actions required.

One of the things that they started doing was identifying management teams with long-term visions whom they could trust to compound their investment over time. In doing so, they learned that a prudent management team is great capital allocators, allowing investors like Nick and Zakaria to rely on them on capital allocation decisions rather than frequently trading the company’s shares.

The book did not explicitly say this, but I believe this is what Nick and Zakaria did for their investment research.

·  Seek companies with a long, exceptional track record of success.

·  Identify common traits among these successful companies.

·  Determine the business model that enables these traits. (They discovered one powerful model called “scale economies shared” or SES.)

·  Vigorously search for companies utilizing the SES model.

By doing so, they found Wal-Mart, Costco, and Amazon. They started learning about Amazon in 1997 and began their investment in it in 2005. Then sold in 2020.

When they read Amazon’s shareholder letter in 2005 that said, “relentlessly returning efficiency improvements and scale economies to customers in the form of lower prices creates a virtuous cycle that leads over the long term to a much larger dollar amount of free cash flow, and thereby to a much more valuable Amazon.com”, they knew Amazon was applying the Costco success playbook.

When they learned that Amazon introduced Prime Membership, they knew that “Amazon became Costco on speed”.

They outlined the desired future state of an investable company that applies the SES model. They analyzed impacts and laid out the necessary steps for the company to fully apply the SES model and grow.

“Increase revenue → begets scale savings → begets lower costs → begets lower prices → begets increased revenues.”

The similarities of their destination analysis and change control are striking. 

Munger’s philosophy comes to mind again: “Invert, always invert.” Start from the future state and work backward.

Final Thoughts

So, readers, here it is. If we want to solve a problem, or accomplish something, we must write it down. What exactly? The future state. The destination. The goal. Then slowly work backward. Start inverting.

Ask ourselves:

·  What are we going through now that is so unsatisfactory that we want something to change?

·  Why do we want to change it?

·  What must be done to get to our goal?

Map it out. One by one. Build a checklist.

Then check it off. One by one.

In no time, we will get there.