When Outsourcing Stops Making Sense€¦ · Outsourcing is a fact of life because it provides three...
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When Outsourcing Stops Making Sense A Case Study 2 October, 2013 Steve Herbert Senior Vice President, Cytel Inc.
Transcript of When Outsourcing Stops Making Sense€¦ · Outsourcing is a fact of life because it provides three...
When Outsourcing Stops Making Sense A Case Study
2 October, 2013
Steve Herbert
Senior Vice President, Cytel Inc.
Presenter
It is with great trepidation that I begin this Powerpoint presentation and a tip of my hat to Jeff Bezos, the man who has famously banned PowerPoint in meetings of his senior team at Amazon. Instead, those with presentations are made to write six-page memos. Meetings open with 30 or so minutes of silence in which people read and digest the memos, called "narratives." Then the discussion begins … so if you are all listening comfortably, I’ll begin …
Outline
1. Outsourcing is a fact of life because it provides three seductive components: 1. Cost
savings, 2. More labor flexibility, 3. Access to specialized skills
2. To outsource for cost benefit alone is dangerous because the short-run benefits may be
reversed by economic or political challenges quicker than it takes to realize true gains
3. Simplistic ROI calculations do not reflect the realities of start-up costs, crossing the
experience chasm, true managerial overhead, actual relative regional productivity differences,
rework or non-tangible drawbacks such as customer service, staff turn-over, cultural barriers
4. Outsourcing obviously can and does work in many situations
5. EMD Serono case: when it works it feels good
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1. Reduced costs (53%) 2. Improved quality (43%) 3. Improved efficiency in use of internal staff (43%) 4. Access to operational expertise (43%) 5. Process improvement (30%)1
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Top 5 Reasons clinical trial sponsors report for entering outsourcing relationship
1 Avoca: Strategic Partnerships Under Scrutiny: Are They Working and How Long Does It Take? Executive Summary of The Avoca Group’s 2012 Industry Survey Research, http://www2.theavocagroup.com/content/documents/files/Executive_Summary_-_2012_Industry_Survey.pdf
2 Avoca Consortium of Quality, Quality Summit Report, 2012, http://www2.theavocagroup.com/the-avoca-
quality-consortium/consortium-news-and-updates/the-avoca-2012-quality-summit-report
But 59% of sponsors said after 3yrs they were getting worse quality than in-house 2
1. Lower cost of labor 2. Avoidance of regulations, taxes, energy costs, labor benefits 3. Short-run gross margin incentives 4. Increase flexibility of workload peaks & troughs 5. Remove non-core activities and increase focus on core 6. Access to highly specialized capabilities1
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The Real Reasons: cost, cost & cost
1 Such as clinicians, patients, monitors, advanced skills such as adaptive trial simulation, DMC experience
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Of Course We Have it Backwards
1. Access to highly specialized capabilities1 2. Remove non-core activities and increase focus on core 3. Increase flexibility of workload peaks & troughs 4. Short-run gross margin incentives 5. Avoidance of regulations, taxes, energy costs, labor benefits 6. Lower cost of labor
1 Such as clinicians, patients, monitors, advanced skills such as adaptive trial simulation, DMC experience
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Why do we outsource?
Because big-pharma is in urgent need of flexibility in structural costs:
Source Pharma Executive, Top 50 Pharmaceutical Companies in 2012
Change in Rx Sales
Rank Company Rx Sales R&D spend R&D/% of Sales Rx Sales R&D spend R&D/% of Sales $1 Pfizer $47.4bn $7.0bn 15.0% $57.7bn $9.1bn 16.0% ($10.3bn)
2 Novartis $45.4bn $8.8bn 19.0% $54.0bn $9.1bn 17.0% ($8.6bn)
3 Merck $41.1bn $7.9bn 19.0% $41.3bn $8.5bn 21.0% ($0.2bn)
4 Sanofi $38.4bn $6.1bn 16.0% $37.0bn $6.0bn 16.0% $1.4bn
5 Roche $37.5bn $8.0bn 21.0% $34.9bn $7.9bn 23.0% $2.6bn
6 GSK $33.1bn $5.3bn 16.0% $34.4bn $5.8bn 17.0% ($1.3bn)
7 AZ $27.1bn $4.5bn 16.0% $33.6bn $5.0bn 15.0% ($6.5bn)
8 J&J $23.5bn $5.4bn 23.0% $24.4bn $5.1bn 21.0% ($0.9bn)
9 Abbott $23.2bn $2.9bn 13.0% $22.4bn $4.1bn 18.0% $0.8bn
10 Eli Li l ly $18.5bn $5.1bn 27.0% $21.9bn $5.0bn 23.0% ($3.4bn)
20112012
Presenter
The primary problem in the pharma industry is not in the expense line, it’s in the revenue line: patent expiries and declining sales cut by generics and the immense difficulties the industry is having in reliably replacing this income. This chart shows that in 2012, 7 of the top 10, and 3 of the top 3 pharmacos suffered significant revenue declines. Pfizer lost $10bn in sales. Nearly $20bn of sales were wiped off the slate of the top 3 alone. Why does all this matter? Because even if you’re not in one of these companies where cost is a matter of immediate survival, there’ll come a time when cost does really matter. And there’ll come a time when someone asks, probably your VC or board member, “Why not do this in China? Or India or someplace cheaper?”
Quality is a constant companion of outsourcing
Rework and quality: 22% of sponsor companies surveyed by Avoca reported having discontinued
strategic relationships ... because of poor quality of deliverables, http://www2.theavocagroup.com/
Quality is compromised, mistakes are made: Albert shows up at a Mumbai clinic to register for a trial in skin care. Steve realizes too late his CRO got the inclusion/exclusion criteria mixed up with an ecology study they were doing
for Greenpeace 9
Presenter
Short-run benefits provided by offshore-outsourcing may be reversed by economic or political challenges quicker than it takes to realize true gains. The inefficiency & inexperience of the workforce may not, in many circumstances, be compensated by the low cost of labor. This is surprising to many people who have not experienced the productivity gap between US/Western Europe and the developing economies. A consequence of this inexperience can be a quality gap – unreliable work, rework, extended time to get it right, misunderstood instructions, or considerable project management overhead: such as the need to give detailed instructions where fewer or none were needed for your in-house team.
• Take a sound decision to outsource – Outsource for reasons other than cost-savings alone – Outsource for increased workload flexibility – Outsource to gain skills you do not have – Outsource to increase home-team’s focus on work you cannot outsource – Do not outsource if it would result in depletion of core competencies
• Set expectations appropriately – Plan start-up time realistically – Expect significant cultural, communication issues, know what they are and train – Do transfers between partner and offshore staff
• Carefully select your partner – One with experience and reputation in your field e.g. IT offshoring experience is not
transferrable to statistical programming offshoring – Check references
• Set up KPI’s & monitor closely • Adjust early and often where adjustment is necessary
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How To Offshore-Outsource :
Presenter
The answer to these challenges is to be diligent in your decision to outsource, set expectations appropriately, take care in selecting your partner, set up SOP’s and KPI’s and monitor performance …
• Increased constraints in labor flow i.e versus the industrial revolution • Reduced constraints on movement of capital and goods i.e. versus pre-WWII
– Reduced banking regulations, increasingly global flow of electronic funds – Increased ease, decreased costs of transportation
• Decreasing communication costs – These act to reduce geographic concentration of industrial development – And lower the cost to spread ideas & practice which results in improved coordination and efficiency within
corporations across countries
• Increased technology enables more tasks to be offshored – A SAS program written in Massachusetts can run trial enrolment in India
• Wage Convergence is probably not an issue yet • Shift in demand towards non-tradable services such health-care provision or
government sectors accelerates deindustrialization – Deindustrialization means from our point of view today that more economic activity is outsourced – This deindustrialization in more economically and technologically developed regions is accelerated by
increased industrial productivity
• Increased regulatory controls in industrialized global north • Increased educational investment & social incentives in developing south for
technical & scientific capability vs developed north 10
Be Aware of How We Got Here and Trends: Global trends are driving outsourcing, not tactical decisions by America’s corporations
Presenter
“History turns upon the tides and not the deeds of man” Grateful Dead, Robert Hunter
Increasingly constrained labor flows
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Immigration Reforms
1. Current USA Immigration Reform proposals, if accepted, will
affect margins
2. Restrictions on the placement H-1B employees at the client’s
location places the offshore business model itself at risk
3. Visa costs and availability increase costs where some of
offshoring model requires USA presence
4. Indian outsourcing providers will need to evaluate options
such as acquisitions and larger presence in smaller US cities
“The industry will have to realign its business model,” said Ameet
Nivsarkar, vice-president at Nasscom that represents India’s $108-
billion IT industry
“This bill does not affect only Cognizant. It affects many of the largest
companies in the US who use our services because of the shortage of
science, technology, engineering, maths graduates in the USA,” said R
Chandrasekaran, group chief executive at Cognizant
Publication: The Economic Times Mumbai; Date: May 13, 2013;
Presenter
Last week, investors cheered Cognizant’s robust sales growth and bullish June forecast but the celebration was mixed with caution as 80% of its revenues are derived from the US, leaving the New Jerseybased company extremely vulnerable to the proposed overhaul of the immigration system in the world's largest economy. The Economic Times, Mumbai 13MAY2013
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Reduced constraints on movement of capital & goods coupled with radically decreased communications costs
Moore’s Law: Graphic courtesy Intel
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Increased technology enables more tasks to be offshored
Chief economist with Morgan Stanley, Stephen Roach:
“The internet has forever changed the competitive climate for most white-collar knowledge workers. Courtesy of near-ubiquitous connectivity, the output of the knowledge worker can now be emailed to a desktop anywhere in the world. That brings low-cost, well-trained, highly-educated workers in Bangalore, Shanghai and Eastern and Central Europe into the global knowledge-worker pool.”
Presenter
With technological progress, more tasks can be offshored
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Economics: Wage Convergence
… wiping out the benefit of labor arbitrage-based outsourcing and with it the
competitiveness and industrial base of the developed economies
Presenter
Lewis turning point: when surplus labor evaporates, pushing up wages, consumption and inflation. The point marks where manufacturing competitiveness and the pace of growth begin to turn down as labor costs rise. “Both India and China are still some years away from the Lewis turning point in urban areas. One of the most important results of China’s census, released in late April, is that the pace of urbanisation has been significantly quicker than previously thought.” but “All this means that the process of urbanisation and wage dynamics in China still has a long way to go. According to a research published by the US Bureau of Labor Statistics in 2009, Chinese manufacturing workers' hourly wage was only USD0.81 in 2006 - 2.7% of comparable costs in the US, 3.4% of those in Japan, and 2.2% of those in Europe. After five years of growth, inflation, and currency appreciation, we estimate that the wages of Chinese workers are still just around 5% of the levels in G3. If assuming an annual wage growth of 15% for another decade and total 20% appreciation of the yuan, China’s wage would be 25% of G3’s current levels. Indeed, it is still an ocean apart.”
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Boosting EMD Serono’s Biostatistics & Programming with a Cytel “Extension Arm”
Sponsor’s Challenge EMD Serono is conducting clinical studies
in multiple therapeutic areas, including
oncology and multiple sclerosis.
The company seeks a flexible, scalable
resourcing model to meet additional R&D
demands without raising head-count.
To increase their biostats and programming
capacity, EMD Serono turns to Cytel.
The Cytel-staffed “extension arm”must:
• lower costs, yet deliver qualified clinical
stats and SAS and R talent
• adhere to EMD Serono standards
• limit start-up disruptions
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Creating the External Arm Team-building for EMD Serono
Co-develop start-up strategy – together,
construct a plan addressing typical
outsourcing challenges – especially
requisite skill level fulfillment and
synchronizing distributed work centers.
Monitor and adapt - progress and quality
of the extension team’s work is carefully
monitored both by both Cytel and EMD
Serono managers.
Responses
Assemble qualified team - Cytel
assembles a team of qualified
biostatisticians and SAS and R
programmers from our Indian offices.
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No Startup Disruptions COMPLETELY SPECIFY PERFORMANCE CRITERIA FROM THE START:
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Co-Develop Governance Processes
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Outsourcing Outcome Flexible Stats & Programming Capacity
Outcomes The extension team is now
functionally integrated with EMD
Serono’s own biostatisticians and
statistical programmers in Europe
and the US.
The additional resources also can
flexibly scale to cope with future or
resource bottlenecks anticipated or
unforeseen.
The EMD Serono project is a great example of
setting expectations realistically and
managing the delivery carefully …
… with the result that cost savings are a consequence of the decision without compromising the quality and flexibility Serono demanded.
Ajay Sathe
Chief Executive, Indian Operations
Cytel Inc.
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Summary
1. The outsourcing model’s benefits mean that outsourcing is here to stay:
i) Cost savings, ii) More labor flexibility, and iii) Access to specialized skills
2. To outsource for cost benefit alone is dangerous because the short-run benefits may be
reversed by economic or political challenges quicker than it takes to realize true gains
3. Simplistic ROI calculations do not reflect the realities of start-up costs, bridging the
experience chasm, true managerial overhead, large relative regional productivity differences,
rework or non-tangible drawbacks such as customer service, staff turn-over, cultural barriers
4. Outsourcing can and does work in many situations where expectations realistic,
documented, measured and governed
5. EMD Serono case
Thank you. Your comments or questions?
2 October, 2013
Steve Herbert
Senior Vice President, Cytel Inc.
