News & Media
Outsourcing: opportunities vs costs
“Outsourcing is a means of getting more final output with lower cost inputs, which leads to lower prices”
“These days, as companies of all shapes and sizes seek to reduce costs, smaller firms are increasingly embracing outsourcing as a cost-effective way to remain competitive. Outsourcing allows its practitioners to reduce overhead expenditures, increase speed, flexibility and response times, and improve organizational efficiencies”.
- Outsourcing is the system of using a non-related company to produce materials or perform tasks on a contract basis.
- Outsourcing has resulted in the development of a new paradigm for doing business. Companies from vertically to horizontally
- In an effort to reduce time-to-market, companies are more and more focusing their attention on their core competencies.
- With outsourcing the companies reduce or eliminate in-house production capabilities and replace them with contract manufacturers.
- Outsourcing is now a common practice of almost all pharmaceutical companies.
- Only a few years ago drug discovery research was never, or only very infrequently, outsourced to CSOs (Contract Service Organization)*.
- Now, many companies use CSOs in addition to university groups to support some aspects of their drug discovery efforts.
*The term CSO includes contract research organization (CRO), contract manufacturing organization (CMO), site management organization (SMO), and any other organization that provides the pharmaceutical industry, or client, with a contract service. Regardless of type, all contract manufacturers have the common denominator of providing one or more services for a fee.
The need for the services of a contract manufacturer can occur at any time during the development phases and/or commercial manufacture of a product’s life cycle. Such situations occur when
- specialized manufacturing capabilities are required that are not available in-house;
- assistance is needed with product and /or process development;
- the need to establish the market potential of a new product is required before investing in specialized capabilities;
- production requirements cannot be accommodated when sales exceed capacity;
- capacity is needed for the production of new, growing product, but a place for the manufacture of products that are at the end of their life cycle still needs to be provided.
- Expediting the time to market
- Producing at a lower cost
- Avoiding capital investments in facilities, equipment and personnel
- Avoiding the need to establish and maintain a cGMP manufacturing facility
- Concentration on core business
- Tax benefits: the strategic requirement to relocate business units because advantages in different regions of the world
- 1991 – Italian Law Decree # 178: this introduced the possibility to outsource production
- Use one’s capacity and space for something more:
- Important (“core product”)
- Secret (new technology)
Stick to what you do best and outsource the rest
Try to accomplish everything and you’ll accomplish very little. Instead, focus on what you do best and select qualified partners to handle the rest.
- To gain access to production facilities without having to invest any of their own capital
- To instantly add a breadth and depth of expertise
- To gain the use of the contractor’s operating personnel
- The major negative aspect associated to outsourcing is related to intellectual property that before was closely guarded secret and lost of know-how.
- Client also must consider that they are one of the many: as a result due to competition for the contractors resources, projects may not move forward as a client may desire.
… I think some inherent knowledge needs to be maintained. If outsourcing is taking place you don’t know whether that knowledge is being kept up to date and maintained; when you bring it back in-house you may find that you now have no knowledge pool at all.
- How much does it cost to use a contract manufacturer?
- Although CM may seem expensive, its use enables a client to dedicate its resources to more productive activities than maintaining a variety of production facilities. In return for providing with this opportunities, the contractor expects to receive a fee.
- When a business uses outsourcing most efficiently, it pays only for services used rather than having full-time employees performing at part-time levels.
- This also reduces the size of the building or office space required.
- Furthermore, outsourcing lets the company concentrate its resources on the only activities that will generate revenues: marketing and sales.
- Most companies enter into outsourcing contracts for one reason alone: cheap labor.
- A recent report indicates however, that such a single-minded approach to outsourcing is the primary culprit for those offshoring contracts which fail to yield dividends for the company.
- Companies often fail to account for hidden transaction costs, increased staff training and turnover costs, as well as worker inefficiencies when creating cost savings models.
- Start up costs are so high that real savings in outsourcing cannot be achieved until the contract reaches a maturity of one to two years. Many companies have ignored this fact and entered into short-term contracts, almost eliminating entirely the possibility of achieving major cost savings.
“For the same reasons, short-term offshore deals lasting less than one year are unlikely to realize any cost savings“
- A report by global professional services company confirms that despite warnings, companies are continuing to overestimate cost savings attainable through outsourcing.
- What most company’s are finding however, is that maintaining reliable quality often means a much higher ratio of management to workers. Some companies try to avoid this dilemma altogether by completely outsourcing the work to a third party offshore.
- What they fail to plan for, however, is the complexity of enforcing the contract; a significant cost which is sometimes ignored altogether.
- Firms do not realize that it takes a lot of time, money and resources to manage offshore operations effectively. These company also under invest in the ongoing governance and management of the service provider relationship.
To manage the contract actually takes a lot of in-house capability, and a lot of organizations have failed to really understand this
- Outsourcing is a double-edged sword. If managed properly, it can reap immense benefits; however, there can be unpleasant surprises also in an outsourcing deal
The most successful projects, those that exceed expectations, are the ones in which the client’s organization is intimately involved during the execution phase. A spirit of partnership between the organizations is allowed to develop and shows itself in four common characteristics:
•Taking ownership of a client’s project
• Clarifying expectations at every stage of a project
- Communicating progress efficiently
- Communicating trouble without delay