Challenging Traditional Outsourcing Models Using Core And Non-Core Assessment

Transcription

1 Challenging Traditional Outsourcing Models Using Core And Non-Core Assessment Introduction At this year s Eyeforpharma SFE conference, Quintiles conducted a workshop led by Morna White (Practice Leader, Commercial Strategy) to explore attitudes, beliefs and current thinking about the role of outsourcing as a long-term strategy and potential mechanism for biopharma to support the required transformational change in light of tough environmental challenges. The objective of the workshop was to evaluate the role of a core/non-core analysis tool which can be used as an organizational diagnostic to determine which commercial activities should be retained within an organization and which are better outsourced to a third party. For the session, Quintiles covered key background material: the rationale for transformational change of the biopharma model, examples of outsourcing in R&D versus the commercial experience and examples of alternative outsourcing models. Further to this, Morna White highlighted a process that is used by consulting to aid decision-making within outsourcing using a core/non-core analysis framework and subsequently used this concept to run a discussion with the attendees. As a framework for the workshop, Quintiles proposed the following challenges: 1. Commercial outsourcing is used generally in a tactical manner 2. Outsourcing decisions are based on brand-by-brand needs rather than based on organizational competitive advantage considerations 3. Larger biopharma companies operate in silos and therefore tend to make decisions within their silos which again decreases the potential value the organization could gain through strategic outsourcing 4. Biopharma have not capitalized on cost savings to be gained with regards to back-room functions. Quintiles insight is that greater value has typically been achieved within R&D outsourcing vs sales & marketing. In comparison to biopharma commercial activities, Quintiles has abundant examples of R&D outsourcing being used as a strategic mechanism i.e. sustainable, year-onyear improvements across programs and large scale functions encompassing productivity gains, cost reduction and quality improvements. That is not to say that within commercial outsourcing there are no strategic examples of outsourcing, they are just not as prolific as R&D. Small biopharma may be the exception where they are rapidly taking up the option to improve NPV and their market capital valuation by using a broad provider of service offerings as a viable alternative to out-licensing.

2 Transformational Change Transformational change of the commercial model is a priority that biopharma execs are trying to navigate. The well-documented industry forces (pipeline dearth, patent cliff, shift to payer dominance, requirement for increased value/evidence etc) are impacting the profitability of biopharma, more than ever. These palpable forces will not only continue to prevail, they will undoubtedly get worse given the economic environment and increasing regulatory restrictions. Biopharma has undergone a number of changes over recent years possibly in response to the ever changing reality rather than in preparation of what is to come. Restructures, consolidation, reorganisations and licensing deals are all typical strategies deployed over the last years with success being mixed; in absence of a robust pipeline, emerging market strategies or diversification into OTC seem to be the only tangible growth drivers. Strategic outsourcing as a cost-reduction vehicle has not been actively adopted by biopharma in the commercial space as one of the potential means to address these challenges. Therefore, the 1st challenge proposed is that biopharma uses commercial outsourcing in a tactical manner. Needs are considered on a brand-by-brand and year-by-year basis, determined by factors such as demand-based resource, flexibility, short-term cost improvement and occasionally technology needs. These factors are always good reasons to outsource. However, these reasons are arguably tactical and ignore the fundamental factors that make for a competitive business model. Which lead to the 2nd challenge - biopharma do not always make outsourcing decisions based on competitive advantage e.g. retaining, divesting, outsourcing or developing competencies according to whether that capability truly differentiates them from competitors. Core competency analysis to deliver competitive advantage is a seminal principle of business strategy, but we frequently ignore it: Core Capabilities provides true competitive advantage; you should own and develop Non-core capabilities - essential to business model; you don t need to own The commercial arena arguably remains short-term focused and therefore, by ignoring the above, will receive only short-term gains. The R&D Experience vs The Commercial Experience Commercial model outsourcing continues to be decided on a country-level, brand-by-brand and/or team-by-team tactical basis. Exceptions to this are outsourcing of planning, market insight, communications etc; functions that typically cut across geographic boundaries.

3 All that said, our 3 rd challenge is that companies operate and therefore make decisions within their silos e.g medical communications, market insights, brand planning, salesforce deployment etc. Outsourcing in this respect as a potential vehicle to address the aforementioned challenges has limited benefit. This is in contrast to R&D where there are numerous examples of embracing outsourcing as a vehicle to deliver transformational change to improve ROI. If we want this argument to resonate with pharma executives, the only metric from R&D outsourcing that needs to be communicated is this one: Greater speed to launch a reduction in development time of 1.5 years as a result of improved productivity /reduced cycle times. These results have typically been achieved by a detailed analysis of what is core and non-core in R&D. The stark difference between R&D and commercial in terms of attitude towards core/ non-core analysis and therefore outsourcing is possibly explained by the fundamental distinction between these functions: On the simplest of levels, R&D differs from product commercialisation, in that: R&D is a highly-centralised function R&D has historically not required detailed input or engagement from local customers (although this needs to change) R&D is heavily regulated by regional authorities Therefore, for commercial to achieve the same level of benefits as its R&D counterpart, it needs to involve not only cross-functional/multi-disciplinary requirements and local customer needs/ regulations but also evolve to consider the broader core and non-core capabilities. These considerations make it challenging. Alternative Models Not only has R&D embraced a more strategic model of outsourcing, R&D has also looked outside of its industry for new models of cost reduction or productivity improvements. Business Process Outsourcing (BPO) is now routinely being adopted by pharma R&D for data management, pharmacovigilance and statistics. Large scale builds in off-shore, lower-cost locations which not only offer an immediate labour arbitrage but a continuing cost reduction, are strategies that pharma R&D continue to put in place. Why is this relevant to commercial outsourcing? Our 4 th challenge is that there is significant cost savings to be gained with backroom functions.

4 Again, in R&D, there are numerous examples: Early development cost reductions via shared development of Phase I/II compounds Functional level off-shoring (20% data cost reduction in 2 years) Activity level cost reductions (60% reduction in processing of specific activities) Encouraging this thinking within biopharma commercial has its challenges. Within the biopharma industry, if we speak about commercial or sales & marketing, we tend to think of the front end either marketing or the sales force which needs to be local, adaptable and responsive to understand and meet customer needs and preferences. The sales force is your brand, whether it is representing you in front of a physician or a payer. The reality is that the front end is made more powerful today with a slick back room. Sales force effectiveness is now increasingly translated as being the back room differentiator the analytics and the varying support functions that make the front-end productive and effective. However, this back room doesn t necessarily need to be locally based as it relies on data, technology, analytics and remote functions. However, possibly with the exception of CRM, this customer-essential function is frequently built/delivered on a brand-by-brand basis and frequently uses multiple vendors e.g. local market research, analytics, call centres, logistics etc. This means significant transactional costs of doing business with several providers. This is where core/non-core analysis really has value by establishing the individual components of your value chain, identifying true areas of competitive advantage and determining where savings can be made and value can be added. Core/Non-Core Process The Core/Non-core Assessment is an organizational diagnostic used to help determine which commercial activities truly should be retained within an organization and which are better outsourced to a third party. The premise is as follows: Improve commercial value and outcomes by optimizing an organization s approach to outsourcing Diagnose strengths, areas for development, and what activities are considered core and non-core to the organization Optimize internal resourcing by identifying activities that are currently conducted inhouse which are in fact non-core, and instead should be outsourced

5 This process typically involves: 1. Building A Customized Model For Your Organization 2. Deploying The Diagnostic Evaluating Current Outsourcing Practices 3. Mapping Core and Non-Core Activities vs Outsourcing Activities 4. Uncovering Areas For Further Investigation 5. Creating Recommendations Workshop Insights Quintiles shared a model with the attendees of potential areas that could be outsourced. This is a critical first step of the process, in terms of alignment of a model that is reflective of how an organisation would view outsourcing. We then discussed what the group felt were functions or capabilities that were frequently outsourced versus those that are very rarely outsourced. While the group agreed that the model was reflective of their business and how individual functions may be outsourced, the common themes were that outsourcing was still based on: Brand-by-brand decisions Demand needs at time / peaks & troughs Portfolio needs/lifecycle needs Possibly new therapy areas Needs relating to new technology Regulatory issues The workshop then focused on mapping out this original model against the core/non-core framework according to competency and competitive advantage. This exercise was difficult for the following reasons Deep analysis in terms of core vs non-core was difficult to do in absence of a crossfunctional team within an individual pharma company There was naturally a focus on brand-by-brand needs; it was difficult to detract from this thinking Likewise, the prevailing issues of demand, technology, new therapy areas or regulatory detracted from thinking of competencies as an organisation.

6 Conclusions The Core/Non-Core process needs resource, time and investment. To move away from brandby-brand or supply-and-demand decision making to a framework that would support outsourcing decisions based on sustainable value requires an in-depth approach: Diagnosing strengths, areas for development, and what activities are considered core and non-core to the organization requires cross-function involvement, at a senior level Detailed mapping would support identifying areas where significant synergies (cost reductions) could be made. Investment is required to lay the foundation to improving commercial value by optimizing an organization s approach to outsourcing and ensure that internal resources are focused around truly differentiating capabilities Culture is a big driver of current out-sourcing strategy; facilitating change through showing the value of alternative models and therefore driving internal alignment is critical In the CRO arena, Quintiles has achieved significant advantages for clients as a result of using techniques such as core and non-core analysis. This has only occurred for the following reasons: Trust, respect and shared vision A shared overarching goal between Quintiles and our Client An accurate analysis of core and non-core capabilities A subsequent allocation of capabilities between Quintiles and our Client KPIs that are program and organisational based i.e. product or functional based cost reductions/quality improvements through to organisation-wide cost reductions/quality improvement Achieving the same level of results requires collaboration by both parties; the results could be significant. Morna White Practice Leader, Commercial Strategy Quintiles