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The Issue: Charting a Future Course for

Outsourcing in the Pharmaceutical Industry
By: Vicki Phelan, Pharmaceutical Industry Practice Lead
Stan Lepeak, Managing Director, Global Research
Rich Pierle, Client Executive

The global pharmaceutical industry is in The Details

an accelerating state of transition. Shifting An analysis of basic demographic trends for the users of
demographic trends in both western and pharmaceutical products would lead to the assumption that

emerging markets are driving the demand times have never been better for the industry. Aging and
for more and better pharmaceuticals.
Healthcare spending levels globally have
never been higher. Yet pharmaceutical
firms face a growing and daunting
array of competitive, regulatory, price
and operational challenges. There are
growing threats to intellectual property
protection and a general demonization
of pharma firms by some mainstream
media, politicians and influencers. Major
changes to business models are needed,
including more consolidation to gain
greater economies of scale and better and is not keeping pace to support the desired levels of services,
more efficient ways to bring new drugs
to market. Excelling at the core business
of pharmaceuticals is more critical than
increasingly unhealthy populations in western markets have a
growing and urgent need for a wide range of pharmaceutical
aids and cures. Growing affluence in emerging markets is
creating large classes of prospective pharma consumers.
Healthcare spending levels globally have never been higher
despite the best efforts to reign them in. Advances in drug
design and development techniques are opening doors to new
classes and types of pharmaceutical and biotech products.
Yet the reality of the situation is more troubled for both
pharmaceutical firms and those who use their products.
Pipelines for new drugs are weak in many large pharma
firms. At the same time, many lucrative blockbuster drugs
are coming off of patent. Regulatory scrutiny continues to
grow as does the recurring threat of litigation over real or
perceived drug side effects. Healthcare spending is up but
at least as defined by the patient and consumer. Much of the
world and their governments that want more and better drugs
have little interest in paying their true price and have few

ever. Outsourcing is playing a growing and qualms about pirating products. An increasingly loud and less
than well informed media, populace and politicians want to
increasingly important role in defining next enjoy the benefits pharmaceutical firms can deliver but at the
generation pharma business and operating same time make the business of being a pharmaceutical firm
models. untenable (or at least less profitable). Regardless of the virtues
and motives underlying the drivers of change, the global
pharmaceutical industry is evolving toward a new operating
model.
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Redefining the Pharma Operating Model

Global pharma firms are rethinking their core operating models. This is manifested
in a new and significant round of market consolidation via mergers and acquisitions
(M&A). The goal of these efforts is to create even greater economies of scale for
both strategic and operational activities. There is the desire to capitalize on synergies
between existing competitors, for example by marrying a firm with a strong brand
and distribution channel with another that has a stronger new drug pipeline.

Pharma M&A is nothing new but the scale occurring today is unprecedented. There
is also greater focus than in the past on ensuring that the benefits and “synergies”
projected from M&A efforts are fully realized. While mergers have enabled pharma
firms to reduce costs, for example by consolidating operations, they have also
resulted in sprawling, costly and often duplicative back-office and support operations.
Melding of significant investments in information technology (IT), applications and
systems creates complex operating environments that require extensive care and
feeding and are often in need of rationalization. The challenge in the current round
of M&A activity is to lessen these negative side-effects while gaining the expected
cost savings.

Pharma firms are redefining their strategies relative to diversification vs.

specialization. This includes reassessing what work is so strategic that it leads to
competitive differentiation and therefore must remain as internal operations (e.g.,
drug design, drug branding) and what work, while still strategic, a third party
can viably perform (e.g., drug development, clinical trials). While pharma firms
are reassessing how to best perform strategic activities, they continue to have
more interest in letting someone else perform a broader range of back-office and
operational services (e.g., IT, finance and accounting (F&A), human resources (HR),
facilities management). These strategic changes are affecting M&A, divestiture and
partnership efforts and driving more business process and IT outsourcing (BPO/ITO).

How are Pharma Buyers Responding?

The outsourcing landscape among global pharma firms is radically different than it
was five to ten years ago. This is the case both relative to the volume and scale of
deals as well as what is in scope for outsourcing both in the front and back offices.

• While in the current economic environment any outsourcing effort is focused

on achieving maximum near term cost savings. From a strategic perspective,
pharma buyers are focused on transforming via outsourcing how they
deliver operational services. This is in contrast to the “lift and shift” mentality
embraced in earlier deals, particularly ITO. The incremental costs savings were
the primary goal but a major overhaul of service delivery models and processes
was not in scope as is more often the case today.

• Pharma outsourcing buyers have become more sophisticated. “Out” clauses

in contracts, for example, are more prevalent and creative. Buyers are smarter
about pricing and understanding you get what you pay for in outsourcing.
Multi-sourcing is becoming more common both as a strategy and as a result
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of simply doing more outsourcing. This creates greater access to more diverse
skills but makes the outsourcing governance process more expensive and
complex.

• The use of lower cost offshore resources has become commonplace both
for back-office and strategic activities like R&D (research and development).
The model is moving beyond simple point-to-point offshore solutions and
towards a true global sourcing model using multiple providers across multiple
geographies. This sourcing model better reflects the operating model and
footprint of global pharma firms, but it also introduces significant sourcing
and outsourcing governance complexities. In parallel with these trends Indian
service providers have become more competitive for both BPO and ITO pharma
services.
The strategic goals of outsourcing in the pharma industry are more than just
reducing costs. The need to reduce costs, often significantly, is a given. Greater
emphasis is now placed on redirecting highly skilled employees to more valuable and
strategic work while eliminating the lower value and commoditized work through
outsourcing. Increasingly pharma firms are not only recognizing that internally
performing lower value work does little to create differentiation, but also how this
work is performed is largely irrelevant to their strategic competitiveness. There is
growing acceptance of standardized processes, models and IT systems to support
and perform back-office work and a recognition that maintaining highly customized
operations, even if at reduced costs, does little to support strategic goals.

The result is that the pace of pharma outsourcing continues to accelerate. Figure
1 illustrates outsourcing uptake among major pharma firms over the past ten
years in the ITO process areas of infrastructure and application development and
maintenance (ADM). The figure illustrates both the growth of ITO in the pharma
market and the expansion of scope to more often include ADM.

Pharmaceutical ITO Timeline by Buyer

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

AZ Bayer BI DSM DSM Merck AZ Amgen

Astella Allergan AZ Akso Lilly J&J BMS Schwarz
J&J Nobel DSM Wyeth Pfizer pharma
Astellas GSK Novartis Novartis UCB
AZ Pfizer Organon
Catalent
Merck
Roche
Sanofi
Schering
Shire
IT (ADM)
J&J GSK BMS Pfizer Novartis Pfizer AZ
Catelant J&J Amgen
J&J

Figure 1
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Pharma outsourcing buyers continue to expand the functional and process areas in scope for outsourcing beyond ITO. Today
F&A, HR, source to pay (S2P), real estate and facilities management services are being outsourced. Even more strategic activities
like clinical data management (CDM), sales force analytics and research are targets for outsourcing to third-party providers.

Figure 2 illustrates the level of outsourcing across 10 major functional areas in 20 of the industry’s top global and regional
pharma firms. Sales force analytics is the function most frequently (at least partially) outsourced while the greatest scope deals
are occurring in ITO, followed by F&A and CDM. There have also been multiple large, global Human Resources Outsourcing (HRO)
deals in the pharma market segment. This level and depth of investments exemplify the transition of pharma firms from vertically
integrated to horizontally specialized in their pursuit of competitive differentiation.

Pharmaceutical Sourcing Landscape by Function and Buyer

Functions Sourced
Revenue Research Real Estate Salesforce
Rank Company IT F&A S2P OTC HR CDM Chemistry Mgt Legal Analytics

1 Pfizer
2 GlaxoSmithKline
3 Sanofi-Aventis
4 AstraZeneca
5 Merck
6 Novartis
7 Johnson & Johnson
8 Roche
9 Eli Lilly & Co.
10 Wyeth
11 Bristol-Myers Squibb
12 Abbott Laboratories
13 Schering-Plough
14 Bayer Schering
15 Boehringer Ingelheim
16 Takeda
17 Astellas
18 Daiichi-Sankyo
19 Eisai
20 UCB Group

Unlikely or Evaluating /
None Unknown In Process Some Most

Figure 2<
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How are Outsourcing Service Providers Responding?

The growth in the level and scope of pharma buyer outsourcing demand has been
facilitated by the growth in depth and breadth of service provider capabilities.
Outsourcing demand cannot successfully grow without the availability of quality
supply. This is manifested in the growth and expansion of capabilities among legacy
multinational ITO providers and the penetration into the market by India-based
services providers — first in ADM and more recently in ITO and BPO. There are also
many specialist regional and India-based providers with offerings in emerging areas
such as sales force analytics, regulatory, rebate processing and research.

The “build it and they will come” theory is a bit like the chicken and the egg situation.
The providers must be careful not to invest in a capability that is way ahead of its
time yet they must be forward thinking enough to anticipate the market direction.
Conversely, pharma buyers may have strategies that include outsourcing a capability
not traditionally considered core but the supplier market is not yet positioned or
ready for it. The balance is not yet perfect but the service providers are investing
heavily in new BPO market segments to meet buyer demand.

The pharma industry is actively targeted by service providers offering emerging BPO
and knowledge process outsourcing (KPO) services such as analytics and R&D. This
is not surprising given the knowledge-intensive nature of the core business of the
industry – making it more ripe for knowledge-intensive services. Both multinational
BPO providers as well as India-based service providers who initially entered the
market through IT and ITO services are now expanding their BPO and KPO offerings. It
is critical that both buyers and service providers understand the buyer’s risk tolerance
when venturing into these new BPO and KPO areas.

Providers are competing aggressively for new business and for experienced staff to
build out their offerings. India-based firms in particular have been hiring western-
based staff with pharma industry experience to lead and support the growth of their
offerings. The India-based service providers are typically more aggressive about what
services they seek to deliver remotely as they recognize the need to have a stronger
local delivery presence for select BPO and KPO services.

Last year EquaTerra surveyed pharma outsourcing service providers on the maturity
of their service offerings in several BPO and KPO areas. The research also probed
providers’ future plans in these market segments. The research analyzes key
investment areas being pursued by providers, the level of buyer uptake in these areas
and the success buyers are having in achieving the goals sought in their outsourcing
efforts. The full results from this research are available in the EquaTerra Perspective
paper “Emerging BPO and KPO Trends in the Pharmaceutical Industry” available for
download at http://www.equaterra.com/fw/main/Emerging-BPO-and-LPO-Trends-in-
the-Pharmaceutical-Industry-1069C513.html?LayoutID=32.
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The Advisor Perspective – Critical Points to Consider

While many pharma buyers have had success with outsourcing and continue to
expand efforts, doing so successfully remains challenging. There are operational
difficulties related to successfully sourcing new deals and fitting them into the
existing portfolio. Outsourcing governance challenges grow with the size and
breadth of the portfolio. The service provider landscape is fluid and keeping track
of the best providers for different tasks is difficult. There are also a broad range of
additional challenges to developing and executing a sourcing strategy in an industry
in flux and during a period of global economic turmoil. Current conditions make it
even more difficult to define and execute a long-term strategy.

There are important directional trends in the global sourcing market and pharma
industry that EquaTerra recommends all outsourcing buyers and users account for in
their sourcing strategy.

• The ongoing globalization of business and IT services market will continue

largely unabated. Protection policies will have little tangible impact on global
sourcing in the long run, especially for global firms like many in the pharma
industry. On the plus side, providers will get better at designing, optimizing
and delivering a broader range of services globally in a more integrated and
coordinated manner.

• Market consolidation within the pharma industry and between pharma and
other life science industry segments will continue to accelerate. Relative to
global sourcing this creates both challenges and opportunities to expand
efforts, rationalize, streamline and improve the efficiency of existing
arrangements. Buyers can take advantage of change efforts to overhaul service
delivery models to take greater advantage of global sourcing opportunities.

• Pharma firms have great opportunities via divestitures and spin-offs to recreate
their service delivery models and operations. New opportunities exist to
maximize the use of third party specialists to manage and deliver these services
and enable the new corporate entity to focus more intently on differentiating
activities over back-office or lower value-add operations.

• Cost reduction programs will become more rigorous and cut closer to the
bone for at least the next 12-24 months. Pharma firms operate in a cyclical
market, though less so than some other industries. Pharma firms should not
delay, however, rationalizing operating and service delivery models to improve
margins. EquaTerra sees many pharmaceuticals using these difficult and
recessionary times as the impetus to make broad scale changes that arguably
should have been undertaken several years ago.
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• Creative alliances and significant outsourcing relationships will more often arise
in functional areas previously handled primarily as internal operations. Buyers
need to understand their options in these new areas, including best practice
business case models and the make-up of the supporting service provider
landscape. These areas include the following.

–– Real estate and facilities management

–– Regulatory compliance

–– Research and development

–– Legal

• All outsourcing buyers, including those in the pharma sector, must improve
their skills and increase the emphasis on becoming better at outsourcing
governance. As more services are performed by third parties the required skills
to manage this service chain must become a core competency just like those
used to manage drug development, manufacturing and distribution supply
chains. Improved techniques include the following:

–– Managing multi-sourcing and multi-provider relationships and engagements

–– Managing sets of third-party service relationships more as a portfolio and

less as individual engagements

–– Better defined and standardized outsourcing governance processes and

models

–– Greater use of specialized software tools to automate and support

outsourcing governance efforts

• Pharma firms must explore and better understand how they can use ITO and
BPO efforts as the means to rationalize and improve their global enterprise
systems environments. These enterprise software systems are the backbone
for global operations. This does not mean that buyers need to own and directly
manage all aspects of operations. This becomes more important as upgrade
requirements become more expensive and onerous and more alternative
software models (e.g., software as a service, “cloud” computing”, social
networking) that merit considerations and possible adoption come to market.
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Conclusion
The global pharmaceutical industry is facing difficult times. Major changes to existing
operating models will accelerate. Firms responses to these challenges range from
loss of intellectual property rights, new global competition, and bloated legacy
operating models to new national healthcare models that challenge core industry
operating principles. Improved ways of doing both the strategic and operational work
of pharma are required. Outsourcing efforts to date in the pharmaceutical industry
have been largely successful at reducing costs and shifting focus away from lower
value added activities. These trends will not only continue but will accelerate and
broaden in scope.

For more information on our Pharmaceutical services or to contact an expert, please see our
Website at: http://www.equaterra.com/fw/main/Pharmaceutical-955.html

About EquaTerra Contact Us

EquaTerra sourcing advisors help clients achieve
sustainable value in their IT and business processes.
Our advisors average more than 20 years of
industry experience and have supported over 2000
transformation and outsourcing projects across more
than 60 countries. Supporting clients throughout
the Americas, Europe, and Asia Pacific, we have deep
functional knowledge in Finance and Accounting,
HR, IT, Procurement and other critical business
processes. EquaTerra helps clients achieve significant
cost savings and process improvement with internal
transformation, shared services and outsourcing
solutions.
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If you would like to know more about EquaTerra, please contact us.
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+44 (0) 845 838 7500 +1 713 470 9812
infoeuapac@equaterra.com infoamericas@equaterra.com
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If you have questions about this report or would like to learn more
about how EquaTerra can help your organization address the points
and opportunities discussed, please contact Vicki Phelan or
Stan Lepeak.
Vicki Phelan, Pharmaceutical Industry Practice Lead,
vicki.phelan@equaterra.com, +1 609 304 1030
Stan Lepeak, Managing Director, Global Research,
stan.lepeak@equaterra.com, +1 203 458 0677

Rich Pierle, Client Executive

richard.pierle@equaterra.com, +1 908 284 9535

For additional information on EquaTerra, please contact

Lee Ann Moore, leeann.moore@equaterra.com, +1 713 669 9292.

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