Hey, nobody ever said making a profit in the pharmaceutical market was easy. The barriers to success are both high and
numerous. Industry figures show that only one candidate in many thousands ever becomes a commercially viable product. The
average commercial drug costs $800 million to research and develop. And less than one-half of all commercial drug products
ever return a profit to their parent firms.
And don't get me started on all the legal, compliance, and government clearance issues that biopharm companies must address
before even getting out of the starting gate.
Good or bad, depending on your point of view, it's no longer a luxury, but a necessity for biopharm companies to turn to outsourcing
You can't blame the bean-counters — the chief financial officers and other corporate finance executives who make the decision
to farm out operations. With the financial risks so high in the biopharm market, more and more companies in the life sciences
arena are looking at outsourcing options to effectively reduce some of that risk that is prevalent and unique to the biopharm
In a recent study of global outsourcing by the Chicago-based analyst group DiamondCluster, the growth rates associated with
shipping out operations overseas is skyrocketing. About 86 percent of 182 US companies surveyed plan to increase the use of
offshore outsourcing firms. 40 percent of buyers expect to outsource some IT functions to China over the next three to five
years compared to eight percent last year. And while 88 percent of buyers remain concerned about employee backlash, worries
about anti-outsourcing legislation and political pressure have lessened significantly.
The study states that the greatest risks of outsourcing include the increased complexity of managing relationships, reduced
operational effectiveness, and lower quality of output from their outsourcing providers. It casts doubt on the return on investment
benefits associated with outsourcing overseas, with over one-half of study participants unsure of whether their outsourcing
efforts will bear fruit from a financial bottom line perspective. In fact, the number of companies that expect to save big
money has dropped significantly. They anticipate outsourcing to save only 10 to 20 percent of their costs, down from 50 percent
ON THE OTHER HAND . . .
With such mixed results, why are companies going the outsourcing route?
There are several theories that outsourcing proponents have been advocating for years. While we all know theory is not the
same as execution, the prevailing wisdom was that outsourcing would help US firms in three key ways:
Profits – By farming out tasks that companies don't do well but still need to do, they can then focus on the things they do well, thereby
increasing the chances of higher return on assets. Some evidence of that is true. In a study by the Information Technology
Association (ITA) of America, US software and technology companies will save $21 billion a year by 2008 through outsourcing,
adding $124 billion to the US economy.
Productivity – Companies that outsource are discovering that the work left behind is usually the work employees are trained to do and enjoy
doing. Consequently, personnel productivity tends to rise after outsourcing programs are in place. In the ITA study, researchers
found that cost savings associated with global outsourcing increases employee productivity, boosts their wages, and creates
317,367 new jobs over the next five years. That scenario tends to make both employer and employee very happy. "There is one
time-honored agreement in economics: free trade produces gains for all parties," says Lawrence Klein, a 1980 Nobel Prize winner
and one of the lead researchers in the study. "That is still the case. The American way has always been to move to activities
that are higher value-added."
Politics – Outsourcing can remove many administrative and man-agement headaches asso-ciated with the basic nuts-and-bolts operation
of a company. With logistics, distribution, or back office functions farmed out to specialists, companies have free reign
to focus on deployment of company resources in areas that need help the most.