american pharmaceutical outsourcing

Companies are increasingly implementing strategies tofocus on core activities that are their primary drivers ofprofit. These include divestment, mergers, and out-

sourcing. Clinical research in drug development is no excep-tion. As the pharmaceutical and life sciences industry strug-gles to respond to increasing cost containment pressures andmaintain shareholder value, it has been forced to bothincrease the level of outsourcing and to re-evaluate the natureof outsourcing relationships. This article explores the mech-anisms of implementing a new outsourcing model for clini-cal research, strategic partnering, borrowing on lessonslearned from other industries.

The ethical pharmaceutical industry is under increasingpressures to bring new products to market faster. Faced withdeclining productivity in the face of escalating drug develop-ment costs and increased competition [1], the industry isincreasingly implementing strategies to focus on core activi-ties that are their primary drivers of profit. Outsourcing isone of the prime mechanisms used by all industries, particu-larly those facing increasing cost-containment pressures, tofocus scarce internal resources on the highest margin (value)activities that both maximize return on investment and dif-ferentiate them in the marketplace. Accordingly, in a recentsurvey by IDC and Cap Gemini Ernst & Young, enterprisesin “volatile” industries were found to be 40% more likely tooutsource key activities than the average American companyand spend twice as much on outsourcing annually [2].Current “volatile” industries include financial services,telecommunications, utilities, energy companies and chemi-cal manufacturers. Ninety-four percent of those companiessay they see outsourcing as a way to become more flexible andadaptive, and manage uncertainty.

Ethical drug development is no exception. With the costto discover and bring a new chemical entity to marketapproaching $900 million [3], sponsors are increasingly tak-ing a strategic approach to outsourcing; outsourcing non-dif-ferentiating, process-intensive tasks such as monitoring, datacollection, data cleaning, and data entry while retaining intel-lectual-intensive activities such as program design, studydesign, and interpretation and presentation of data. This dra-matic increase in the volume of outsourcing has greatly exac-erbated the extant weaknesses in the current sponsor/suppli-er relationship while creating an opportunity for the sponsors

who appropriately leverage the relationship into a competi-tive advantage. Clinical development in particular, as thebiggest piece of the product development pie, in terms ofboth spend and time, is the focal point of both the currentfrustrations with outsourcing in the industry and the realiza-tion that it holds the most promise for drastic gains in effi-ciencies.

Most pharma companies today adopt a transactionalapproach to outsourcing and buying CRO services.Transactional buying is characterized by relatively simple rela-tionships, dominated by price, and incentivized by volumewhere interaction with suppliers is limited and often viewedas adversarial. The missing component here is quality. Manysponsors note a lack of differentiation between suppliers,concerns over quality, and excessive efforts to manage out-sourced work. While this current model of transactionalbuying allows for some of the capital investment avoidanceadvantages conferred by outsourcing it falls apart whenattempting to confer some of the more strategic componentsof outsourcing, i.e. freeing up internal resources for re-alloca-tion. In other words, if the cost of vendor management andre-work requires re-allocation of internal resources to manageoutsourced contracts instead of freeing them up to pursuemarket-differentiating activities, then the only advantagesconveyed by outsourcing are tactical.

To realize the full value proposition of outsourcing, maxi-mizing ROI and market differentiation, pharma companiesmust move from the current transactional buying to a morestrategic, long-term relationship buying approach of CROservices. Relationship buying is characterized as multi-faceted, dominated by value and an understanding of totalcost, and incentivized by customer satisfaction with interac-tions at all levels. Rewards are shared as well as risks in a con-text of mutually agreed upon metrics.

The roadmap on how to manage these relationships can beprovided by examining the long-range strategic outsourcingrelationships that have developed in other manufacturing andservice environments – automobiles, clothing, aircraft, hi-tech/software, and customer support call centers to name buta few. Typically, in such relationships, one company suppliesor supports the other in some fundamental aspect, while therecipient agrees to sustain a monogamous, long-term rela-

American Pharmaceutical Outsourcing

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Partnering for Success inClinical OutsourcingJeffrey S. Handen, Ph.D. and Neil Patel, Pharm. D.IBM Business Consulting Services

tionship with the provider. Each organization remains com-mitted to identifying ways of reducing costs or improving thequality of the overall process. If they can be engendered, suchrelationships will permit the linked organizations to derivevalue that traditionally has been created only through verticalintegration, while simultaneously avoiding many of thedevelopmental costs associated with the oversight of yetanother production step.

How then can pharmaceutical companies create a compet-itive advantage by creating that strategic sponsor/supplierrelationship? A deeper look into strategic outsourcing acrossthese other industries uncovers leading practices that can beapplied to the ethical pharmaceutical development chain.The concept of business process outsourcing (BPO), andassessments of the high-tech and automotive industries arefertile ground for identifying leading practices in outsourcingthat can be applied to pharmaceutical development. BPOcan teach how to manage long-term relationships. The high-tech industry can teach how outsourcing can be used toincrease innovation. The automotive industry can be viewedas the benchmark on how to work with many suppliers/ven-dors to create a product.

Business process outsourcing (BPO) is increasingly beingused by many organizations as a way of focusing on coreactivities, often resulting in the outsourcing of non-core sup-port or non-market differentiating activities; such as humanresources, training, customer relationship management, andfinance and accounting. As a result of this increase in BPO, anumber of leading practices have been developed and shouldbe considered by pharmaceutical companies. Before anorganization decides to outsource a particular businessprocess, an assessment must be made to clearly delineate whatis considered core, shared-core, and non-core activities. Inmany major pharmaceutical companies, the difficulty is inclearly delineating the shared-core activities from the coreand non-core. The shared core activities are those activities,which are dependent on the core activities and need to beconsciously integrated when outsourced. An example of sucha situation in which difficulty may arise is in considering datamanagement activities. A company considering data man-agement as a core competency needs also to delineate the datacapture component of data management as either a core com-petency or a shared core activity. The sponsor company willthen understand how to align people and processes appropri-ately to integrate electronic data capture capabilities of a ven-dor to their own site initiation and in-house data manage-ment capabilities. Failure to understand the link between ashared-core activity and an in-house core competency oftenleads to process and technology incompatibilities between thesupplier and the sponsor. Business process outsourcing alsoshows the value of managing the contract and not managingthe work or processes. Managing the vendor’s activities

defeats the purpose of using the vendor and undermines therelationship. If we continue upon the example of data man-agement and electronic data capture, a sponsor companyshould not manage the implementation of electronic datacapture rather the terms agreed upon in the contract, whichmeasure quality and time. The vendor providing electronicdata capture will implement the process in the most efficientand cost effective manner since this is their core competencyand in their best interest. During the decision making processthe sponsor will have chosen the vendor because the vendorexhibited core competency of which the sponsor does nothave. Pharmaceutical companies should demarcate theirstrategic competencies, and when outsourcing activities thatdo not fall in the core competency give the vendor the abili-ty to execute within the context of service level agreements.

The high-tech industry, e.g. semiconductors, cell phones,PCs, faces many of the same challenges as the ethical phar-maceutical industry, among these are; capital-intensive R&D,time to market compression, and the drive for innovation.The high-tech industry has used strategic outsourcing toaddress some of the challenges. High-tech companies haveused select partners to conduct key R&D activities, mainly inthe exploratory concept phase before committing significantinternal resources to a project. These partnerships give spon-sors immediate access to specialized product developmentcapabilities, obviating the need and expense of developingnew internal core competencies. Pharmaceutical companieshave begun to outsource innovation in this manner as evi-denced by the multiple industry partnerships with third partytechnology providers. Many of these partnerships are struc-tured such that the vendor will search for a compound orplatform (innovation) and the sponsor will commit to devel-opment if the compound or platform is viable. High-techcompanies also are adept at reallocating internal resources tofocus on innovating either a new product or a product indevelopment. This concept can be applied in clinical devel-opment. When the decision is made to outsource a clinicaltrial/program, the sponsor has freed resource away from oper-ational activities to focus on innovation. Innovation in thiscontext can be finding new ways to recruit patients, enhanc-ing trial design for supporting studies, focusing internally towork on other compounds, etc. Currently most clinical trialmanagers are focused on managing the operational work aCRO is conducting. In a strategic outsourcing arrangement,the clinical trial manager would focus more on innovationand internal product development efforts and the outsourc-ing manager would address the performance of a particularCRO.

The automotive industry is currently facing a situation inwhich automobile manufacturers must build better vehiclesin less time and cost. This is all too familiar to pharmaceuti-cal executives. The automobile suppliers are faced with meet-


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ing the needs of manufacturers and remaining profitable.This is all too familiar to CRO executives. Because of the sit-uation the automotive industry is facing, suppliers are beingasked to assume greater responsibilities in engineering, prod-uct development, warranty, and global support while meetingstricter quality and timing standards and price-reductionrequirements. As a result of these changes, product develop-ment is now a strategic function that critically influences theperformance of a supplier organization. How the automobilemanufacturer manages resources, both internally and exter-nally across their supply chain, is an important element of theoverall product development process. The AutomotiveConsulting Group Inc. has defined a concept calledSynchronous Simultaneous Engineering. This is defined asthe process of managing interdependent simultaneous engi-neering programs across key suppliers in a product develop-ment program. It has been a critical tool for achieving cost,quality and timing targets. What this means to pharmaceu-tical companies is that they would synchronize (coordinate)various service providers along the development chain. Thedevelopment chain here can be defined as a ClinicalDevelopment Program where you have providers developingand implementing the clinical supply program, clinical studyprogram, and regulatory program. The pharmaceutical com-pany would implement a team that manages all the providersand reviews quality. The sponsor team essentially acts as aproject management office, assuming responsibilities such as:• Tracking issues within and across providers and enabling all

providers to see all the issues i.e., the project managementoffice would make sure the clinical operations team is awareof the clinical supply issues.

• Providing all critical project performance information i.e.,recruitment, clinical supplies information, data queries,safety information, etc.

• Facilitating project team meetings between the sponsor andall suppliers to ensure proper planning, coordination, andcommunication of the project.

• Creating a channel for vendors to communicate project spe-cific information regarding deliverables, timelines, andhandoffs.

• Ensuring processes are aligned across service providers tosupport the sponsors clinical program.

Strategic outsourcing is perhaps best characterized as a part-nership activity. It requires investment in the relationshipfrom both sides, a commitment from all internal and externalparties involved, not just the business managers, and a will-ingness to understand each other’s culture. Operationallythis is accomplished by managing the relationship and notthe project. Lessons learned from other industries provide anindex of leading practices.• Most common duration for outsourcing contracts is

three years.

• 0% defect is neither attainable nor necessary, quality needsto be sufficient not 100%.

• End-user/functional input and buy-in is critical. They arethe customers or the competition.

• Establish service level agreements with clearly defined,measurable, mutually agreed upon metrics.

• Judge success as delivery of objectives in project environ-ment.

• Contracts don’t manage themselves – invest in the relation-ship and make vendor management a core competency.

• Assume nothing! Define all terms, expectations, objectives,deliverables, etc.

• Gain commitment from all parties, internal and external.• Don’t start until all parties are satisfied.• Understand each other’s cultures.• Elect “Project Managers” on both sides.• Be proactive - give the CRO the inputs they need on time.• Involve CRO in scheduling and planning meetings.• Audit well ahead - exchange SOPs. • Implement formal project post-mortems where lessons

learned are documented and feedback supplied to the CRO.

• Use “best in class” regardless of cost.• Look for value creation as a primary selection criterion.• Train the suppliers.• Think strategy not tactics.

Currently most ethical pharmaceutical companies adopt atransactional approach to outsourcing and buying CRO serv-ices. A small number of companies are beginning to movetowards a relationship model of buying with benefits for bothCRO and sponsor.

Successful implementation of strategic outsourcing as apartnership activity in clinical research has the capacity toultimately increase the value of the entire portfolio, by free-ing up scarce resource and capital for market differentiatingactivities (i.e. innovation) and decreasing the associated costand delay of rework due to poor quality (i.e. time to market).In a 2002 cross-industry survey for the PDMA/MRT Co-Development Conference, conducted by the PerformanceMeasurement Group, it was found that 85% of surveyedcompanies reported that projects which used outsourcingreached market faster than projects that did not [4].Additionally in a PricewaterhouseCoopers 2001 survey,eighty-one percent of top technology industry executivesstated that innovation was the organization-wide priority intheir business, and 77% said innovation was the focus of newproduct development [5]. Therefore, strategic use of out-sourcing as a mechanism that both speeds time to market andfrees up resources for innovation, as opposed to operationalexecution and management, can be a valuable mechanism forcompanies to focus on the bottom line.


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REFERENCES

1. Pharma 2005: An Industrial Revolution,PricewaterhouseCoopers LLP, 1998.

2. “IDC Study, Transformational outsourcing is transformingoutsourcing”, Outsourcing Journal, Nov. 2002.

3. “A Revolution in R&D, The Impact of Genomics”, BCGFocus, June 2001.

4. “Strategic Outsourcing of Design and Development”, WindRiver Systems, 2002.

5. "Technology Barometer", PricewaterhouseCoopers, July 18,2001.


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Jeffrey S. Handen, Ph.D. is a Principal Consultant inthe Life Sciences Practice of IBM Business ConsultingServices. Dr. Handen has over ten years experience inbiotechnology, biomedical R&D, and manufacturingprocess management. Prior to joining IBM, Dr.Handen held positions in research and development andproject management at the University of Pennsylvaniaand the National Institutes of Health.

Neil Patel, Pharm. D. is a Consultant in the LifeSciences Practice of IBM Business Consulting Services.He has over 10 years experience in the pharmaceuticalindustry. Prior to joining IBM, Dr. Patel held positionsin clinical research with Covance and AstraZeneca.

american pharmaceutical outsourcing

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