It’s no secret that the pharmaceutical and biotech industries are facing challenging times. What’s also obvious is that some companies are responding creatively to the pressure. They are adapting by doing things that they might not have considered before—entering R&D collaborations with Indian pharmaceutical firms; acquiring smaller companies, but leaving their management structures in place; and forming new types of partnering relationships with CROs and other outsourcing partners.
A key trend here is that companies are looking outside themselves to deliver on higher-value-added tasks. While it makes sense to be careful in this process, the overall trend is irreversible. As fully integrated manufacturers learned 50 years ago, a company can be dealt a fatal blow when others create—through deep and well-orchestrated relationships with partners—a more flexible and responsive competitor. Today, the infrastructure of most fully integrated pharma (and even some biotech) companies is not well suited to the current dynamic environment.
Take, for example, a large company experiencing many of today’s industry pressures: Increasingly cost-conscious, it is being forced to lay off large numbers of staff. Its pressing business needs, however, remain the same. Thousands of individual projects that roll into key initiatives must be completed—and completed well.
But there’s a problem: The internal resource pool, while still large, does not contain the same level of specialized expertise it once did—nor should it. After all, why should a company that’s under significant cost pressure increase its staffing to address every potential need with in-house resources? Outsourcing certain tasks to consultants and others makes more sense than ever. It allows the company to be flexible, using specialized, third party resources when they are needed, without having to carry the fixed costs when they’re not.
While this may sound like the classic explanation of the value of outsourcing, it is more complicated than it used to be. In the recent past, large pharmaceutical companies were able to maintain extensive infrastructures, even when the need was variable. The use of consultants, while extensive in many cases, was tightly controlled. Consultants were generally subjected to a rigorous sourcing process that measured and rewarded activities (primarily billable hours) rather than outcomes. Little talk occurred about the fundamental nature of the business challenge. And there was no talk about the consultant being paid for completing the work on time and meeting the sponsor’s business objectives with measurable client satisfaction.
The result: Key suppliers to the industry were being sourced very much like light bulbs or paper clips.
A new model
In the future, consulting firms will work much more closely with their end customers within companies. Specialized consultants will have the opportunity to work on a larger volume of strategic and operationally focused projects. Clients will increasingly focus on receiving value for their money—on realizing maximum value from a project rather than simply getting it down. Payment based on objective measures of performance or outcome will become far more common.
More importantly, companies will come to look at their relationships with specialized consultants as strategic relationships. Instead of asking how little they can outsource by breaking things down into smaller pieces, they will strive to work with partners in a more integrated way. In addition—in terms of key aspects of licensing, new product planning, pricing and contracting, monitoring, and improving sales force effectiveness—the consultant will be delivering large, high-quality components of clients’ plans rather than small inputs to the process. Breadth and depth of expertise will be important. Consultants will be more highly accountable for the success of the fully integrated components they deliver. The reward is that consulting firms will become more embedded as strategic partners with their clients, making the entire enterprise more flexible, more efficient, and more competitive.
Consider now a smaller company that has few marketed products but a robust development pipeline, with four potentially important products in late Phase II or Phase III, and a couple of them two or three years from launch. Historically, a company in this situation would begin to build up its staff significantly, enhancing its internal capabilities in a variety of commercial functions.
Today’s business environment, however, demands more cost-effective approaches. Certainly, this company will build strong internal capabilities, but for the most part it will rely on external sources for the expertise and staff to tackle specialized challenges (or even non-specialized challenges that are variable in nature).
For the company, this means a leaner, more streamlined infrastructure focused on executing its core competencies with in-house resources. Along with a lean infrastructure will be a small group of consultants and service providers who are able to tackle highly specialized or infrequent challenges. These external parties will truly be partners in the company’s business, working collaboratively to help the company meet its objectives.
Flexibility and strength
The fundamental issue here is one of balance. Instead of spending $7 million in incremental costs to support a larger commercial infrastructure, and perhaps $3 million in incremental costs to support a larger clinical infrastructure, the company maintains flexibility and financial strength. Events are monitored. Capital is not deployed until events (such as advancements in a product’s approval process) warrant a large investment. Capital is thereby preserved, and overall resource utilization and efficiency increased.
The quality of the analyses and project work overall stands to improve, as consultants are held more accountable for achieving specified results. The company looks at its consulting supplier as a key partner in spreading business risk and achieving critical business objectives. The consulting partner, for its part, has changed its business model to be able to commit the resources needed to deliver “just in time” to meet critical business milestones.
Opportunity and responsibility. All of these changes are already well underway. They represent a departure from old ways of doing business. They mean that pharma and biotech companies—small, midsize, and large—will re-evaluate and streamline their internal infrastructures. They also will give specialized consulting firms increasing opportunities to play a critical role as an integrated and strategic partner.
John Campbell is CEO of Campbell Alliance. He can be reached at jcampbell@ campbellalliance.com