StreetTalk: Have Business, Will Travel: Outsourcing in the Global Commerce Age

Fully understanding the pros and cons of outsourcing specific job functions can help determine if it's the right strategy for your company
Oct 01, 2005

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.


Brian O'Connell
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 these days.

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 industry.

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 in 2003.

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.