Emerging Pharmaceutical Outsourcing Market
Dr Madhusudan P Dabhole, Group Manager - Bioprocess, R & D , Richcore Lifesciences Pvt Ltd

Pharmaceutical industry outsourcing has grown during the past few years, and indications are that it will continue to grow through the next decade. Outsourcing has proven effective at reducing operational and infrastructure costs. This article explores the emerging outsourcing market, and discusses the trends, challenges and opportunities in pharmaceutical outsourcing.

Outsourcing is a complex issue occurring when company's contract out activities previously performed in-house or in-country to foreign (usually offshore) companies globally. In the terms of a SWOT analysis and using a modified Harvard-style case study that was subjected to the SWOT analysis, one can analyse business process outsourcing (BPO) to emerging markets, frequently called outsourcing or offshoring. The main advantage of outsourcing is that it allows a business to focus on core activities as called for by core competence, strategic alliance, and competitive advantage theories of international business. A transformational aspect of outsourcing is evidently very important for emerging markets but also for many companies in the developed world.

Emerging markets are any place in this world that are in the process of rapid growth and industrialisation. India and China are considered the two largest from a pool of approximately 20-30 countries. In the recent past, western pharmaceutical companies have typically utilised CROs in China and India to perform tasks such as clinical development, data management and preclinical toxicology studies. Now, Chinese and Indian CROs are moving up in the R & D chain by offering more challenging services in chemistry, assay development, and even in target identification.

China, with approximately 20 percent of world's population is an emerging market in the pharmaceutical arena. A Significant savings in labor and laboratory set-up costs, as well as strong government incentive programs such as various tax exemptions, are attractive incentives for western-based sponsor companies. It is estimated that the clinical trial costs in China are roughly 30 to 50 percent of costs in western countries. Demand for drugs due to surge of diseases in various therapeutic areas and other health related problems, combined with a rising level of income, is enlarging China's pharmaceutical market by more than 20 percent a year and creating attractive opportunities for global pharmaceutical companies at a time when rates of growth in European and US markets are declining.

Vendor Relationship Management
Vendor Relationship Management (VRM) is a set of tools and services that help companies manage their vendor relationships. The advantage of Vendor Relationship Management is that the purchasing company has control of the process and the information that results from the interactions.

Vendor Relationship Management came to the façade with Project VRM, a research and development project from The Berkman Center for Internet & Society. It was created in 2006 by Doc Searls, a fellow of Berkman.

Vendor Relationship Management is based on the core belief that "free customers are more valuable than captive ones". It aims to encourage purchasers to be free from the control of vendors.

Doc Searls appears to be the main promoter of VRM but there are several detractors that do not believe that it will happen or work. The main obstacle seems to be persuading vendors to:
  1. Give up the benefits of their saved data, thus allowing purchasers to benefit from the marketing advantages they previously owned.
  2. Introduce the processes and systems required to instigate VRM with multiple customers.
  3. Allow purchasers to manage their own processes.
  4. Implement the extra security features that would be required.
The critical success factor depends on communication, performance management and responsibility between the company and the vendor. A full-time Vendor Manager, under the direction of the Contract Executive, works closely with the vendor, having day-to-day responsibility for the quality and cost effectiveness of the vendor's services. Communication with the vendor will be both written and verbal (meetings). In addition, the vendor will be required to submit formal, written reports on key dates throughout the contract term.

Depending on the contract arrangements, the vendor would submit invoices that reflect base line contract charges and charges for changes to the contract scope. Wherever possible, rates for additional and reduced work (by staff position or a predetermined unit of work) should be negotiated into the contract. Invoices should be submitted with a summary page and with backup detail sheets that reflect the programme components and the units of work.

Effective issue resolution and Dispute Resolution procedures ensure that problems and disputes are handled as quickly as possible and are solved at the lowest possible management levels.

Issues should be resolved using an Issue Resolution Process. An "issue" is a decision that needs to be made regarding how a task is to be completed or is perceived as a discrepancy in the deliverables completed or work performed by the vendor. Issues do not include work to be performed as part of the contract. If the Vendor Manager and vendor's Programme Manager cannot agree, these issues should be escalated to the Contract Executive and the vendor's Account Executive.

The vendor would be responsible for estimating the size, effort and cost of any contract change. Since individual vendors have different methods for estimating, the Vendor Manager should agree on the methods to be used to determine size, effort and cost and document the agreed upon process.

Every customer would genuinely appreciate the ability to interact directly and easily with the businesses they deal with in a simplified manner to resolve any problems if and when they arise or exchange their opinions and ideas to provide a feedback. This eventually benefits the vendor who responds to the customers and listens to their input and brings out products an services that appropriately serve the needs of the end-users. With that in mind, the implementation of VRM - from the customer's perspective is an incredible business-customer partnership that will be winning proposition for all involved. The use of digital technology allows this basic need of every business met by a well-planned VRM programme.

Not only individuals but also businesses of all sizes become 'customers' to those with whom they conduct business dealings. Essentially VRM helps (i) effective communication with the vendors (ii) convey their requirements or problems to be addressed by specific vendors (iii) analyse current needs and changes over a period of time (iv) ensure the products and services satisfy their needs on an ongoing basis (v) develop a mutually trusting business relationship (vi) provide an excellent support through reliable vendor response programme, (vii) develop a timely and dependable contact and resolution plan, (viii) enable honest and transparent communication (ix) ensure everyone is aware of proper VRM procedures and enforce it effectively .

Cost Reduction in Procurement
There are many challenges that some of the customers face in the area of procurement. Before any improvement can happen, the first step always entails awareness, analysis, acceptance and acknowledgement of the desire to change. One of the biggest mistakes business executives is in their lack of understanding that learning how to get the best purchases is about building successful communication and friendships. Brainstorm to look for the best ways to reduce costs. Comparison shopping, buying in bulk, negotiating by building relationships and buying cyclically during sales are always going to be smart choices.

Creating successful outsourcing strategy
Outsourcing facility services can be a immense challenge for organisations that perform those functions using in-house staff. But as even the most routine tasks become more complex, facility executives search for innovative ways to improve services and save money.

Despite a steep learning curve, hiring service contractors is a logical business decision that, if implemented properly, can benefit an organisation for years. Following a few common-sense strategies from those who have already hired contractors to service significant portions of their facility operations can make the process less daunting.

Identifying needs is the first step in developing an outsourcing strategy. "Start with an internal assessment," says Kenneth Cooper, director of corporate real estate for Scholastic Inc. "Why do you want to outsource? Has the internal staff failed in some way? If it has, what's to say the outsource staff won't fail for the same reasons?"

That issue must be addressed and corrected internally before any external partnership can succeed.

Next, recognise what tasks can be successfully outsourced and what tasks must remain in-house. Realise that different organisations have different requirements, but generally the early focus should be on services readily available, says Andrew Millest, executive director of property services at Morgan Stanley. He further says "services available in one market might not be available in others". For example, in New York, it's possible to find any type of service. In less mature markets, there are fewer choices.

The most commonly outsourced tasks are the day-to-day, labor-intensive operational chores. “Service delivery functions, such as building management , administration, security, janitorial and food service, lend themselves well to outsourcing,” says Alan Abrahamson, asset management director for AT & T Global Real Estate.

Regulatory Challenges
When a company is looking for CRO and CMO partners it should be aware of domestic and foreign regulatory requirements. Due-diligence auditing will be necessary to thoroughly evaluate the alignment of the two parties for the upcoming technology transfer. Contracts must be written, and the company must conduct quality oversight of all contract manufacturers have a written quality agreement and other documents, to clearly identify the responsibilities of each party.

It is important to have a project team working together on both ends in a proactive manner, targeting dates, batches, and resources. Outsourcing clinical trials called for pressing awareness because there are no regulatory agencies with trained people and resources to actually monitor all drug trials overseas. There are some international and country guidelines, and laws, but their effective implementation is unclear. Companies must be assertive in discussing the outsourcing of clinical trials and provide information on their standards.

Logistics and distribution must grant brand security and supply chain optimisation trough product serialisation, electronic pedigree documentation and effective tax rate (ETR). Due to regulatory requirements and limited outsourcing options, it may be challenging, at times, to find the right supply chain strategic partner; however, once partnership is accomplished, he must comply with new regulations to combat product counterfeiting, and concur to supply chain visibility and control. The outsourced partner must have cold chain management specialists, securing biotech and pharmaceutical companies' strict regulatory compliance and product control.

Regulatory outsourcing is now fairly well-established, with a large number of companies turning to partners to manage operational tasks, including report publishing and submission publishing. A smaller number have engaged partners to assist with submission planning and regulatory data management, and while only a small percentage are using outsourcing partners for regulatory information management, many plan to do so in the future. Across the industry, companies are waking up to the plethora of regulatory data that need to captured and updated, and more are assessing whether this may be best handled by an outsourcing partner. The one constant in outsourcing is change. While companies were once reluctant to outsource anything other than back office tasks, that's no longer the case.

Many pharmaceutical companies that outsource major projects, can end up managing relationships at arm's length, because distance and lack of visibility of project progress, may foster problems that will take more time to identify; often times the key to a successful outsourcing strategy in off shoring countries, lies in having a company person in place to mitigate business risks.

Quality Management in Outsourcing
Quality Management Outsourcing is strategic with providers focusing on a few profitable areas like supplier development, internal auditing and improvement events. According to David A Lalain, President Omnex Quality Culture, Quality Management outsourcing;

Reduce operating costs: Experience has shown a 40-60 percent reduction in costs from economies of scale, off-shore services and variable expense versus fixed costs of fulltime resources.

Focus resources and energy on core processes: Quality demands involvement of your scarcest resource--your best people, due to high visibility and risk. These are the same resources that are key to growing your core business.

World-class experience: It takes a great deal of time to teach your own people in the technical and complicated methods of quality management, and their only benchmark in many cases is entirely internal. Outsourcing brings a wealth of knowledge workers with specific skills honed from years of experience in all types of situations and businesses.

Objectivity: Your partner is outside the political landscape and focused entirely on your success, because it ensures their success by definition. They can even instill confidence in your customers that an independent third party is looking out for their interests.

Management attention: It's an investment, and face it--management pays more attention to the ROI on any expenditure than it does on time spent by internal resources. As a partner, the QMS outsource must have direction from and accountability to top management.

Employee acceptance: It is much easier and less risky for an employee to air a sensitive issue with a third party than directly with their bosses.

Risk management: Objectivity, accountability, knowledge /experience, and practically unlimited resources are there when/where needed , which means no surprises.

Customer security: Your QMS outsource partner should be one voice of your Customer, ensuring their needs are known and met. At times they are your conscience when the all-to-often grey areas demand a dissenting voice.

Less hassles: No succession planning, no turnover, no delays in critical projects for lack of resources add up to a better quality of life for the client.

The functions included for QM outsourcing are QMS certification, QMS certification maintenance, improvement efforts, Supplier development, Training, Customer relationship management, Quality culture deployment, Knowledge management, Operational excellence and new product launch support.

In QMS, the best partner can be summarised in the five R's -
Results: Start with the end in mind. Set clear measurable goals and deliverables with your partner and expect regular updates regarding the key milestones. They must focus on your success not your satisfaction; they must be willing to tell you what you need to hear not just what you want to hear.

Reputation: They need a proven track record and capabilities in all areas of the QMS you're looking to outsource. If your organisation is global, so must your partner be. You will want a full service provider who can manage the entire scope of work either first-hand or through subcontractors. This keeps the accountability with your selected partner but allows them to marshal the necessary resources to ensure the best solutions.

Relationship: There must be trust and compatibility right down to the core values of both organisations. Your QMS outsource partner will impact on your overall Quality Culture, so a common value system is a must.

Regulation: Even with the best relationship there needs to be controls. Set boundaries where needed to ensure the scope and expense don't increase over time without clear agreement. Take responsibility to monitor progress on agreed-upon deliverables and provide timely feedback to your partner.

Renewal: Keep the relationship strong through appropriate use of recognition and rewards for outstanding performance. The most appreciated rewards are more business and strong endorsements. As they meet and exceed your expectations, look for more opportunities to profit from your partnership.

Technological Transfer During Outsourcing
Outsourcing the production of key input is a widespread phenomenon in modern business. How the firms organise their production and whether they also sell the intermediate inputs to their rivals are very subtle and complex decisions that involve significant strategic considerations. The traditional firm theory would dictate that a firm confronted with the choice of in-house production versus outsourcing would typically depend on the cost consideration, and the firm would choose the least cost option.

There exists an independent input supplier who does not produce the final product. However, one of the final good producers, say firm 1, has a superior technology to produce the key input in-house and then it can also participate in the input market to compete with the independent input supplier to sell the input to its rival (say firm 2). Firm 2 do not have the requisite technology to produce the input in-house; so it has to depend on the input market to source its input. In this setting we analyse the decision of firm 1 between outsourcing the input from the independent input suppler or producing it in-house and also the decision to transfer the technology to the independent input supplier. We would show that firm 1 would outsource the key input if the gap between its input production technology and that of the independent supplier is small, and it would produce the input in-house and also supply to its rival when the technology gap is large. When the outsourcing is done, firm 1 buys the input However, in an imperfectly competitive market structure, most decisions are based on complex strategic considerations and it is not surprising that a firm might outsource a key input from the outside supplier even though it can be produced cheaply in-house. In this paper we focus on such a scenario of outsourcing from the monopoly input supplier at a price much higher than its in-house production cost.

However, the advantage of outsourcing stems from softening of competition in the final goods market and this in turn accrues to firm 1 through a payment for the technology sold to the independent input supplier.

CMO Responsibilities
The global contract manufacturing market is growing steadily with firms allocating up to four per cent of annual organisation revenues for contract manufacturing organisation (CMO) services, with a likely markup to 11 percent within the next three years according to Frost and Sullivan. Recent customer research from Frost & Sullivan's analysis, which surveyed 312 global decision makers from biotechnology and pharmaceutical firms, reveals that of all parameters used in CMO agreements and selection, volume commitments ranks as the most important, followed by manufacturing capacity and site transfer capabilities.

"While packaging, logistics and clinical trial supply are the most prevalent services currently being outsourced, organisations are particularly keen to leverage CMOs' capabilities of outsourcing drug delivery technology services in the near future," said Frost & Sullivan Customer Research Global Director Tonya Fowler. "Thirty-seven percent of respondents also stated they were likely to partner with a CMO that functioned as an external consultant, mainly in cases where they required manufacturing consulting."

The main CMO responsibilities are to;
  1. Facilitate growth, sales, and marketing strategies at an organisation.
  2. Increase revenue generation.
  3. Reduce costs.
  4. Perform risk mitigation.
  5. Prepare overall marketing strategy.
  6. Develop programmes with quantifiable objectives to measure results .
  7. Implement and manage marketing budget.
  8. Leverage data and analytics to drive insights.
  9. Modify or redirect business intelligence strategy.
  10. Oversee and direct the efforts of the marketing team.
  11. Develop segmentation, competitive analysis/market intelligence, prospecting, lead generation, product and market development, pricing, promotions, communications and budgets, sales force effectiveness, strategic planning, services units and revenue retention and growth.
  12. Oversee the development of new products.
  13. Create product roadmap.
  14. Develop and measure key metrics around the business including user acquisition, conversion rates, engagement rates, satisfaction and renewal rates.
Like the software industry, CMOs found that outsourcing dried up in slow times as customers retrenched and took diminished demand in house. It all depends on whether you believe there are 400 monoclonal antibodies in development and what you think the likelihood is that none, a few or many of the proteins identified by the human genome project and its offshoots will become products. If you believe that such proteins will have the same success that other proteins traditionally have enjoyed because of lack of safety problems, then the shortage theory may be correct. If on the other hand you think that safety questions associated with such proteins are a complete unknown - ie, you worry that the situation with cytokines such as interleukin-12, which had a disastrous clinical history, will be more the rule than the exception - then the overcapacity scenario may be more likely .

Cutting Cost in Outsourcing
With the outsourcing industry emerging from the aftermath of the global recession, there are a number of trends that give us a glimpse of the future :
  • Buyers will seek more standardised solutions from their outsourcing engagements, so they will have to differentiate themselves through performance rather than pricing. Hence pricing structures will be stabilised to some extent.
  • Shared and common services were always considered a threat to outsourcing, but the trend is changing. Sharing critical business and IT services has been proven to cut costs, reduce errors and improve productivity.
  • Industry experts predict that Latin America and Europe will be the new outsourcing destinations in the near future.
  • Brazil and Russia will make their presence felt in the global outsourcing market and China will continue to move ahead.
  • The rising price of oil will put pressure on companies to take advantage of technology and outsource work to remain profitable.
  • Big pharmaceutical companies will launch new drugs in the market at a fraction of the current cost by partnering with India, China, and Russia in molecular research and clinical testing.
A leading global pharmaceutical company turned to IT outsourcing to lower costs, improve IT efficiencies and diversify risk within its IT operation. The company's objectives included:
  • Reduce IT costs - The Company wanted to reduce spending and move toward a "utility" model with an enhanced service catalog.
  • Diversify operating risk - At the time, the company's IT infrastructure operations were concentrated into a single, internally -owned and operated service center. To reduce the risk of an IT outage, the company needed to create some IT redundancies.
  • Global messaging transformation - The company had an internally developed and supported email platform and was looking to migrate to Microsoft Exchange globally.
Latest Trends in the Contract Services Industry
When developing an outsourcing solution, effective contract management is the cornerstone of success.

Outsourcing is a major change for existing staff. They are often accustomed to managing or even doing the work themselves and may have a difficult time turning the responsibility for day-to-day activity over to a service provider. The change requires staff to manage a complex outsourcing contract and a new high-level relationship with a service provider. It's important to manage the change and equip the new contract management team with tools and skills they need to be successful.

The tools include a solid contract management process with an effective and flexible contract that has service levels, a performance management framework, defined reporting and interfaces, and change management and conflict resolution processes built in.

The change management process is needed because it is impossible to consider every situation that could arise. What's more, the simple reality of the situation is that, over the course of a long-term outsourcing contract, business needs will change. A change management process enables the facility executive to manage changes in scope or service levels using a pre-defined mechanism to set a fair and reasonable price.

Putting a contract-management team in place is more challenging. Since the contract-management role often means a significant shift for the facility staff, it requires a careful matching of skill sets and sometimes a change in the culture of the facility management organisation. The contract manager must shift from managing resources to managing results and focus on the strategic issues that add value to the company.

New job descriptions should outline the change in roles and responsibilities . At the same time, provide staff with guidance on the intent of the outsourcing relationship and the workings of the contract, service levels and performance management framework and give them training or coaching on contract management principles.

With a combination of well-defined service levels, structured performance measurements and effective contract management, the outsourcing initiative will deliver the benefits expected, including getting the correct level of service and successfully supporting the company's core business.

India's Role in the Outsourcing Industry
India continues to be the major destination for outsourcing because it has been able to evolve with changing needs. NASSCOM, (National Association of Software & Service Companies) the apex body of India's premier IT software and service (IT & BPO) companies, reported that India's share in the global outsourcing market rose from 51 per cent in 2009 to 55 percent in 2010. India still stands out for its customer service and efficiency, so its future is bright. Today, customers are not only looking at cost-effective solutions for their outsourced business but also for skilled staff, enhanced productivity, service quality and business process excellence. India, with its large population and multiple-skilled people, would continue to be preferred for both back-end and front-end outsourcing.

Opportunities for the Indian Outsourcing Industry
The growth of Indian outsourcing industry has been phenomenal. As markets worldwide are becoming knowledge-intensive, India has evolved to become the most preferred destination for knowledge services. Knowledge Process Outsourcing may soon be the biggest revenue grosser in India. India has a large pool of skilled manpower– Chartered Accountants, MBAs, Doctors, Lawyers, Research Analysts, etc., which strengthens its position in the knowledge service industry.

Opportunities for India in terms of outsourcing are:
  • In services that require advanced English, like KPO, Content and Medicine, India will continue to excel. NASSCOM predicts that India will emerge as a global hub for knowledge services by 2015.
  • India has a large pool of English-speaking lawyers with expertise in foreign legal systems who can offer legal support and patent services. A few Indian companies are already affiliated with American legal firms and they have captured a small part of the American market.
  • India is now the leader in the FAO market with many Fortune 500 companies already having their outsourced operations in India with firms like IBM, ACS and TCS etc.
  • India has a big market in pharmaceuticals, in terms of clinical research and manufacturing. Availability of talent for high-quality trials and data management gives it an edge over competitors. Ranbaxy, a major Indian pharmaceutical firm, has tied up with GlaxoSmithKline to manufacture certain compounds together.
  • Another vertical that presents great potential for India is Infrastructure Management Services. A wide range of management services for IT infrastructure, application operations, IT security and maintenance can be provided.
  • According to a study done by Booze and Company, India will become a dominant player in the Engineering R & D market which is expected to expand to USD 1.4 trillion by 2020. India's domestic market is expected to contribute 10-15 per \cent of the global ER & D services market. Pros and Cons of Pharma Outsourcing
Outsourcing non-critical processes constitutes normal day-to-day business and best practice in industries such as aerospace, the automotive sector and telecommunications. Losing the non-value add stuff so that more time and budget is available to spend on the critical? A no-brainer, surely? But this is not yet the case in pharmaceuticals, an industry that transforms our lives with modern science, but whose approach to business processes can sometimes seem lackluster by comparison.

Outsourcing is not a new concept to pharma perse. Manufacturing capacity and clinical trials are frequently outsourced; and truck loads of documents and paperwork are shipped to clinical research organisations (CROs) on a regular basis. But outsourcing an actual compliance-critical process? No way .

Take for example pharmacovigilance; the terror of being sued over incorrect reporting of an adverse event, or putting the business reputation at risk has led the pharma industry to clutch these processes fearfully to their chest. The processes themselves are needed for compliance reasons and add little in terms of value, but plenty in terms of cost and added stress to the business.

In the area of emerging markets, enhanced patent laws, better education systems and greater access to available patients has led to sponsors moving from "subcontracting commoditised work to seeking expertise for specialised products.

So is it the fear factor that makes pharma companies ignore the benefits that outsourcing can bring? Well, intense scrutiny and regulatory pressures mean that a culture of extreme caution has developed when it comes to new ways of working.

Many processes in pharmacovigilance are a burden to Pharma and ripe for outsourcing. In a business making drugs based on, for example, acetylsalicylic acid, a product that has been on the market for well over 100 years, the chances are there is often no new knowledge to be gained from single case handling, yet the dogged reporting and analysis still has to take place in order to maintain compliance.

The drugs do not contain intellectual property, do not tell the company anything useful and could easily be managed outside of the business. Forward thinking Pharma companies are beginning to wake up to this fact.

Of course if a drug company fully owns a proprietary product that accounts for a significant proportion of its annual revenue, then chances are that they will want to keep every process concerning its safety in-house, because any margin for error puts the business at huge risk.

However, for the larger pharma and generics companies with huge portfolios of non-proprietary products, there are several non-critical processes that it makes sense to outsource, even if they are needed from a compliance perspective, so that they can focus on the critical ones free from any distraction.

So, how is Pharma going to cleanse the bad taste in its mouth about outsourcing process? They view it as high risk and highly complex: how do they ensure that they outsource only the right processes and cases? How do they ensure a compliance risk never slips in between them and the provider ?

It can be done. First, pharma companies should work with an outsourcing expert who knows their business intimately, and undertake a full risk assessment of their processes to decide which they can outsource and which they cannot risk. They then need to work with the provider to ensure that their understanding of risk priority and process is shared. They need to be crystal clear on who is responsible and who is accountable for what. They should create a triage process to be followed so that, should a risk be spotted, it can be mitigated in good time.

Then there are the practicalities; do their technologies enable them to share both information and data on cases in real time? Technology around transferring data and sharing case information is now advanced and safe, with applications like Microsoft SharePoint making it secure and easy to share information with a provider straight away.

Basically, Pharma companies should be setting up a partnership where the potential for the unexpected to happen is reduced to almost nil. Pharma companies do not like surprises!

Finally, European pharmacovigilance legislation is also changing to open the door for both outsourcing and collaboration. Volume 9a states that drug companies may now collectively submit their PSURs, for example for generic products, rather than individually.

The authorities like it because they read one report instead of many. As for the pharma companies, the change in law means they can collaborate which other generics manufacturers and outsource their long-winded PSUR process and, at the same time, share the cost with other companies yet still remain fully compliant. That is one surprise that pharma companies might find that they like.

It is expected that, within the next three years, life science companies will have completed a full assessment on which compliance driven, non-value adding processes they can outsource, and will be using drug safety experts and CROs to help them focus the value add in patient critical areas.