Outsourcing And Research Productivity: Are We On the Wrong Path?

Starting in 2007, the pharmaceutical industry began a strategic shift to outsource core research and development functions. The purpose of this was threefold:

  1. Remove assets from the balance sheet, including large research facilities here in the US and overseas;
  2. Reduce fixed costs such as employees and support staff with cheaper labor overseas in developing countries;
  3. With their core competencies in R&D, CROs were expected to find synergies and cost savings through scalable operations.

In time, this model was to develop several key values to the sponsors. First, considerable cost savings were to be achieved through exclusivity deals with the larger CROs. Second, R&D budgets would see a jump in internal rates of return. Last, pharmaceuticals expected to see a rapid replenishment of their pipelines.

The early results suggest that things haven’t worked out as planned. In several recent headlines, we’ve seen pharmaceuticals deliver tough reviews of their strategic partners. At a high level, many of the major goals were not accomplished – timelines have not been reduced, internal rates of return have actually decreased, and pipelines remain ominously dry.

It makes more sense to see these events more as predictable than disappointing. That a big entity with a traditional approach (the Partner) proves no more adept at executing these than a similar big entity with a traditional approach (the Sponsor) is hardly surprising. Neither is the observation that a Partner with a commodity, time-and-materials business model, is not very adept at switching to an innovative, strategic change agent to spearhead a more agile development approach.

The real measure of this goal is not short-term costs, it is IRR. No industry ever addressed the issue of declining productivity by cost cutting, and it’s a safe bet pharma won’t either. Just ask General Motors.

More effective development requires addressing these central issues:

  • How do we improve operational efficiencies, not by speeding up current practices by but developing better processes?
  • How do we facilitate on decision-making, on all levels, operational as well as strategic?
  • What enables effective decision-making?
  • How do we incentivize our partners?

 In dealing with clients, the approach we’ve taken as a company is to emphasize three key elements to focus our efforts and by which our mutual success is measured:

  • Research productivity, measured by IRR: Better decision making defines better productivity, and that comes from information that is immediate, clean, and actionable. Productivity is quantifiable in IRR as well as other measures—but notably not just cost. Better productivity allows our partners to grow, which comes from the ability to accelerate promising programs and cutting others. Ultimately better use of funds means more shots at the goal.
  • Agile Decisions. We believe good decisions are made with two key variables: timely and actionable information. Sometimes you succeed with just one, but rarely with neither. Data is valuable in the proper context…and useless in a vacuum; its value is its role in making quick, informed decisions. The greater the impact, the greater the value. We help sponsors structure reporting system to optimize decisions, based on immediate data, reported on a clear and intuitive manner, and reviewed by parties responsible for a decision.
  • Shared Risk. Partnership means shared risk. Since time is money, Information availability and decision timelines are the measure. Failure to perform means penalties; exceeding them creates additional value.
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