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India and China: Outsourcing Beyond the Comfort Zone (continued)

Select the right partners. It is always important to apply a rigorous supplier-selection process, especially when evaluating suppliers in emerging markets. By standardizing the process, organizations can save time and incorporate lessons learned from past experiences into future situations. Pharmaceutical companies must have a complete understanding of their strategic reasons for outsourcing each task and of the benefits they want most to gain. For example, if a company values speed to market more than cost savings, then it should weight its supplier evaluations accordingly. One of the most important factors to consider when outsourcing to a company in an emerging market is the candidate's track record. A supplier that has demonstrated its capabilities working for other large pharmaceutical firms and has a sustainable track record on quality and intellectual property protection is likely to be a more attractive candidate. Reference checking is a normal course of business in any outsourcing arrangement, but when dealing with emerging markets, due diligence is critical. Leading companies often look for opportunities to bundle services and to strategically partner with a smaller number of suppliers when appropriate. One executive told us, "We are interested in outsourcing to a partner that can perform the entire development through launch." Because such arrangements lead to spending more with each supplier, they help companies negotiate greater cost savings and more favorable contracts. Structure arrangements carefully. The executives we interviewed believe it is important to structure a contract with pricing that benefits both sides. A win–win deal is better than squeezing maximum concessions from a supplier because it sets the stage for working together constructively. If the contract is priced too low, then there is a danger that the partner will quit or raise prices sharply in the future. Key decision makers should be involved in the selection of suppliers. Senior management from departments that will be affected by outsourcing strategies such as those in R&D, engineering, manufacturing, and logistics also should play an active role in developing the outsourcing strategy. It is important to consider a range of perspectives given the potential for significant changes in resources and results. Each outsourced activity and each outsourcing strategy has its own goals and potential complications; therefore, the structure of each contract should reflect those differences. In some instances, a company may want process improvements from a supplier, notes Rudy Hirschheim, a professor at Louisiana State University. Offering incentives that reward service providers for such improvements is the best way to make them happen, he says. Manage outsourcing performance. Turning an activity over to a third party doesn't mean forgetting about it. "Outsourcing does not mean abandoning. You must manage on a daily basis," says David McGirr, chief financial officer of Cubist Pharmaceuticals. To receive the full benefits of outsourcing, companies must establish formal roles, procedures, and metrics. Best-practice companies appoint a governance committee to manage the selection and performance of service providers, review and approve the outsourcing strategy, and resolve issues. They create a process for reviewing suppliers on a quarterly basis (or less often for less-strategic relationships). Timelines and frequent communication are important parts of the equation. In addition, leading companies create scorecards to evaluate supplier performance on both a qualitative and quantitative basis. By clearly setting expectations up front, these tools can minimize delays, cost overruns, and problems related to quality, which are some of the biggest issues pharmaceutical companies face when they outsource. Scorecards should include general metrics that apply to all areas (e.g., adherence to deadlines) as well as measures that are specific to an activity. By formally surveying a cross-section of those who work with the supplier, companies get a more detailed picture of whether trust and communication are at optimal levels. Sometimes relationships don't work out, despite an organization's best efforts. Companies must prepare for that possibility by establishing procedures up front for resolving issues and for exiting the contract, if necessary. Making the move Choosing to move closely held processes to far-flung shores is no easy decision, but the potential benefits are too compelling to ignore. Leading pharmaceutical companies already are following in the footsteps of other businesses, assessing where they could be more competitive, and evaluating where a global outsourcing strategy would further their efforts. The road isn't easy. Many challenges remain, from intellectual property protection to supplier management to quality concerns. But some companies are learning to manage those challenges to achieve the potential global outsourcing has to offer—those that aren't are in danger of falling behind. References Parexel's Pharmaceutical R&D Statistical Sourcebook 2004/2005 (Parexel International, Waltham, MA). Outsourcing Among Pharmaceutical and Biotech Firms: The Growing Imperative for a More Aggressive Approach to Outsourcing (CFO Publishing Corp., New York, NY, 2004). Outsourcing Strategically for Sustainable Competitive Advantage, available at www.capsresearch.org. PT