Pharmaceutical & healthcare

Strategic review of R&D outsourcing — an essential step towards R&D transformation

In the current “Pharmaceuticals Out of Balance” environment, pharmaceutical and biotech companies are facing unprecedented pressure to demonstrate operational excellence and reduce costs. Research and development (R&D) for these companies is a critical source of competitive advantage. But R&D is also a very significant expense, often in the hundreds of millions of dollars, for large and mid-size companies in this sector. As a result, R&D functions—from discovery and development operations to regulatory affairs—are all required to contribute to company-wide operational excellence initiatives and cost improvement targets.

This expectation means significant change for R&D organizations. It also presents a tremendous opportunity to undertake holistic R&D transformation, including but not limited to the strategic review of R&D outsourcing.

Our research of the global R&D outsourcing supply markets and work with leading pharmaceutical and biotech clients confirms the need and value of such a strategic review. We have developed a robust framework and approach along with pragmatic guidelines to help biotech and pharmaceutical executives effectively initiate the strategic review of R&D outsourcing.

See the following previously published article in SCRIP that discusses our perspective, and/or go to the online journal for more information.

Time to transform R&D outsourcing?
16 July 2009 — SCRIP
The growing emphasis on operational excellence in the pharmaceutical industry necessitates a fresh look at R&D outsourcing and key external partner relationships. Wynn Bailey and Adwait Bhagwat of A.T. Kearney share their perspective.

Pharmaceutical and biotech companies know that the pressure to step up their game in operational and cost performance is intensifying, and that R&D is not exempt. The challenges faced by the biopharmaceutical company are widely acknowledged and anticipated, but many companies are still not fully prepared. As a result, R&D functions—from discovery to development operations and regulatory affairs—feel the pressure to make substantial contributions to company-wide operational excellence efforts. The objective of these R&D transformations is not only to save money, but also to fuel growth through innovation, getting the most out of every R&D dollar, euro or pound. Real R&D transformation can seem complex and daunting, and the consequences of getting it wrong can be painful. Getting it right, however, will create a significant competitive advantage.

Effective R&D transformation is holistic in nature, achieving balanced improvements across multiple dimensions. These dimensions typically include:

simplification of the operating model;
organisational redesign and alignment;
process reengineering and standardisation;
globalisation of R&D footprint; and
strategic outsourcing.

The following focuses on the critical dimension of strategic outsourcing. Strategic review of R&D outsourcing is an essential step towards R&D transformation. This urgency is driven by the growing trend among biopharmaceutical companies to outsource, the changing supply market and the potential for dramatic performance improvement.

There is an accelerating trend in the biopharmaceutical industry of R&D outsourcing to CROs and other service providers. Such decisions often result from the need to gain scale, expand geographic footprint into emerging markets and reduce costs.

Designing the right global portfolio of R&D partners and service providers has become increasingly complex. Systematic analysis of the supply market reveals a few important cross currents. First, the choice of CROs and service providers has increased, including a growing number of promising niche providers and local CROs in developing countries. Second, traditional information technology outsourcing (ITO) and business process outsourcing (BPO) companies are keen to exploit the adjacencies and expand from providing IT services to providing outsourcing services for certain R&D functions. Clinical data management and safety surveillance are two R&D functions where traditional BPO companies have gained credibility. This growing number of supply alternatives means a wider range of the quality and cost of service. It also puts a greater onus on sponsors to adopt a rigorous process to screen, select and manage outsourcing service providers or CROs.

Conversely, a small number of leading US and European institutions and service providers continue to gain market share among large biopharmaceutical companies. Some of the large CROs have developed truly differentiated scale, R&D capabilities and an integrated delivery model. These supply market dynamics have significant strategic implications for the industry and individual company decisions to outsource R&D (see sidebar, Risk-Managing the CRO Portfolio).

The authors have observed several common sources of “operating ineffectiveness” that can be addressed. In many companies, R&D outsourcing decisions and management of outsourcing providers remains sub-optimal. Often outsourcing decisions are made at the functional, therapy area or even individual study level. Mid-level teams take the initiative to outsource and put in place incremental solutions. Tactical and near-term goals take priority, and savings justifications based on wage arbitrage look attractive on paper. Discrete outsourcing arrangements are established that are often in the comfort zone of working teams. Over time there is thus a proliferation of outsourcing operating models, service providers, systems and processes. This proliferation leads to a sub-optimal operating environment, uncompetitive commercial terms, lack of performance and cost transparency, and poor risk management across the portfolio of outsourcing providers. Core R&D competencies are compromised while redundant administrative roles create inefficiencies and wasted effort and reduce the speed of innovation and development.

Other companies have sought to undertake more comprehensive transformational efforts, only to be overwhelmed by the scope and complexity of the effort. Still others have ended up with excessive dependence on dominant entrenched service providers, experiencing frequent budget overruns and bloated overhead cost structures. As a result, the strategic, operational and financial benefits of R&D outsourcing often remain untapped—leaving room for dramatic improvement in performance.

In our experience, there are six critical success factors that can begin to help biopharmaceutical executives structure their R&D outsourcing efforts to avoid common pitfalls and improve the likelihood of success:

Assure clarity of purpose and vision up front

The sponsoring executive must articulate a clear purpose for the initiative and a clear vision of how the future should look. Without this, mid-level management and staff are left confused and it is all too easy to regress to a least difficult consensus.
There should be a well developed and clearly communicated framework regarding how strategic make-versus-buy assessments and subsequent outsourcing decisions will be made. The ambitiousness of the goals will determine how much appetite for change can be accommodated in the organisation. Decisions then must be framed in the context of how they will help achieve the goals.

Systematically review outsourcing across the R&D value chain

Clients find it beneficial to first establish a baseline of R&D process and map resources, budgets and metrics to processes. This also allows for consistent and efficient application of the R&D outsourcing decision framework and alignment of the review outcomes.
Supply-market insights, implementation complexity and process inter-dependencies are some of the factors that can help prioritize outsourcing efforts in the context of an integrated plan.
Strategic review of R&D outsourcing across the value chain provides a unique opportunity to design a superior R&D operating model in line with the vision and initial scope of the outsourced R&D processes.

Fact-based evaluation of supply-market dynamics and supplier capabilities

Supplier screening and selection should be objective and fact-based. Inviting two or three incumbent CROs to provide proposals limits the opportunity to inject provocative and innovative ideas. It also limits the degree of competition and results in lower, yet uncompetitive costs.
Identification of clearly articulated and quantified performance metrics and critical business requirements are essential for launching objective supplier review and selection. Key stakeholders must be engaged and allowed a voice in supplier selection, thus ensuring broad-based buy-in for the decisions.

Assess risk early

Identifying and managing the sources of critical risk must be done early in the process. Some examples of outsourcing risk include business continuity (operational disruption and delays in current programmes and studies), start-up and transition, and supplier portfolio.
Scenario generation along with application of proven risk assessment and mitigation frameworks is most beneficial if done in advance of the supplier selection decisions.

Implement change management and communication programme covering executive and line staff

Executive predisposition to a particular outcome or lack of buy-in from a single large local country manager can disrupt and derail adoption of the proposed R&D outsourcing model. The review must identify influencers and stakeholders and assess their readiness for change.
There must be a well organised stakeholder management and change management plan that considers key influencers and their alignment with the strategy. Importantly, these influencers may go beyond the R&D organization to other parts of the company and even to current and future key suppliers (for example, suppliers who currently play important roles in critical projects, but who may not have a long-term place in the portfolio of critical service providers).

Install effective governance and continuous improvement

Throughout the review and later into implementation, a small but powerful programme office is essential to provide oversight and ensure coordination across the R&D functions and alignment with the outsourcing vision.
Potential linkages to other dimensions of R&D transformation such as globalisation and process reengineering should be identified throughout the outsourcing review.
A continuous improvement philosophy should be designed into the review and implementation plans such that R&D outsourcing becomes a critical milestone in the continuous improvement process rather than a perceived final destination.

The proof of an effective R&D outsourcing initiative is in designing an approach that meets company-specific requirements and, most importantly, in executing the plan to realise the vision. We believe that given the potential for improvement, companies cannot afford to ignore outsourcing in the current environment. It is one of very few means of achieving overall R&D transformation, yet also is challenging to execute.

Lack of an R&D outsourcing strategy or a sub-optimal tactical plan, or poor execution can mean at best slowing down the R&D pipeline and at worst a loss of competitive advantage. Getting it right can create a source of meaningful competitive advantage, including improved development effectiveness (more consistent processes and more successful globalization) improved time to market (15-20% on critical cycle-time metrics), and cost efficiency improvements of 10-40%.

Side Column: Risk-managing the CRO portfolio

Biopharmaceutical companies can benefit from taking a portfolio risk-management approach to developing strategic outsourcing relationships. Identifying the right number of CRO or other outsourcing service providers across the entire R&D value chain is an important step in the review process.

In an unstructured R&D outsourcing environment, we have seen large biopharmaceutical companies with little visibility into the number and nature of outsourcing supplier relationships. R&D client executives have been alarmed to learn about scores of CROs and contractors supporting their organisation. Clarifying the operating model and undertaking a systematic selection of partners can help manage the complexity that can arise from supplier proliferation.

In the CRO selection process it can be tempting to rush into a sole-sourced, single-supplier arrangement. However, there are a couple of critical risks that biopharmaceutical companies must manage before getting into a sole-sourced CRO relationship. First, the sponsor’s preference to choose only the single-best supplier for a function may potentially sow the seeds of future oligopolies within the CRO space. This can over time shift power from the biopharmaceutical sponsors to the dominant CRO. While such a possibility may seem remote, projecting three to five years out we believe this could be a credible risk in certain functional areas and geographies. Secondly, such sole-sourced relationships could result in over reliance on a single CRO and eventually create a powerful entrenched supplier—one that is less responsive to the sponsor’s needs and with tremendous negotiating leverage operationally and commercially.

One effective approach is to break down the R&D value chain into a few modules, segmented either by function, geography or therapy area. Select two suppliers within each of the modules. Consider a mix of a dominant supplier and a hungry, capable and growing competitor. Then systematically rationalise the number of suppliers across the R&D supplier portfolio to create a strategic and risk-managed CRO portfolio.

R&D organisations often find it valuable to partner with the internal strategic procurement organisation and finance, as well as external subject matter experts, to facilitate the design, objective evaluation and selection of an effective supplier portfolio. A focused R&D-wide effort, while challenging to execute, does provide the unique opportunity to design a compelling operating model, lean processes and a rationalised yet risk-managed CRO portfolio across all of R&D.

The R&D outsourcing portfolio plays a critical role in the discovery and drug-development capability of the sponsor company. In mid-sized and large biopharmaceutical companies, it often represents annual spend in excess of several hundred million dollars. The risk-adjusted supplier portfolio done right can create a source of competitive advantage. Get it wrong and sponsor companies risk getting bogged down by an inefficient and ineffective research and development process, thus ceding advantage to competition.