Outsourcing - now's the time

Outsourcing - now’s the time

As companies increasingly begin to turn outside for help to support their activities, Peter Bamfield looks at how best to manage such cooperations, and questions to what extent they are desirable.

Until a few years ago, R&D managers in large organisations regarded using outside contractors as a short term activity, designed to overcome a temporary constraint on our resources. Typically, we would use a small company to provide a specialised analytical service, hire a piece of equipment for trial, or employ a toll manufacturer to make the initial quantities of a new intermediate. It was a tactical option - if the service was going to be needed regularly we would recruit the staff, buy the equipment, and then build up the resource ourselves. When sales of a new product grew significantly we would build a plant to make the intermediate and terminate toll manufacture.

But all this changed in the 1990s. The financial climate became harsher and new words started to appear in our vocabulary. We were being downsized, delayered and demerged as commonly as we were being deplaned when flying on US airlines. No longer allowed to increase staff numbers, we were told to concentrate on core activities, to understand and build on our core competencies - not to take on new ones. Consequently, because we still needed to continue developing, it became essential to use outside agencies to provide many key services. Another new word was on our tongues and has remained there ever since, outsourcing.

So what is outsourcing? Simply defined it is the provision of a service, resource or product from outside the organisation. However, as outsourcing has developed, this definition has become much too simple. What for a previous generation of R&D managers was a tactical option, is now an essential component of the business strategy in many companies. Recent headlines in the chemical press have changed from a cautious wait and see view of outsourcing to full blown statements that its time has arrived. Such has been the explosion in outsourcing, especially by drug companies as they try to shorten development times, that there has been little time to develop any guidelines for the activity. So what different types and levels of outsourcing R&D are available and how best can we ensure success with this activity in the chemical industry?

Why outsource?
It is easy to understand why small and medium sized enterprises (SMEs) use outsourcing. New products or developments come along at more irregular intervals in the SME sector than they do in larger companies. Additionally, some R&D skills required for product development are missing in smaller companies but because of the peaks and troughs in R&D requirements they cannot justify recruiting more staff. These companies have no choice but to use outside expertise if they are to make progress, contracting these resources only when they are needed.

But, why should a large company, with all the resources it needs to develop a product in house, choose to contract some of these activities from an outside agency? After all, managers have control of their resources, can maintain their quality, limit their cost, plan their future activities and resolve potential conflicts of interest between competing projects. Yet it is just such companies that are increasingly resorting to outsourcing. Basically, there are three reasons for this change: cost, time and technological complexity.

1. R&D managers are under constant pressure to control costs, especially fixed costs, and to do more work with fewer people. No one wishes to cut resource at the sharp end of R&D, and the only way to avoid this is to put all other activities under the microscope. One answer is to stop any irrelevant support and to consider outsourcing of certain non-core, but essential services.
2. Everybody wants to get their products to market as quickly as possible - time is money. A shorter time to market means that income arrives sooner and the residual patent life left for protected sales is longer. Using smaller, less bureaucratic, contract companies to carry out some of the key development activities is one way to speed up product development.
3. R&D has become increasingly technologically complex and multi-disciplinary. Consider the number of different skills needed to invent and put a new drug on the market or to develop a Dram chip. Few companies, if any, can afford to have all the necessary technical expertise under their direct control. Outsourcing or joint collaborations are the way round this problem.   

What, when and where?
In theory, we can outsource almost everything. However, to my knowledge no major company has taken the plunge and allowed its key research activities to be totally outsourced. Virtual companies do exist, but so far they are only involved in the development, usually of a drug, from a research lead generated elsewhere.

Companies can get involved with outsourcing at several levels. Initially they can use local organisations or Yellow Pages to provide cost effective commodity services, or services that are used only infrequently by R&D, for example, fine chemical supplies, instrument manufacture and glass blowing. R&D also occasionally requires specialised analytical techniques, and universities or research institutes with these instruments may carry out the tests on a pay as you go basis. We might also consider outsourcing regularly used in-house services that provide no competitive advantage, for example, IT and computing, information and library support and routine analytical services. Because such services are essential for the smooth operation of R&D, it is usual to agree an ongoing service contract with a specialist organisation.

Before outsourcing commercially significant activities, however, we need to give the idea some careful consideration. Even so, companies regularly outsource many steps on the critical path to introducing new products. There is nothing new in this: custom manufacture of key intermediates has gone on for many years, but over the past decade the growth in this area has been very fast. More recently, companies have begun sourcing products as well as intermediates by contract manufacturers. Other key services for product development that are regularly outsourced are all aspects of safety, health and environment, including toxicology. A whole range of contract research organisations (CROs) have sprung up to service the development requirements of drug companies, including carrying out Phase I, II and III clinical trials.

More sophisticated than any of the preceding activities, and one more prone to risk, is the shift to outsource key steps in the discovery phase of R&D. This is at the centre of the debate about how far companies should go with outsourcing and when does a technological company cease to be one. Many managers think that it is very unwise to outsource technologies that are critical to achieving the business strategy. Outsourcing of selected research activities and technologies is still the preferred option. Companies prefer to form strategic alliances or collaborate with other companies when essential technological core competences required to carry out research programmes are missing.

Reluctance by companies to move into wholesale outsourcing has not prevented a massive expansion in the number of CROs over the past decade. More than 600 CROs are now believed to be touting for business worldwide. This is hardly surprising since calculations show that every 1 per cent move into outsourcing by international pharmaceutical companies produces $200 m extra business for CROs.

One stop shop
’One stop shopping’ is a late 20th century phenomenon; whether it refers to a city superstore or a bank that has become a financial services centre, the motto is no need to shop around, we can do it all for you. By adopting this idea, the chemical service industry has targeted the f ormation of super CROs as the way forward, especially to service drug companies. Super CROs would aim to reduce drug development times and make the costs more predictable, by active partnership with the lead compound generators. It is only a matter of time before these wholly owned service companies have all the core competencies to carry out all aspects of drug development.

Virtual companies
The management guru Tom Peters is one of the strongest proponents of the virtual company, arguing that imaginative use of modern information technology renders the corporation redundant. We are still a long way from that happening. Virtual companies are springing up largely, if not solely, in the pharmaceutical field. A lot of money can be made from one even modestly successful drug, and venture capital is not a problem. Virtual companies are acquiring lead compounds; they may even be supporting screening programmes, using CROs to take a product through all the development stages and to market. They do not have any technical resource under their direct control and use consultants to advise on the various stages of development. The people managing the company, possibly as few as four or five of them, must have good project management skills to keep the work on track.

Now’s the time
There are many examples of successful outsourcing of R&D and there is no doubt that companies can save fixed and capital costs and deliver projects faster by the intelligent use of outside agencies. However, there are also many cases where the experience has not been so satisfactory. To date no detailed study has been published on outsourcing in the chemical industry but from my experience the guidelines in Box 1 should be useful to companies thinking of embarking on this route.

Understandably, individuals working in such companies may feel uneasy at the prospect, though perhaps they should feel encouraged by the increasing employment opportunities becoming available in the CRO sector. The amount of consultancy work is burgeoning, with an increasing number of mega firms offering specific expertise being established worldwide. As the title of the old Charlie Parker bop classic says: ’Now’s the time’.

Source: Chemistry in Britain

Acknowledgements

Peter Bamfield is an independent consultant on R&D management. His book, R&D management in the chemical industry was published in May 1996 by VCH. He is currently president of the RSC’s Industrial Affairs Division.