Our world is living differently than about a decade ago. Some say we are living in a global village. We mean proximity when we talk of village. So, it is just so near, or a short distance. This is the twenty-first century where everything and everyone are interconnected. Communications and transportation have never been so effective and fast phased.
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What do we want to bring out before we expound further on the main topic of this Report, which is Outsourcing for the Pharmaceutical Industry? Some of the points we want to bring are:
- Distance is no longer a problem of businesses and organizations.
- Business organisations are free to locate many screen-based activities wherever they can find the best bargain of skills and productivity.
- The world is having access to networks that are all interactive.
- There is increased mobility.
- Large networks enable us consumers to order and receive what we want to buy – where and when do we want these things to go.
There are countless other opportunities and benefits the world has offered to us, all because of the internet or Information Technology that is at everyone’s disposal. Transportation has also revolutionized that allowing peoples and organisations to travel faster than the speed of sound.
Technology is the powerful force that now drives the world toward a single converging commonality. No place and nobody is insulated from the alluring attractions of modernity. Almost everybody everywhere wants all the things they have heard about, seen, or experienced via the new technological facilitators that drive their wants and wishes. And it drives these increasingly into global commonality, thus homogenizing markets everywhere.
Levitt (1986) states this is the globalization of markets. “The result is a new commercial reality – the explosive emergence of global markets for globally standardized products, gigantic world-scale markets of previously unimagined magnitudes” (p. 20).
One of the phenomena that resulted out of globalization is outsourcing. There is insourcing and there is outsourcing. The root word itself is self-explanatory: source in and source out. Businesses can now get supplies or parts of their products from outside source. Although this is not something new, it has been refined, reformatted and reinforced by the internet and the power of computers. Multinational corporations have been outsourcing products and services, but now it is entirely different with the internet.
Outsourcing is a phenomenon in business transformation that continues to dominate business functions all throughout the world. With globalization and the continuing changes in technological advances, tremendous development is going on in business and organizations. Each passing day these organizations have to catch up with technological advancement and adjust with countless changes all throughout their existence. If they don’t do so, they will be lagged behind, and they have to give way to others who are as smart and competitive as they are.
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Communications have tremendously improved; it has now become easier for companies to track spare capacity and low prices. A knowledge-based company can buy in more of what it needs – design or marketing or packaging – than can a traditional company. It can thus grow more integrated horizontally, rather than vertically. There will be new opportunities to bring together customers and suppliers, using the corporate communications network as the connective issue.
Cray and Mallory (1998, p. 1) add:
The world of organizations and managers has expanded dramatically in the last decade. Suppliers, customers, competitors and personnel now move easily across national borders. Developments such as the integration of the European Union (EU), the implementation of the North American Free Trade Agreement (NAFTA), the conclusion of the Uruguay round of the General Agrement on Tariffs and Trade (GATT) and the subsequent establishment of the Wrold Trade Organization (WTO), and the entry into the world economic provided emerging opportunities for the expansion of international operations.
In globalization, everything seems interconnected. It’s not only the philosophies of life that are interconnected, business is too. “You are wired; we are wired with no connecting cables!” This means from the remotest areas of the globe, we still can connect. And business has to take hold of this opportunity – or mis-opportunity – otherwise it goes down the drain.
Sussland (2000, p. ix) says:
The world has never been so tightly interconnected as it is today. These connections have been realized at almost no cost to the customer and at a reasonable cost to the supplier. Even small artisanal companies have access to a vast global market where they can sell their products while also comparing the quality of services offered by their suppliers.
Such is the reality nowadays. And there is no miracle; there is no ‘click’-of-a finger or easy way to success. Businesses simply have to plan and be competitive; they have to realize that the world has gone to the basic ways of evolution – survival of the fittest. If you are not really that good at competing, you just have to give in to the ‘fittest’ of the species.
Michael F. Corbitt & Associates (cited in Mariotti 2002, p. 105) conducted a research done for The Outsourcing Research Council which showed that “3000 US companies with more than a half-billion dollars each in revenue will spend 7% of that revenue – that’s $875 billion in total, heading toward a trillion dollars – an outsourcing.”
Outsourcing is really big business. The pharmaceutical industry may have a staggering detail and statistics which can surpass to billions more. The study above also showed the projected outsourcing to grow at a 15-25% rate per year for the foreseeable future.
Cobb and Stueck (2005) say that production costs force companies to go abroad. “Because U.S. compensation costs are higher than in low-income countries, factor-price equalization theory suggests that many service jobs not tied to location may move overseas.” (p. 58)
Outsourcing is not limited to one or a few countries. Many countries, especially the developing ones, are “implementing proactive strategies to attract jobs and industries. U.S. companies are encouraged to move work offshore because of the direct incentives these governments offer as part of their national industry strategy.” (Hira et al., 2008, p. 167)
Bamfield (2006) says:
Outsourcing, now an essential component of business strategy, is defined as the “provision of a service, resource or product from outside the organisation. At one time the use of outsourcing by R&D managers was tactical, used only when in house provision was stretched or not available, but is now an essential component of the business strategy in most companies. (p. 89)
A lot of organisations are now doing this, buying or sourcing products, components, or services from other companies or organizations. The internet makes it easier for companies to manage outsourcing, because almost everything that a company needs, from management skills to the human-resources department, can now be bought from outside sources.
Cairncross (2001) states: “Thanks to the Internet, companies find it easier to outsource activities they would once have carried out in-house” (p. 150).
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Why should we outsource? Is it necessary? Is it not only for the big businesses with big capital? For pharmaceutical companies, this is necessary. We will enumerate these reasons and interrogate the questions.
Almost all businesses and organizations outsource for precisely the same functions and objectives. In the pharmaceutical industry functions outsourced include human resources (operations or payroll), financial transaction processing (for accounts payable), procurement, distribution and logistics, and clinical data management. (Halvey and Melby 2006, p. 37)
“Outsourcing is not a threat to this nation’s economy – it is an opportunity to raise American paychecks, productivity, and prosperity. It’s an opportunity we will squander if we let the alarmists stampede us into boneheaded solutions.” – John Castellani, President of The Business Roundtable to the Detroit Press Club, February 24, 2004 (cited in Brown and Wilson, 2005, p. 19).
Many say the primary aim of outsourcing is to make an organization move fast, or to let it advance as possible as it can. But are there negative results? There are a number of these what we call negative results, but actually they are disadvantages to outsourcing.
Nevertheless, outsourcing has revolutionized processes in the workplace, provided tools and valuable data and information to managers and employees, shortened workloads, and has done many things of great importance to businesses and organizations. Springsteel et al. (2004, p. 58) define outsourcing as “the transfer of a commercial function to an outside service provider, subject to the customer’s retained authority and responsibility to third parties and shareholders for continued success of the customer organization.”
Moreover, outsourcing is not like the mercantilism practiced by European countries in the 18th century. “Mercantilism used large, government-supervised companies to gather resources from around the world, like cotton, sugar, and gold, and then return them to the home nation or a third country to manufacture finished products.” (Eltschinger, p. 2)
Reasons for outsourcing
In strategic outsourcing, Mariotti (2002, p. 105) provides these reasons for outsourcing:
- To beat the competition, make more money, do it faster, better, and always to serve the customer better.
- Where (execution) – where you can’t do it alone (which is almost always), so you can concentrate on what you are best at doing.
- Who (selection) – choosing the partner to trust for the things you’re not good at.
- What (need) – you cannot afford to be good enough at everything, so choosing what to be good at is a critical decision.
- When (timing) – as soon as you realize you should.
Mariotti (2002) further states that “if you truly understand the reasons for using partnerships and outsourcing – how and when to use alliances, partnerships, different forms of working together – then you will be on the road to doing strategic outsourcing” (p. 106).
Factors that motivate pharmaceutical companies to outsource:
- Overall cost savings
- Flexible/variable pricing (not fixed/dedicated resources)
- Access to a broad pool of competent, trained resources
- Continued and early access to state-of-the-art technologies and processes
- Rapid standardization or globalization (Halvey and Melby, p. 37)
The pharmaceutical industry Research and Development utilizes outsourcing. (Bamfield, 2006, p. 89)
Why outsource? Innovative companies need to support a vigorous new product pipeline but still want to maintain fixed cost, they cannot hire staff or expand facilities at will.
Why must a company outsource?
This question suggests that a company needs to outsource. Not all companies use this, but a pharmaceutical company needs to.
Bamfield (2006, p. 89) cites 3 reasons why companies outsource:
- Businesses are under constant pressure to control costs, especially fixed costs, to do more work with fewer people. One answer is to stop any irrelevant support and to consider the outsourcing of non-core, but essential services.
- Everybody wants to get products to market as quickly as possible – the old adage that “time is money” is as true as ever.
- R&D has become increasingly technologically complex and multi-disciplinary. In drug research the advent of technologies such as combinatorial chemistry and high-throughput screening has meant that smaller companies can often provide the expertise required in a more technically advanced and efficient way.
Outsourcing in R & D of Pharmaceutical Companies
More sophisticated than any of the activities, and one more prone to risk, is the outsourcing of key steps in the discovery phase of R&D. Many managers think that it is very unwise to outsource those technologies that are critical to achieving the business strategy.
Outsourcing of only selected research activities and technologies is still the preferred option. Companies prefer to form strategic alliances or collaborate with other companies when essential technological core competencies are missing.” (Bamfield 2006, p. 90)
Pharmaceutical companies spend a lot of time and capital in R&D. With globalization, they must think there is no option but to outsource. Research and development (or R & D) is extremely complex, bringing a new drug from the idea/concept phase to the market introduction phase is a difficult endeavor.
Global Companies and their strategies
DSM (a pharmaceutical company), carries its research at Geleen in the Netherlands, and also in North America and Asia. In 1999 they reorganised this effort into 25-30 “competence units”. In the preceding decade innovations from outside the company had increased from 10% to 50%. At that time the company believed that in future 90% of innovations would start outside. They therefore intended to sustain the innovative process by translating concepts invented elsewhere into innovations at DSM.”
The following quote comes from DSM:
“DSM’s Venturing & Business Development group continuously scans the horizon for innovative ideas outside the company in which we can invest, enabling us to access and make the best possible use of new technological developments and resources (2004).” (Bamfield, 2006, p. 90)
Another example is Pfizer which has the largest global pharmaceutical R & D organisation. Pfizer’s largest pharmaceutical R & D organization, Pfizer Global Research and Development, boasts of $7.4 billion spent in research & development in 2005. (Bamfield, 2006, p. 88)
Here’s what people from Pfizer says:
Pfizer’s search for new treatments spans hundreds of research projects across multiple therapeutic areas – more than any other company. Our scientists, clinicians, technicians, and other professionals employ state-of-the-art tools ranging from robotic high-throughput screening (a method pioneered by Pfizer) to sophisticated genomic studies, to deliver a steady stream of innovative new products that enhance human and animal health. (Bamfield 2006, p. 88)
It further said that it had links with “250 partners in academia and industry, to strengthen their position on the cutting edge of science and biotechnology by providing access to novel R&D tools and to key data on emerging trends” (Bamfield 2006, p. 88).
Wyeth too, could not be lagged behind. This is another large company which has gone on strategic global research alliances with companies on the cutting edge of technology and innovation. Bamfield (2006) quoted Wyeth as saying, “Through our relationships with these companies, we are able to participate in combinatorial chemistry, high throughput robotic screening of compounds, in-licensing of important new products, and genomics initiatives” (p. 88).
Another example is the Virtual R & D Company
Tom Peters (cited in Bamfield 2006, p. 92), a management guru, has been considered the strongest proponent of the “virtual company”. He argues that “imaginative use of modern information technology renders the corporation redundant.”
These virtual companies do not really have technical resource under their direct control and supervision. Instead, they use consultants and other outside agencies to advise on the various stages of the product development.
The working of a virtual company is that it will license a potential new product from a non-commercial research organization and then manage the process through to successful launch onto the market using CROs under contract. Bamfield (2006) says: “Virtual companies are based on the premise that core competencies within chemical and pharmaceutical companies lie in discovery research and not in development.”
Out there are so many research and manufacturing companies who can do the necessary product development process. The job of the virtual company is to access these skills and then utilize them in an efficient way.
The Drug Development Pathway and Outsourcing Opportunities
SOURCE: Adapted from Bamfield, P. (2006) Research and development in the chemical and pharmaceutical industry. Weinheim: Wiley-VCH Verlag GmbH & Co.
From the figure, the subtitle suggests that this is a pathway for outsourcing opportunities. Bringing a new concept or idea for a drug is entirely a difficult job. A lot of research is needed in the initial stages of making a drug.
Companies can save costs and deliver projects faster by the intelligent use of outside agencies.
Guidelines to successful outsourcing, from Bamfield (2006, p. 91):
- Commodity services and non-core technologies – these kinds are suitable for outsourcing;
- Enabling technologies, longer term and or fundamental research – these can all be outsourced but the company needs to retain enough internal intellectual capacity to be intelligent purchasers of the research and technology.
- Critical, core technologies – which the company needs to take great caution, since without core skills a company has little to differentiate it from others in the field.
- Confidentiality and intellectual property ownership – which must addressed and formalised from the outset of any relationship.
- Management time – the amount of management time required to monitor outsourced activities should not be underestimated.
- Suppliers – should have the right skills, the necessary facilities and can control quality and costs to the desired standards.
- Planning and project management – which should cover all eventualities and have shared benefits, the supplier being treated as a partner.
R&D Laboratory of chemical and pharmaceutical industries needs the support of professional and experts in the field. When a service, which previously has been provided internally, is outsourced it is an obvious concern that the support provided may not be of the same quality. To this end it is important that laboratory managers are involved in the drawing up of the contracts and in the assessment of the capabilities of the providers of a service. (Bamfield 2006, p. 96)
Once an overall R& D strategy has been defined, the first step in pharmaceutical project management is to select and evaluate the right projects. Many companies rely on the net-present-value method in order to select projects. This method projects future cas in-flows and out-flows and discounts the balance of each year’s net cash-flow to the present date by the relative costs thereby incurred.
With all the good things said about outsourcing, is it really good for the company? Is it really good for business? And is it really good for mankind in general?
For business yes. The answer will also depend on the kind of business and how large the business is. But as to the question if it is good for mankind, there’s a big doubt on this. It is a hypothetical question, even if the reality is we have passed from the days when there were no telephone, no cell phone, and the fastest means of transportation was just the horse.
One disadvantage – that can be seen as an advantage by the company outsourcing some business functions through the internet – is manpower is reduced in the area where outsourcing is served. For example, in the United States a lot of companies have resorted to outsourcing. Outsourcing involves servicing clients or companies whose customers are asking information about products and product warranties. These companies use Call Centers stationed in Asia, and operators reply to clients’ call. Companies in the United States and other European countries also outsource supplies from China and other developing countries. Companies lower costs of manufacturing and production through outsourcing.
Since the 1960s, the United States has been using outsourcing. American car makers such as Ford and GM used this to be more competitive with Japanese car manufacturers. They would source non-vital parts, for example carburetors, from specialty sub-contractors. Japanese counterparts also used the same method. Toyota and other car manufacturers outsourced their car parts from outside sources as an operational strategy to lower the cost of manufacturing. These companies have been successful in outsourcing that their finished products are mostly composed of outsourced products or components from their own valued suppliers. (Lynch, 2008, p. 765-767)
With the present economic downturn in the United States and all throughout the world, unemployment is aggravated by this process of outsourcing, although this refers only to buyer countries. This is therefore no answer to mass layoff of employees of many businesses.
Organisational learning in a new context
Writers and researchers try to identify the important factors that organisations must confront in the global environment.
Cray and Mallory (1998, p. xi) state:
The tremendous growth in international business over the last two decades has seen a parallel explosion in the literature devoted to the problems and techniques of managing across cultural boundaries. As with many explosions, this one has generated a good deal of noise and confusion, along with some heat and light. This is hardly surprising given the complexity of the field and the diversity of contexts in which research takes place, but such considerations offer small consolation to managers and employees seeking guidance for interactions with colleagues from other cultural backgrounds.
Really because of the global phenomenon, the business environment has become complex and more difficult for the managers and employees of business and organisations.
Barlett and Ghoshal (1987, cited in Cray and Mallory, 1998, p. 5) cite organisational learning to the usual considerations of global efficiency and local responsiveness.
These researchers cite two implications:
- Managers must acquire a new set of skills to process information from a global network on an ongoing basis. They should encourage subordinates to generate and pass on the information to the important departments of the organisation, and they have to be willing to act on the new information. Learning does not occur simply by accumulating information from numerous sources.
- Then we have the results of organisational learning. One of the results of organisational learning is that the context of management is evolving over time. With this new way of acquiring organisational learning, things become a bit more complex.
Cray and Mallory (1998, p. 5) say that ‘strategy must not only take into account current developments and anticipate new ones; it must do so from a continually changing base.’ They further state that the comparative organizational behaviour field has not changed or has remained while the international organization has become complex. With the complexity of different information because of the fast phased world of the internet, managers and employees have to be aware of the biases.
Cray and Mallory (1998, p. 5) cite certain cultures wherein higher-level managers have a tendency to restrict the flow of information because it would seem to enhance status or power. A manager will need guidance in encouraging organisational learning.
One example for this type of environmental context is the case of Canadian oil firm. This is a global firm which had standard procedures for evaluating the potential of a production site. It had a local partner which was at that time not so well organized and had some problems, so that its Russian data was not to be relied on. It had to do its own exploratory drilling which increased the Canadian company’s costs and also a waste of time. A complication further arose from the competing jurisdictional claims of some branches of government. This was new to the company’s history. Things became complicated in the decision-making process of the firm’s potential partners and its procedures. The response to the complexity could be seen in the internal legal, financial and operational arrangements the company made in order to their field exploitation; the company also had to deal with the local culture. (Cray and Mallory, 1998, p. 6)
Cultural integration theories
The problem of integrating employees from several cultures becomes a major concern of organisations. One is overcoming value and behavioural differences when employees of different cultures mix or work together. One example here is when an organisation with its headquarters in a country that gives considerable deference to leaders. The organization may have a problem in imposing its policies if the norm or the common practice is consultation among supervisors and subordinates.
Cray and Mallory (1998, p. 7) state:
The literature is replete with studies that detail these differences, but theoretical or applied treatments which would help a manager to deal with the consequences of these differences have been in very short supply. The international manager is admonished to be aware of these differences and to minimize them, but is given precious little advice on how to do so.
Integration is the problem in new international organizations. Different cultures have to be dealt with. Higher levels of integration is needed to respond to the rapid pace of economic change and the need to respond quickly to customers, suppliers and other segments of the organization.
Cray and Mallory (1998, p. 8) explained it that there are two considerable organisational that focused on the concept of culture. “One method of integration that continues to be used in many organisations with diverse workforces is the promotion of a cohesive culture.”
In the topic of the two cultures, we have the study conducted by Hofstede and his associates which stated that the two cultural systems are essentially separate (Hofstede et al. 1990). Their findings state that ‘national culture is derived from early socialization, while the corporate or organizational culture springs from specific organizational practices… National culture may affect organizational culture mainly through the nationality of the founder’ (Hofstede 1985, cited in Cray and Mallory 1998, p. 9).
Cray and Mallory (1998, p. 12) cite these issues in comparative organizational behaviour:
The traditional way of management does not work well in the globalizing economy. It is difficult to depart however from the traditional way of engaging business, but companies manage, especially the pharmaceutical companies. They have to outsource. Outsourcing is global but still seen as new, despite the fact that it has been with businesses and organizations for decades now.
The world is constantly changing. Man’s ways of business, personal relationships, social relationships, have to cope with the increasing changes in the environment.
Sussland (2000) argues:
Confronted with an environment that is global and chaotic and with new organizational structures, management has resorted to the research that has been done on the theory of chaos since the 1980s. Scientists have looked to Nature for answers. They have found that in the universe and on Earth, Nature provides simple principles, and allows structures to self-organize. (p. 5)
What might this structure be? Order emerges out of chaos, these scientists found out. With globalization, can it be outsourcing?
Information Technology and the internet have totally revolutionized the processes of businesses. There are many functions now that can be outsourced or serviced by employees not organic in the company or organization. For example, call centers. Businesses in the United States use call center agents manning the many call centers in the Philippines and other developing countries to answer to their clients’ queries about product warranties or anything about their products.
BPOs from these developing countries also service clients in the Unites States or other countries. Countless changes, development, innovations, and advances have been going on. It is therefore not logical with new and emerging companies not to cope with these changes.
However, an organization should not rush into outsourcing right away. The buyer should follow some steps before outsourcing, conduct a feasibility analysis, define the parameters of the contract, and build a strong relationship with the vendor or supplier. After doing this, the organization can rely on the success of outsourcing.
As an outcome of outsourcing, many organizations have improved much in their operations and have soared to new heights in their operations. But with the present recession as a result of the global economic crisis, the chaotic start initiated by Wall Street companies, and the collapse of big insurance and investment companies, outsourcing has been affected but not in the process of outsourcing per se. Some countries may have been affected because their respective businesses have done outsourcing even before the outbreak of the present recession. But it doesn’t mean companies doing the outsourcing have been at fault.
We have researched theories from Hofstede on organization behaviour. Our theories deal with integration or the intermingling of cultures because this is what outsourcing is all about. We tend to interchange outsourcing with globalization, or that outsourcing is an offshoot of globalization.
Hofstede and his associates have dealt a lot on organizational culture and the cultures of peoples working in organization. As we can see an organization which has gone global is like going into a pit or a deep of water where its resources are hidden in the deep. We say this because there are a lot of complex problems and situations that have arisen in this multi-phenomenal globalization of organizations and businesses.
But why are organisations opting to still go on global? Why should they outsource? Well, we can see that for pharmaceutical firms, most of them are large corporations, large organizations with complex and intermingling activities, research and development, planning and future business, or should we say ‘imagined’ products that have to be worked out. Added with this is the competition, the will to be on top, to gain more and more profit at low, low costs.
Why do they still go on? They have nowhere to go to. They are stuck on this so-called high technology, computers, the Internet, etc, which has enslaved organizations and businesses of the world. This is going nowhere, and it’s not helping the organizations. Supposed all of these bogged down. Or at an instance, we would be back to zero – no internet, no cell phones, no computers. Life would be as simple and as challenging again.
Yet we have no choice. All we have to do is to go on studying the intricacies, the complexities, and the problems that have been created. The theories of Hofstede and his associates on cultural integration are well indorsed and should be analyzed and studied.
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