Feature

India and China: Outsourcing Beyond the Comfort Zone

Chris Paddison is a vice-president at A.T. Kearney, Inc., Chris White is a former vice-president and alumni of A.T. Kearney, and Carol Cruickshank is a principal at A.T. Kearney Ltd., Box 68, Suite 2300, 20 Queen Street West, Toronto, ON M5H 3R3 Canada, tel. 416.596.3749, fax 416.977.1315, carol.cruickshank@atkearney.com

Pharmaceutical companies are under constant pressure to innovate, comply with a myriad of regulations, and meet the demands of quality standards—all while delivering as much profitability as possible. Challenges are escalating. Investors are accustomed to double-digit growth, which is a goal pharmaceutical companies will be hard-pressed to achieve as patents expire, blockbuster launches decline, and large customers, especially governments, step-up pricing pressures on the industry. At the same time, compliance with stricter regulatory requirements is lengthening the time to launch a drug into the marketplace. The average number of clinical trials per new drug application has more than doubled in the past 30 years, and the average number of patients participating in clinical trials has increased two and half times during the same period. Research and development (R&D) costs also are rising. In fact, the cost of bringing a new drug to market has more than doubled in the past decade and is approaching US$1 billion (1). The pharmaceutical industry's general and administrative costs are high as well—at 28% of revenue, based on A.T. Kearney's analysis of the top 10 pharmaceutical companies' 10K submissions. Pharmaceutical general and administrative expenses, as a percentage of revenue, were two-thirds higher when compared with a broad mix of companies in highly technical, process industries, consumer goods, and retail mix. There's no quick fix, but pharmaceutical companies must control costs and increase productivity. It's inevitable that global outsourcing will become a part of the answer as it has in other industries (see Figure 1). Financial institutions, led by GE, Citibank, Amex, and HSBC, are guiding the way. In 1999, Citibank formed e-Serve International Ltd., a business processing company based in India. The company's offerings include transaction, customer care, and technology services. Four years after being established, e-Serve performs more than 100 million transactions per year. Other industries such as automotive (in Stage 4) and consumer products (in Stage 3) have shown substantial progress in moving along the lifecycle curve. Procter & Gamble, for example, is consolidating its administrative functions into three business service centers in Costa Rica, the United Kingdom, and the Philippines. This initiative is part of Procter & Gamble's Organization 2005 program. These three sites will provide employee services, purchasing, information technology, finance and accounting, and customer logistics. As a combination of traditional outsourcing (i.e., using an external firm rather than internal resources to provide a service) and offshoring (i.e., seeking services outside the country), global outsourcing represents an opportunity to find the most efficient and effective means of bringing drugs to market. Traditional outsourcing is not new to the pharmaceutical industry. Many companies already look outside their own walls for services in information technology, payroll, manufacturing, clinical trials, and clinical trial data management. Until recently, however, pharmaceutical companies have been reluctant to outsource beyond the United States and Europe, in part because of concerns about intellectual property protection, demands for regulatory compliance, worries about political stability and business continuity. Given the pressures on the industry, however, the potential benefits of global outsourcing are difficult to ignore. Simply put, the industry cannot maintain the status quo. A.T. Kearney analysis indicates that if growth and pricing pressures maintain their current trajectory, by 2008 the US pharmaceutical industry will face a US$48-billion gap between investor expectations and estimated revenue (see sidebar, "Running the numbers"). Because global outsourcing can help pharmaceutical companies address cost pressures and the need for increased productivity, while also leveraging capacity and capabilities, it is inevitable that the global outsourcing trend will grow. The opportunities for pharmaceutical companies are significant: accelerated time to market and greater profitability. On the other hand, companies that wait to see how others in the industry fare may be forced into playing catch-up. (continued)