In Or Out: Outsourcing In Today’s Biopharmaceutical Industry Outsourcing Outsourcing — the hottest buzzword in business — is a paradox of modern enterprise. It’s a strategy that is so pervasive that nearly every company on earth practices it in some fashion, but is seen as so innovative that smart business leaders often are afraid to apply it to extended areas of their business. Why does such an unobtrusive, easy to implement strategy strike fear into the hearts of market leaders? In a marketplace filled with increasing pressures, outsourcing is a strategic imperative. That trepidation is due to the delicate nature of outsourcing. It’s a balancing act that requires each organization to examine its projects and processes. Companies that ignore the benefits of outsourcing may be bogged down by routine functions that could more efficiently be performed by outsiders; companies that outsource too much may find themselves without a proprietary core and without distinction from their competition. Far beyond simple subcontracting to fix a problem, outsourcing today is a strategic imperative that can provide not only a cost-efficient alternative, but also improved efficiency, speed, and flexibility. For innovative managers, the question is not if outsourcing should be implemented, but how. a brief history Outsourcing in the biopharmaceutical industry began in the 1980s and exploded in the 1990s in three core areas: clinical trials, contract manufacturing, and salesforce solutions. Though small-scale outsourcing of functions had been around for decades, the contracting of clinical trials in the 1980s marked the first time pharmaceutical companies trusted outsiders to perform an essential function. “It was not an easy decision,” says Jim Whittle, a former brand manager for Warner Lambert and SmithKline Beecham. “At the large pharma companies there used to be a thought: no one knew better than us.” The shift to outsource salesforces was built on the early success of clinical trials and manufacturing as core but nonproprietary business functions, but it wasn’t an easy transition. Salesforces were seen as a more proprietary function: a company would hire a good sales representative and train him to build a solid relationship with his physician customers. Companies initially outsourced portions of their sales teams to mitigate risk during critical launch windows. They often gave the outsourced team more mature or less strategic brands to sell, while their internal teams handled the launch brands and “growth drivers” in the portfolio. Slowly, however, companies became convinced that outsourced sales representatives could be as well-trained, knowledgeable, and effective as their own salesforce. Today, outsourced sales teams are routinely used to support all brands in the portfolio, including critical launches of potential blockbusters. Expansive outsourcing options fueled the growth of small and midsize companies in the industry, which could not have performed those functions internally. Small and emerging pharmaceutical companies could now outsource clinical trials and contract manufacturing, as well as hire a salesforce without shifting resources away from their proprietary research and development. inside and Out During the past 25 years, outsourcing in the biopharmaceutical industry has grown from its infancy as a short-term tactic to a long-term strategic alternative. The sophisticated array of options available predicates careful consideration by organizations, including what, when, and how much to outsource. Differentiating Capabilities When evaluating the outsourcing of a function, consider the following: is the function a differentiating capability? In his pioneering book on outsourcing, The Age of Unreason, (Harvard Business School Press, 1989), Charles Handy urges companies to carefully determine their “professional core.” This term, which applies both to employees and functions, encompasses those differentiating capabilities that are both essential and unique. “Lose them and you lose the organization,” Mr. Handy explains. To be considered core, the function must be essential and unique; many companies falter by categorizing a capability as a core competency and thus are unwilling to outsource it. This is a flawed model. Certainly the manufacturing of a pharmaceutical product is an essential function, but it is not unique and a quarter-century of success has shown that it can be outsourced with superior results. Alternatively, differentiating capabilities that are truly proprietary and require control should be actively guarded from outsourcing. “To do outsourcing right, you had better know what you wouldn’t give away,” says Susan H. Cramm, the former CIO of Taco Bell. “You need to define an ‘insourcing’ plan that identifies the work critical to your company’s strategic intent.” R&D, technology planning, and strategic elements of marketing, for example, are best kept as internal functions. Some proprietary functions, however, may evolve into strong candidates for outsourcing. Capabilities that were once essential and unique may become less specialized, opening the door for outsourced solutions. Pharmaceutical sales presentations to primary-care physicians are one prime example. Though once a differentiating capability, less specialized audiences, decreasing presentation times, and increased number of products have changed the rep/physician interaction. Still absolutely essential, sales presentations to primary-care physicians are no longer unique, resulting in a fertile marketplace for outsourced sales solutions. Tactic vs. Strategic Alternative In the past, many companies have viewed outsourcing as a tactical way to fix immediate problems, such as calling a plumber when a pipe bursts. Many potentially outsourced functions, however, are consistent and quantifiable operational capabilities that should be integrated into a company’s overall strategy for success. In the current biopharmaceutical marketplace, companies are under more pressure than ever before. Factors such as the high price of R&D, increased government regulation, and heightened competition from generics have forced companies of all sizes to become more efficient. To stay competitive, strategic flexibility is a must, requiring a shift in thinking regarding outsourcing. A pharmaceutical company may, for example, commit resources equal to 20% of its salesforce to be outsourced, without a definite plan for which products will be assigned to that force. This gives the company maximum flexibility to adapt. In addition, a commitment to outsource gives the company’s partner the stability needed for long-term investments to continually redefine the value proposition and provide next-generation solutions to business challenges. Beyond Cost Cutting Cost-effectiveness is the leading reason companies initially choose to outsource, but it is certainly not the only important function served. Speed, flexibility, expertise, innovation, and efficiency are all important drivers in the decision to outsource. Steve Bates, a senior writer for HR Magazine, notes that while lowering expenses is a primary reason many companies begin to outsource, only 30% say saving money is the reason they continue to outsource. Mr. Bates reports that, “more than 90% (of respondents) say they are satisfied with their outsourcing experiences to date, and 83% say the value of outsourcing cannot be measured in dollars alone.” Consider the example of an outsourced salesforce. In a volatile marketplace, a company contemplating such a change will realize a number of benefits. The company will have the ability to upsize and downsize quickly and painlessly. This is extremely useful in an industry that has seen its salesforces double in the last five years. In addition, the problem of turnover — currently at an all-time high for pharmaceutical company salesforces — will become the outsourced organization’s headache. Furthermore, sales success in the biopharmaceutical industry is decidedly nonproprietary today. Physician calls once averaged five minutes or more, when the personality of the rep helped develop a relationship that translated into sales success. In the last five years, the average call time has dropped to less than two minutes with many calls lasting a scant 60 seconds. The industry has responded by deploying “mirrored teams” with multiple representatives calling on the same physicians delivering the same messages. In a world of sound-bite selling, it’s difficult for any rep to stand out. Outsourcing does not have to be an all-or-nothing proposition, either. Biopharmaceutical companies may outsource their entire clinical trials, but only 10% of their salesforce. Companies that embrace outsourcing as a strategic alternative form long-term relationships with their outsourcing partners, allowing the percentages to be adjusted as market conditions change. Long-term commitments to an outsourcing relationship provide significant benefits to both parties. Importantly, it allows the parties to make strategic investments, which create stability and generate better outcomes for both. In a larger sense, companies that turn to outsourcing today reap the benefits of the evolution of the practice. Outsourcing options have grown from functions that mirror in-house capabilities to encompass a vast array of innovative value-added options, for example, sales and sales-support options, including clinical teams of medical professionals, marketing research, and medical-education programs to supplement the salesforces. These alternatives are indicative of next-generation outsourcing that forges strong partnerships and lays the foundation for a successful venture. Increased Efficiency and Flexibility Outsourcing nonproprietary functions can lead to increased efficiency and flexibility. While differentiating capabilities should be kept in-house, other functions can be safely outsourced with confidence. To maximize effectiveness, outsourcing should be embraced as a long-term strategy — not a short-term tactic — and should be included in annual budget planning. In a marketplace filled with increasing pressures, outsourcing is a strategic imperative. (Excerpted from “In Or Out” by Steven K. Budd. For the full text, visit www.pdi-inc.com/strategy.) Steven K. Budd President, PDI Global Sales and Marketing Services To maximize effectiveness, outsourcing should be embraced as a long-term strategy — not a short-term tactic — and should be included in annual budget planning. PDI Inc.

Download PDF