Outsourcing: Transition from Business Process Outsourcing to Knowledge Process Outsourcing

Published on: 
BioPharm International, BioPharm International-05-01-2007, Volume 20, Issue 5

By outsourcing high-end processes that demand advanced analytical and technical skills, biopharm companies are reaping substantial savings.

The business climate for the pharmaceutical industry has changed significantly in the last decade. The realities of an increased emphasis on return on investment (ROI), downward pressures on pricing, and the imperative to provide greater value (higher quality at lower cost) have led members of the pharmaceutical industry to evaluate and implement technology-driven and business paradigms to maintain sustainable competitive advantage.

Hazel Aranha, PhD

One approach the industry has taken to "stay ahead of the red" has been to outsource discrete packages of work, especially when a company lacks in-house capability or cannot complete a task on time. Outsourcing has evolved from a workload capacity management solution to an increasingly strategic solution. It is now widely recognized in the pharmaceutical industry that mastering the industry's entire skill range is no longer a viable option— even for large companies. Organizations of all sizes now realize that specialist companies can, in fact, do things better. Outsourcing may be used to address entire drug development lifecycle needs (as is the case with virtual companies), or it may be used for a variety of activities along the drug development continuum. Factors that help determine whether operations can beneficially be outsourced include the following: host company expertise and capabilities, host company's business model, stage of drug development (Phase 1, 2, or 3), and service provider experience and expertise.

Business process outsourcing (BPO)—the outsourcing of business activities required for the efficient operation of a company—has long been the mainstay of several industries, as functions such as accounting, purchasing, and information technology have been managed by external organizations. In the pharmaceutical industry, discrete packages of work, such as the generation of clinical supply materials for preclinical or clinical testing and manufacturing, have been outsourced. Outsourced manufacturing-related activities have typically focused on tactical operations and have included primary and secondary packaging, formulation, active pharmaceutical ingredient manufacturing, sterilization, and labeling.


With the evolution and maturity of outsourcing strategies, and the added comfort level that has come from successful tactical outsourcing, pharmaceutical companies are moving toward outsourcing high-end processes—and outsourcing them to offshore destinations. The offshoring of high-end, knowledge-intensive work is termed knowledge process outsourcing (KPO).

KPO takes outsourcing to a higher level. Knowledge-based business processes are outsourced to locations and organizations that offer domain expertise, technical skills, and cost-effective operational efficiencies. Examples of KPO services include creating, sharing, maintaining, tracking, and disseminating knowledge across a variety of industry segments; these segments consist of pharmaceutical and biotech research and development, as well as market research, statistical analysis, financial services, and legal services.

Quick Recap

There has been a surge in KPO in the last few years as companies have recognized that high-end processes can be successfully outsourced with substantial cost savings. Incidentally, those organizations and locations that offer first-rate BPO services typically are in the best position to offer high-quality KPO services as well. The global KPO business of nearly $2 billion is estimated to reach $16 to $17 billion in the next five years. According to Evalueserve, low-end outsourcing services will grow globally from $7.7 billion in 2003 to $39.8 billion in 2010, implying a cumulative annual growth rate (CAGR) of 26%. In contrast, the estimated total revenue for the KPO market is expected to grow globally from $1.2 billion in 2003 to $17 billion in 2010, implying a CAGR of 46 percent.1

Investment in KPO infrastructure will be higher compared to traditional BPO infrastructure investment. Companies evaluating offshoring opportunities typically consider the following broad parameters: infrastructure, processes and technology, human resources, credibility, front-end interfaces, and actual performance.2 Good infrastructure is essential, not only from the outsourcing partner, but also in the city or country where the KPO work will be undertaken. Assurance that macro-level infrastructure limitations will not, in any way, hamper operations is important. The partner under consideration should have appropriate delivery systems, in terms of quality standards, to support the processes and the technology. A high degree of expertise in specific areas, along with personnel for support functions, must be available. Credibility is a major issue when evaluating a potential partner; indeed, data integrity and employee credibility rate very high on the acceptance evaluation scale. Direct interface among partners is typically not an issue unless interactions involve a third-party KPO, in which case building trust, demonstrating credibility and domain expertise, working out the delivery model, and defining performance criteria play a critical role.



Pharmaceutical companies can reap considerable benefits from KPO. The drug pipeline is not as prodigious as it was during its heyday in 1996, when 53 new molecular entities (NME) were approved; indeed, there has been a so-called "approval drought" in the last decade.3 The year 2006 saw the approval of only 18 NMEs (the same number as in 2005), and of only four biologic license applications (BLAs). Interestingly, the approval recipients were not the big biotech companies; they were either smaller, newer US biopharmaceutical or biotech companies, or large international pharmaceutical companies that were, in some cases, foreign-based.4

The typical cost of drug development has been conservatively estimated to be $802 million (in 2000 dollars).5 In addition, the fact that 50% of new blockbuster drugs are next-in-class compounds does not provide highly differentiated therapeutic value to the industry. Today only one of six new drug prospects will likely deliver returns above its cost of capital. Drug-candidate screening and evaluation is extremely expensive, and even with the application of recent molecular and informatics tools, performance has not been stellar.

Drug discovery and development KPO, taking into account specific skills afforded by a particular location, can significantly improve ROI. For example, India traditionally has been known for its experience in reverse engineering of pharmaceuticals. Indian scientists have established a stronghold in the computer industry, and collaboration between the computer and pharmaceutical industries can stimulate drug discovery and development programs.

Another area for KPO is data mining. The amount of information that pharmaceutical companies generate and collect during drug development doubles every five years; unfortunately, only 10% of that information is ever leveraged to improve overall competitiveness and compliance. Reportedly, most drug development organizations—regardless of size—are working with ad hoc or silo processes in which data are not captured consistently.6 Data transparency and traceability are imperative in the pharma industry; however, the tendency toward "tribal data capture"—storing data on individual desktops or servers—continues. It is time to do away with the old technology-enabled data management model and replace it with technology-enabled knowledge management. KPO can facilitate this transition. This change will enable "drill-down" capability-data access based on specific requirements such as date, project type, or phase—as well as "drill-across" capability, to develop relationships among processes, materials, and operating modes (good manufacturing processes versus not-so-good manufacturing processes, for example). Knowledge management will allow pharmaceutical companies to revisit NMEs not considered as first-tier candidates (and therefore not brought forward for further development) to determine if their potential should be further explored. Indeed, some pharmaceutical companies have licensed these "back burner" candidates to contract service organizations (CSOs) for further investigation and development.

Table 1 provides examples of KPO services in the pharmaceutical industry.

Table 1. Examples of knowledge process outsourcing


Outsourcing a process offshore does not rewrite the rules of outsourcing. Rapidly developing economies (RDEs) such as India and China offer sizable advantages and are underused by most companies. Many CSOs are increasingly using RDEs in their innovative processes. The general arguments for doing so are as follows: access to a vast pool of high-quality, low-cost technical talent (the labor-cost differential is large); round-the-clock, 24/7 workdays; potentially faster product development times; and better access to local markets—for example, India and China are the fastest-growing sources of demand in the world.

Although many multinational companies have focused on India and China, other regions also being considered include Eastern Europe and Latin America. In a survey conducted by the Boston Consulting Group, approximately 45% of respondents indicated that their companies planned to increase research and development investments in China and India.7 The study also points out that although companies have planned allocations in RDEs, most firms are taking a cautious approach. The most popular target for increasing innovation spending in 2006 was North America; fully 60% of respondents said their companies planned to increase investments there. Western Europe, at 48%, was the second most popular location for increased innovation spending.


As with any project, whether in- or outsourcing, good project management is vital. Effective business process and project management tools must be established. Quality standards also must be established and implemented at every step in the workflow. Typically, KPO will involve a high degree of information sharing and knowledge sharing; therefore, confidentiality, security infringement, intellectual property, and employee credibility are major concerns.

One challenge in KPO management involves defining performance criteria. As KPO services involve deliverables for which it may not always be possible to assign exact specifications, managing expectations is critical. In addition, the following are essential: agreed-upon communication venues, avenues, and frequency; a balanced range of performance-assessment metrics; and the recognition that, at least initially, there may be a productivity lag until specific process knowledge is gained.

Process ownership and task ownership together form another area for which clarification and upfront discussion are needed. Specifications for this area are typically included in the outsourcing contract. For example, for outsourced cell-line development and target protein-optimization projects, it is necessary to identify who owns the processes.

The following case studies illustrate the importance of some of these concepts.


A Japanese pharmaceutical firm acquired rights to develop and license a biopharmaceutical product in Japan while the product was entering Phase 1 testing in the US. As most of the analytical methods had not yet been fully developed when the license was granted, both companies worked together to develop characterization techniques. For the majority of the methods, the two companies pursued the same course and arrived at nearly identical procedures. However, in the case of the bioassay, the Japanese group used the cell line that had historically been used by researchers in the field, while the US company moved to a new cell line that had been reported in the literature as being more robust. The assay was complicated by the presence of a preservative in the drug product that caused cell death at high drug concentrations.

Both groups were successful in developing an effective assay that measured the biological activity of the drug. Although either firm could have insisted that the other firm use its method, in the end good science prevailed and both methods were validated after demonstrating comparability. The take-home message here is that sound scientific methods should take precedence over individual opinions.


Years ago when a company wanted to develop a master cell bank, it had to obtain the starting DNA for the specific protein from a natural source. To change the amino acids or to improve expression, the development scientists would start with this gene and make point mutations to alter specific sites (today they almost always start with a synthesized gene). In addition to providing exact control over the sequence of amino acids to be produced, the increase in synthesis capability allows the company to optimize the sequence for other reasons. For example, they often choose to express a protein in a host different from the one in which they obtained the original DNA sequence; the desired host may favor certain codons for expression that differ from those found in the native sequence.8

To increase expression levels, they go through a process of codon optimization. Several firms offer the specialized service of codon optimization based on the selected host cell line. Although it is possible to perform this work in-house, many firms outsource this function to an outside provider. This is an example of KPO; rather than developing this narrow but highly specialized skill in-house, the company in question works with an outside group that has invested the resources to add knowledge value.


To create value, both in the short and long terms, pharmaceutical companies need to see the big picture and build an integrated strategy that balances the advantages against the potential risks from offshoring. KPO entails shifting from simple execution of standardized processes to carrying out processes that demand advanced analytical and technical skills as well as decisive judgment. KPO projects are typically marked by a higher level of control, confidentiality, and enhanced risk management. Laxity in any of these parameters can jeopardize or nullify the expected strategic value.

Current outsourcing practices of many pharmaceutical companies are overly conservative, and project management practices are sub-optimal. As the Boston Consulting Group concluded in a recent report, Looking Eastward: Tapping China and India to Reinvigorate the Global Biopharmaceutical Industry, companies that carefully implement an integrated and deliberate strategy will have the greatest advantage in the future.9

Hazel Aranha, PhD, is president of GAEA Resources, Inc., Northport, NY, 631.261.4665, hazel@gaeainc.com. Scott M. Wheelwright, PhD, is founder and CEO of Strategic Manufacturing Worldwide, Saratoga, CA, 408.420.5352, info@smwbiotech.com


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2. Knowledge process outsourcing—An emerging opportunity. Gurgaon, India: Kelly Services; 2006.

3. McCaughan M. The approval drought. In Vivo. 2006 Feb 1;63.

4. Owens J. 2006 drug approvals: Finding the niche. Nature Reviews Drug Discovery. 2007 Feb;99–101.

5. DiMasi JA, Hansen RW, Grabowski HG. The price of innovation: new estimates of drug development costs. J Health Econ. 2003 Mar;22(2):151–185.

6. Morris K, Venugopal S, Eckstut M. Making the most of drug development data. PharmaManufacturing. 2005 November 30;4(10):16–23.

7. Innovation 2006. Boston: Boston Consulting Group; 2006.

8. Expression Optimization. DNA 2.0 Inc.; 2004 [cited 2007 Mar 3]. Available from: www.dnatwopointo.com/commerce/misc/opt.jsp

9. Looking eastward: Tapping China and India to reinvigorate the global biopharmaceutical industry. Boston MA: Boston Consulting Group: 2006.