In Or Out: Outsourcing in Today's Biopharmaceutical Industry
By Steven K. Budd, President, PDI Global Sales & Marketing Services

(As appeared in the January 2004 Business Briefings Ltd. Pharma Outsourcing report & CD-ROM and April 2004 Business Briefings Ltd. Pharma Tech)

"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 are often 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?

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 of Outsourcing in the Biopharmaceutical Industry

Outsourcing in the biopharmaceutical industry began in the 1980s and exploded in the 1990s in three core areas: clinical trials, contract manufacturing and sales force 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 that no one knew better than us."

In this case, the driving force was cost; even the largest pharmaceutical companies realized that staffing a clinical trials team was a drain on resources. The need to unload steep costs outweighed the loss of control, Whittle says. Furthermore, organizations realized that once a product reached the trials stage, there was no longer a need for a proprietary influence from the company—the product would either pass or fail without their direct influence. Slowly, companies turned this vital but laborious process over to companies that concentrated only on clinical trials management. No longer inundated by the workload of conducting their own clinical trials, many managers redirected resources to bolster existing internal operations and explore new growth areas.

At the same time, for many of the same reasons, pharmaceutical companies began to contract out the manufacturing of their products to contract manufacturing organizations. Many of these manufacturers were large chemical corporations looking to diversify. With existing facilities and production expertise, these companies were able to control everything from the production of ingredients to the creation of the finished product, often at a much lower cost. Pharmaceutical companies realized that even if they wanted to ultimately manufacture a product in-house, using a contract manufacturing organization might be the best way to begin a product’s run until its success proved the need for a larger-scale operation.

The shift to outsource sales forces was built on the early success of clinical trials and manufacturing as core but non-proprietary business functions, but it wasn’t an easy transition. Sales forces were seen as a more proprietary function: a company would hire a good rep 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 reps could be as well trained, knowledgeable and effective as their own sales force. Today, outsourced sales teams are routinely used to support all brands in the portfolio, including critical launches of potential blockbusters.

The slow implementation of these three outsourcing functions in the 1980s became a torrent in the 1990s. Clinical trials management and contract manufacturing firms boomed in the early 90’s, while outsourced sales blossomed mid-decade, fueling CAGR of nearly 70% each year from 1995-1999. A robust marketplace combined with threatened U.S. healthcare reforms from the Clinton White House forged fertile ground for outsourced solutions.

For large pharmaceutical companies, the outsourcing of clinical trials and manufacturing transitioned from a probationary test-run to a tried-and-true permanent solution. The large companies also found that outsourced sales provided an option for rapid growth of a sales force without increasing internal headcount.

Expansive outsourcing options fueled the growth of small and mid-sized companies in the industry, which could not have performed those functions internally. Small and emerging pharmaceutical companies could now outsource clinical trials, contract manufacturing and hire a sales force without shifting resources away from their proprietary research and development.

Inside and Out
Over the last 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.

A. 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," 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 are thus 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.

B. Tactic vs. Strategic Alternative
In the past, many companies have seen outsourcing as a way to fix immediate problems—a tactic, 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. No longer simply a tactic, companies must consider committing a percentage of their annual budget to outsourcing, even if a specific allocation for that outsourcing has not yet been determined. A pharmaceutical company may, for example, commit resources equal to 20% of its sales force to be outsourced, without a definite plan for which products will be assigned to that force, giving them maximum flexibility to adapt to unforeseen challenges or a changing marketplace. In addition, a commitment to outsource gives their partner the stability needed for long-term investments to continually redefine their value proposition and provide next-generation solutions to business challenges.

Outsourcing non-proprietary functions is a strategy that can both address immediate obstacles and create long-term stability. Just as in 1993, many companies in the industry are now considering outsourcing as a cost-saving measure by reducing headcount and infrastructure in their own organizations, while driving greater efficiency and improved return on investment.

C. 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. Bates reports, "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 sales force. 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—extremely useful in an industry that has seen its sales forces double over the last five years. In addition, the problem of turnover—currently at an all-time high for pharmaceutical company sales forces—will become the outsourced organization’s headache. And with the right relationship, turnover rates need not be higher for the outsourced sales force than with the company’s internal teams.

Outsourcing a sales team also provides flexibility. Such a team can mirror the efforts of a manufacturer’s team or easily be adapted to try different go-to-market strategies, specialty markets or new indications for existing products.

Furthermore, sales success in the biopharmaceutical industry is decidedly non-proprietary today. Physician calls once averaged five minutes or more, when the personality of the rep helped develop a relationship that translated into sales success. Over the last five years, the average call time has dropped to less than two minutes with many calls lasting a scant sixty 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-byte selling, it’s difficult for any rep to stand out.

The example of a sales force illustrates another important point: outsourcing does not mean relinquishing total control of a function. For example, many companies who outsource still control the targeting strategy, marketing message and forecasting metrics central to their sales efforts. 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 sales force. 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.

One unheralded benefit of outsourcing is the knowledge to be gained about a specific capability. Outsourcing companies serve multiple clients in diverse situations and thus experience an accelerated learning curve in their area of specialty. Furthermore, these companies often invest heavily in research of better work practices, recruiting methodologies and training of employees to maximize their productivity.

In a larger sense, companies turning to outsourcing today reap the benefits of the evolution of the practice. Outsourcing options have grown from functions that mirror in-house capabilities to include a vast array of innovative value-added options. At PDI, for example, we offer sales and sales support options, including clinical teams of medical professionals, marketing research and medical education programs to supplement our sales forces and help our clients meet their revenue objectives. These alternatives are indicative of next-generation outsourcing that forges strong partnerships and lays the foundation for a successful venture.

Conclusion
Outsourcing non-proprietary 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.

About the Author
Steven K. Budd has been the President of PDI’s Global Sales & Marketing Services since August 2003. An industry leader in sales outsourcing since 1988, Steve has responsibility for PDI’s service businesses, inclusive of outsourced sales force solutions, medical education and marketing research. In addition, Mr. Budd manages PDI's global relationship with In2Focus, a United Kingdom based contract sales organization, and is a member of their board. He serves on the PDI's Executive Leadership Team, the Executive Finance Committee, and chairs the PDI Commercial Operating Leadership Team.

About PDI Inc.
PDI, Inc. (NASDAQ: PDII), a premier healthcare sales and marketing company, provides strategic alternatives to the portfolio challenges of biopharmaceutical and medical device and diagnostics manufacturers. Focusing on two core businesses, sales and marketing and product commercialization, PDI leverages its expertise and commercial infrastructure to maximize profitable brand growth.

For more information contact the PDI Business Development Team:
By phone: 1-866-311-8868
Email: TheBetterWay@pdi-inc.com