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The Life Science C-Suite’s Top Outsource Considerations

By Carole Pfeil, Vice President, Corporate Communications

In its latest outsource report, the research and advisory firm Gartner Inc. cites cost reduction as the number one reason organizations choose to outsource.3 Findings of a study by EquaTerra, a BPO expert sourcing advisory firm, echoed that conclusion when 56% of its pharmaceutical respondents listed cost reduction as outsourcing’s primary benefit. Coming in second (at 44%) was improving stakeholder ROI by dedicating and redirecting focus to more strategic activities.4 The increased number of outsourced service providers available to the life science C-suite is a testament to the success of the model in achieving the aforementioned goals. However, negotiating the minefield of outsourcing providers and offerings - and selecting the ones that will work best with an organization - can be a daunting task. Manufacturers considering outsource opportunities will gain a competitive edge by thoroughly evaluating business, financial and partnership considerations when contemplating what and whether to outsource.

Section One - Business Considerations

Determining What to Outsource

In the next five years, outsourcing in the pharmaceutical segment will increase as companies are required to focus on efficiency improvements to compete in today's market. Companies are expected to take a much more critical view of nearly all internal operations – including those they have traditionally managed and viewed as core to the organization. Certain financial services, contract management and order-to-cash processing are now all easily outsourced as well. Customer Service and Medical Affairs may also be effectively managed outside company walls, depending upon the product line being considered. It wasn't very long ago that commonly outsourced activities, such as manufacturing, clinical trial management and warehousing and distribution, were considered core to the organization and therefore remained "in-house.”

Using core competency as the sole outsourcing “filter” has proven to be a somewhat flawed model in recent years as functions typically understood as “essential” have been successfully outsourced with great success. While core vs. non-core may in some cases continue to serve as an appropriate filter when determining what to outsource, it is just one of many points of consideration life science manufacturers may use to evaluate potential outsourcing opportunities.

Consider the Following Potential Outsource Evaluation Filters:

Scalability

Outsourcing allows manufacturers to scale up without investing the time and money required to hire, train and maintain staff and allows for immediate reduction of services without requiring staff elimination or maintaining excess physical assets When considering a true outsource/in-house scalability a comparison of direct and indirect costs must be taken into consideration. For example, call centers not only require labor and supervision, but also occupancy, utilities, phone costs, technology, training, etc. Fully utilizing an in-house call center staff is difficult for any company. By outsourcing a call center, a company pays only for the time the service provider spends making or taking the calls. Such end-to-end project outsourcing provides ultimate scalability by converting a fixed cost to a variable cost.

Expertise

When considering outsourcing of a functional area evaluate your current in-house staff by asking the following questions:

• Do the internal personnel currently managing this function require high salaries and benefits?

• Do they have specific expertise making them difficult and expensive to train or replace?

• Is there adequate bench strength internally – a backup for every position?

• Is the depth of management sufficient to manage the functional area consistently and successfully?

• Are internal resources providing adequate service levels?

• Does this department have a track record of continuous improvement?

• Does the department have the resources to apply best practice within this functional area?

• Is this department using the latest technological advances?

• Is this department excelling in service efficiencies that enhance customer relationships?

As the last of the baby boomers retire over the next 5 – 10 years, companies will lose a high percentage of employees that hold the greatest depth of knowledge and expertise. The resulting decreasing labor pool will present a challenge for companies. Outsource providers are staffed with highly specialized personnel - providing access to a larger talent pool and a sustainable source of skills. In addition, outsourced services are provided under a legally binding contract providing a clear accountability advantage over internal services.

Section Two – Financial Considerations

Outsourcing - An Economic Value (EV) Boost

In the field of corporate finance, economic value (EV) is a way to measure management’s ability to create value for stakeholders. Economic value is defined as company’s net operating profit after taxes minus a capital charge for the investment on capital employed in the business.

Economic value is positively impacted by outsourcing’s method of cost reduction. By outsourcing, EV is boosted by taking capital assets off the books. According to Karl Pichler, an associate at Stern Stewart -- the company that conceptualized and trademarked the term economic value added (EVA ) -- looking at outsourcing simply as a technique to reduce capital costs is too narrow a view, “Outsourcing is a key strategic component in capital management," said Pichler. "Not so much to avoid the capital charge, but more to make capital variable and to reduce overall operating costs and capital costs.”

Whether your financial metric is EV, return on investment (ROI) or internal rate of return (IRR), the strategic use of outsource partners can improve the financial health of your company.

Cost Reduction Achieved through Shared Services

As life science executives contemplate outsourcing options, strong consideration should be given to the savings achieved through shared services. In the shared services outsource model, multiple companies within the same industry are able to further increase efficiencies and reduce costs by using third-party providers, also referred to as shared-use distribution providers. To achieve optimum benefit from 3PL shared services, it is important to utilize an industry specific provider. The warehousing, tracking and distribution of drugs, biotechnology products, and hazardous materials requires Food and Drug Administration (FDA) and Drug Enforcement Administration (DEA) level compliance such as high-level security and the use of pharmaceutical grade warehouses.

Perhaps the most regulated of all industries, the life science industry presents one of the most demanding distribution and supply chain management challenges. Regulatory requirements, the need for lot control and quality assurance require 3PLs servicing the life science market to create and maintain best practice levels of accuracy, productivity and efficiency. By sharing space in an FDA/DEA compliant 3PL facility and by outsourcing related I.T. services and systems -- such as warehouse management systems, contract management, order to cash and accounts receivable -- 3PLs are able to spread costs across multiple client manufacturers. As a result, the overhead required for each client is lower and start-up risks for new products are minimized.

Capital Outlay

Internal business units fight a continuous battle for the resources necessary to keep pace with changing technology and business standards set by customers and regulatory agencies. Often, internal groups don’t receive authorization for needed capital investments until after a regulatory observation has been made or a customer complaint received.

Outsource companies are required to look at the changing healthcare landscape and invest proactively in best practice as a means of remaining competitive. They are quick to adapt to changing market demands and regulation and are able to spread required investments across multiple client companies. This aggregation eliminates the redundancy and expense of each company building a unique solution and ultimately removes cost for the entire channel; companies may look to outsourcers as a way to maintain a competitive base without maintaining expensive infrastructure.

Carole Pfeil is the vice president of Corporate Communications, Dohmen Company. As the VP of Corporate Communications Carole works to positively position Dohmen, DDN and RESTAT in the eyes of key audiences — employees, clients/prospects, shareholders and local communities --through proactive public relations and publicity efforts. She has worked in communications capacities specifically in the Pharmacy and PBM spaces for more than 15 years. Prior to Avicom she was the Director of Business Development and Marketing for IHS, a unit of IMS Health, whose 8000-employee workforce supplies consulting, PBM auditing and business process outsourced services to the life science industry. Earlier experience includes rising from Technical Writer to Communications Specialist and then Manager of Communications and Public Affairs for Honeywell-Bull (Bull-HN) a French-owned company with a worldwide presence in more than 100 countries, particularly active in the health care and telecommunications sectors. She also works with DDN and RESTAT’s leadership and marketing teams to ensure branding consistency while creating dynamic internal and external communications tools to help inspire our workforce and reach our client and prospect audiences with compelling messages that extend our corporate vision. Recently she has completed a high level white paper on Outsourcing in the Life Science Industry. For article feedback you can contact the author at Cpfeil@dohmen.com

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