Evaluating the move from in-house laboratories to independent providers
“The option of outsourcing laboratory services is an intelligent win-win approach,” says Andrew Swift, EVP, Intertek Chemicals and Pharmaceuticals (Abu Dhabi, United Arab Emirates).
At its core, laboratory outsourcing consists of the transfer of research and development, quality control, and related analytical functions from in-house laboratories to independent providers of test and measurement services. A recession-afflicted global economy, together with industry-specific game changers, such as the $100-billion-plus patent precipice in the pharmaceutical industry, have made staff and budget cutting almost routine occurrences in technology-driven businesses. As a result, an array of inventive approaches have sprouted to help technology companies cope with lost talent and a surfeit of underused lab instrumentation and facilities.
Outsourcing refers to a broad spectrum of service models and contractual arrangements for laboratory services, according to Phil Heaton, general manager, Oil Sands & Upgrading at Maxxam Analytics (Alberta, Canada). He says that at one end of the spectrum, simply sending out a proportion of a lab’s samples to a third party for testing—anything outside a facility’s own walls—could be referred to as outsourcing. The other end of the spectrum could include the full turnkey operation of laboratories, including the operation of onsite facilities, says Heaton. In practice, both globally and within industries, there are hybrids of all those forms—a blend of models and arrangements in which most industries participate today, according to Heaton. He says there is an overall propensity for outsourcing globally, and “laboratories are not immune to that.”
Sherri Basner, director, Intertek Chemicals and Pharmaceuticals, Americas, explains that while outsourcing entails laboratory-wide shifts from an in-house setting to provision of testing services, the scope is much broader. “It runs the range of outsourcing certain high-volume routine tests to portions of the work flow, or just outsourcing access to certain capabilities that can’t be afforded in-house.”
Basner believes that while there is almost always a good business case to support outsourcing in any business climate, it will be most popular in a dynamic economic environment. “When the economy is growing fast and companies can’t keep up with internal needs, they will look for outsourcing partners. When it is weak and declining, outsourcing is driven more by the need to save costs internally or at least to transition from fixed costs to variable costs.”
Swift joined Intertek, the global provider of testing and measurement services, as it was embarking upon a large-scale laboratory outsourcing program with British Petroleum (BP) for its global refinery support services laboratories. “BP was quite a pioneer in the oil and chemicals industry for contemplating laboratory outsourcing models, and this one certainly broke some new ground.”
“Over 12 years later we continue to run this laboratory in Intertek as an outsourced facility, serving BP with a wider scope of advanced analytical measurement services while being hot wired into the global BP organization. Under the same model and location, a few years later we successfully expanded the scope from downstream refining services into upstream exploration and production support services as well,” says Swift.
At the same time, under the Intertek model, this facility was being projected to international third-party markets through a portal that globally networked organizations like Intertek can provide—so it became a highly valued asset in partnership with BP, according to Swift. “Fueled by further innovative facility outsourcing contracts, over the next 10 years Intertek assembled one of the strongest knowledge centers and global expert measurement capabilities of the time,” says Swift.
A number of other global organizations in related industries saw the success of this partnership and approached Intertek about similar or related models in their spheres, according to Swift. “In the following five to six years, over 10 other global majors successfully outsourced significant laboratory testing and measurement assets, and expert scientists and engineers. Intellectual property was guarded with transparent and innovative approaches to confidentiality and security in each contract,” says Swift. Among them were organizations like Rolls Royce, Kodak, Unilever, Shell in Australia, Dow in the US, DSM and Sabic in The Netherlands, and ICI in the UK, according to Swift.
Heaton says that the management of one of Maxxam’s clients, a multinational petrochemical company that operated its own in-house laboratories globally, concluded more than a decade ago and that the laboratory function was not a core competency. Management recognized that a service provider whose core competency was laboratory testing would be a good partner, according to Heaton. “That was an early example of how Maxxam became focused on laboratory outsourcing, and that relationship goes back more than 15 years,” he says.
Many of Maxxam’s customers, including several of the major global oil and gas producers now operating in the Canadian oil sands, maintained their own in-house exclusive laboratories in the past. “That is no longer the case, and the shift is part of a global trend,” he says. Companies that outsource their laboratory testing reason that a dedicated test services provider focused on laboratory operations will almost certainly be more innovative while pursuing improvements in the field, according to Heaton.
“The acceleration toward large-scale laboratory outsourcing has really picked up in the last 10 years—and will continue to accelerate and become even more commonplace—and certainly for new facilities, it will become first choice,” says Heaton. He noted that it will be more challenging for legacy in-house laboratories.
Swift also believes that the value perception of such outsourcing by the major corporations changed dramatically in the course of the past ten years. He says that various factors influence and drive outsourcing from the corporate perspective and he considers what was ‘core’ and ‘what was not’ to the execution of a company’s strategy, was the original primary consideration. “In the 70s, 80s and 90s in the chemicals, defense, pharmaceutical, and oil and gas industries, to be a technical leader in the market there was a need to have the best equipped laboratory available; having the best laboratory testing capability ‘in-house’ was a key differentiator,” says Swift.
He says that industry recession before the turn of the millennium changed this view considerably and organizations were forced to consider an alternative ‘asset light’ approach to laboratory support while preserving the same technical capability—in the commodities, defense, and chemicals industries, for economic reasons; and in the oil and gas exploration and pharmaceutical industries for strategic reasons. Companies in all these industries realized that the maintenance of in-house laboratories was a very capital and operationally expensive proposition, and that they were building up assets that were only partly used (underutilized) and which were very costly to implement and sustain.
As a result, there was considerable interest in partnering with Intertek’s platform of measurement laboratories which it had built to support its customer base around the world. “These companies were very keen to look at alternative models for retaining access to their instrumentation power and use them on a ‘pay on demand’ basis with a capable partner,” says Swift.
“They secured those arrangements with long term contracts that guaranteed access, on a privileged basis, and which guarded their intellectual property,” he says. As a result of these outsourcing ventures, companies were still able to participate in the strategic development of laboratory capabilities but via a partnership model with organizations like Intertek, which had compatible agendas for developing the resource, according to Swift.
Describing an added dimension, Swift says in many companies with multiple divisions or categories, the ‘high end’ labs serve everyone but are not comfortably owned by any one, and so no single division is willing to take on the liabilities and bear the full cost of an expensive overhead benefitting others. “So the inhouse laboratory in the new economy is a bit of a misfit for the legacy corporation,” says Swift.
Benefits such as more streamlined costs have led to substantial growth in the outsourcing of laboratory operations during the past decade. To be sure, different industries have climbed aboard at different rates. Rob Weibe, vice president and general manager, Maxxam Analytics, Food Science and Safety, says outsourcing is a newer trend in the food industry, which may be five or six years behind the oil and gas industry in this area.
“There are three real reasons why food companies are pursuing outsourcing. Food companies are realizing that laboratory analysis is not a core function. They do not have the training and the systems, and technology moves very quickly in this area.
“The second piece is that the real cost of running a food lab is much higher than many food companies expect—the capital spend and operational costs are increasing constantly, and the cost of data management, which is critical for regulatory purposes, is going up.”
Weibe says the third reason is that outsourcing companies provide food companies with real opportunities for cost savings. He says they offer advantages in identifying better practices, help resolve problems more quickly, tend to invest more heavily in newer and better test and measurement instrumentation, and provide faster and more reliable results than in-house labs. “We have customers who are decreasing their warehouse space because of their switch to outsourcing and away from their in-house labs.”
Basner says that part of the compelling value proposition for companies outsourcing their inhouse labs is that they have the potential to “get much more output at reduced cost.” Prior to transitioning to Intertek, Basner managed the analytical sciences department of an international industrial chemicals and gases company, and she had an integral role in the outsourcing of in-house lab operations to Intertek.
“My experience in this has been in participating in the outsourcing field and transitioning from a parent company into Intertek. I spent the bulk of my career as a product development chemist with a global chemical company where I managed the analytical sciences department. The company closed an outsourcing deal in 2010 to transition the analytical sciences group to Intertek.
“I have been through the outsourcing process, and it has been a very successful venture from the perspective of both companies thus far.
The parent company has publicly stated that success was first and foremost cost reduction— analytical services was a high cost area, very capital and space intensive—especially since the company was in a field that required a very broad range of analytical testing. “The only way to save money and economize was for the company to trim down on people, so they had a lot of underutilized assets, the use of which they needed to optimize,” says Basner.
So they wanted to reduce their total costs, transition their variable costs, and reduce capital investments. “Even if you are not making investments in expansion capital, there is a need to make investments in replacement capital,” says Basner.
“So maintaining analytical services was a constant source of expenditures for them. They wanted to balance that with very high-quality analytical science; they wanted to have access to the scientists who already understood their chemistry and technologies, which was important for maintaining timely service delivery and keeping costs down.
“Also, there was the added advantage of accessing broader Intertek capabilities, which was a big attraction for them, and honestly, they were also anxious to provide career options for their analytical scientists,” Basner says.
To be sure, this process is not devoid of pitfalls and struggles, according to Basner. She says there was a necessity to reeducate people who worked seamlessly at one time so they could work together following the transition of her parent company’s laboratory operation to Intertek. Still, there were lingering feelings of separation, as well as cultural and administrative challenges typically associated with transition.
Basner says tools must be developed and put in place to deal with the issues of transition. In addition, the streamlining of operational steps such as an appealing web-based sample submission system developed by Intertek was enormously helpful, she says.
She sees the relative instability in the economic environment as a big driver of outsourcing in the future. “If you can outsource and save time and money on areas that are not core, you will do it every time. This will no doubt continue over the next several years, and it is also not industry-specific.”
Swift also expects to see expansion over the next several years. As long as companies like Intertek invest in the required technologies, there will be opportunities to provide value to small and medium companies that cannot justify the expense of establishing their own ‘high end’ labs, and to help the larger players pursue large scale growth on a truly ‘asset light’ agenda.