Over the past decade, the pharmaceutical industry has experienced a period of unprecedented change driven by both internal and external factors that is forcing the industry to transform in order to survive. Diminishing returns despite spiraling R&D costs, major patent expirations, austerity measures and regulatory pressures, in addition to poor investor confidence, have made the pharmaceutical industry an increasingly challenging environment. As a result, the industry is being forced to reorganize and rethink its business model. Within this context, both R&D operations and, more so, the majority of its supporting functions have been the subject of intensive sourcing in an attempt to drive productivity and manage costs.
Laboratory services and Integrated Facility Management (IFM) trends
As strategic sourcing is increasingly embraced across the industry, laboratory support functions have also been progressively out-tasked or strategically sourced to multiple players. For the scope of this article, we focused on how these services can be further optimized in the broader context of the Integrated Facility Management (IFM) framework. The ultimate aim is to achieve significant operational synergies coupled with flexibility and optimization of financial and business performance, and at the same time simplify customer engagement.
Increasingly, there has been a move away from the traditional service provider relationship—focused primarily on cost performance—to more strategic partnerships. These partnerships are about more than just utilizing the specific capabilities of third-party contract service providers to reduce costs; the partnerships now reflect the drive for innovation by taking advantage of external specialized skills, expertise and resources. Finding the right partner generally presents a key success factor. Here we provide an outlook of what we see as the future state of lab services based on trends and an intimate understanding of the demand for efficiency and ease of customer engagement.
Over the past four to five years, IFM has exploded within the biopharma landscape, including the management of R&D space. In parallel, many different specialized firms have expanded their service offerings in the specific areas of lab services, including glassware cleaning and lab cleaning, waste management, veterinary and vivaria services, lab consumables inventory management, lab equipment management, and data management. As a result, current service offerings are quite fragmented and suffer vast inefficiencies.
Here we suggest that the next wave of lab services optimization would benefit from integration across multiple suppliers, infrastructure, and systems, and we propose a model that leverages efficiencies and facilitates end users’ engagement. At the same time, this model, through proper governance, will ensure that performance outcomes can be managed effectively even in such a complex environment. We firmly believe that the key to success depends on supplier capabilities and, as importantly, on the retained organization at the customer level. The size (the smaller the better), skills, mindsets and end-user representation within the governance model are critical to ensure that proper engagement occurs on both sides of the relationship. Based on our research and understanding of demand and lessons learned over the past ten years, we propose the “integrated architectural model” as displayed in Figure 1.
Considerations and rationale
Currently (non-integrated) service offering models are inefficient due to multiple and often redundant infrastructure, governances and processes. At the same time, end users overwhelmingly prefer the significant advantage of “one stop shop” vs. multiple points of contact, such as facilities, space planners, move planners, IT, lab services, equipment services, vivaria operations, etc. Although some suppliers in traditional lab services may claim to have the necessary capabilities to manage the entire scope illustrated here, no single supplier currently, to our knowledge, handles the total footprint that we envisioned in the proposed model. We further acknowledge that there is a perceived advantage to having an unbiased “agnostic” entity (that does not manufacture or commercialize lab supplies or equipment) as a business integrator. The largest gap is still at the “platform level,” as many systems are available or have been developed ad hoc and there is therefore an opportunity to rationalize and simplify infrastructure by adopting a single IT platform across the entire spectrum of the service portfolio.
The closest potential for playing the Integrator role exists with some of the largest IFM companies that have entered this space. In some instances, lab equipment and lab space maintenance are outsourced along with other services in an IFM contract. Increasingly, the scope of services outsourced to IFM providers includes general services such as lab space cleaning and procurement of consumables. With the increasing capability of IFM providers, the scope of services outsourced can be further expanded to include services that were traditionally considered to be core R&D. By leveraging their capabilities (infrastructure, sourcing leverage, talent management and transition expertise), the operational model and know-how of IFM companies lends itself to become the integrator of choice.
IFM suppliers as integrator
From a buyer’s perspective, the entire IFM service portfolio is outsourced to one or two suppliers that can cater to the buyer’s requirements on a global scale. Services that support this portfolio (HR, IT and procurement) are being integrated, thus increasing the value and the attractiveness of the partnership. Outsourcing complex categories with multiple services bundled under a single contract will place more pressure on suppliers, as buyers are demanding lower prices. Consequently, the buyer’s leverage in this segment will significantly increase. Additional opportunities exist within more heavily regulated environments as many of these services are required to support GxP operations. As the IFM industry matures, there is an increasing movement to support these activities and further leverage the economies of scale. The opportunity for the buyer can result in cost savings in excess of 10 to 20 percent, and buyers can enter into long-term contracts to capitalize on suppliers’ currently low operating margins.
Market development diversification and risk management
With buyer outsourcing categories becoming more complex, suppliers must look to diversify their service portfolio. Diversification will not be through subcontracting alone, as the open-book pricing model would discourage pass-through costs. Suppliers will explore self-performing additional tasks by increasing their capabilities through strategic mergers and acquisitions. The shift of global outsourcing to a single provider will lead to increased subcontracting, which in turn will drive an increase in management fees charged to the IFM provider, which would be passed on to the client. Additionally, by increasing the scope of the service outsourced to a single integrator, the contract will become complex and will make it challenging to incorporate the KPIs across the portfolio, hence the importance of appropriate deployment of relationship management, contract governance and commercial agreement execution.
Change in contract management strategies
There are currently multiple pricing models in this segment, but for a buyer to reposition itself from multi-suppliers to integrated sourcing, it should formulate effective supplier management strategies. Mutual dependency can be encouraged by switching from a total IFM contract to a shared savings approach. This approach would mitigate supply risks and encourage cost savings, as an increase in supply chain costs decreases the supplier’s returns. If the open-book pricing is adopted, the value chain of the IFM provider becomes transparent to the buyer. This will ensure that the buyer knows: the exact number of staff hired for all the services by the IFM provider and the wages paid; the monetary value of the overheads borne by the provider in carrying out the services; the investment made by the IFM provider in different areas like technology; and the sub-contracting fee charged by subcontractors for their services to the IFM provider. Ultimately, this will help the buyer identify and address the existing redundancies in the pricing structure and the bottlenecks in the IFM provider’s supply chain.
Barriers to new entrants
With the adoption of a global, integrated business model, suppliers should have significant capabilities in terms of service offerings and geographical spread. Suppliers are likely to enjoy significant leverage as there will be very few large “integrators” who will be able to cater to this segment. However, their power will be constrained with the advent of the open-book pricing policy. On the other hand, threat of substitution will be very low as in-house service delivery or partial outsourcing will not prove to be cost-efficient for buyers.
Intensity of rivalry
With the increasing consolidation of FM players and the adoption of a global, integrated business model, the number of suppliers would decrease, leading to a decrease in the industry rivalry. However, given the complexity of the outsourcing category and the volume of business involved, there will continue to be considerable competition between major suppliers.
Operating margins efficiencies
The service providers in due course will gain process efficiencies through the deployment of platform technologies, leveraging larger volumes, replicating proven models across their clients, and improving their talent pool by providing career opportunities. We foresee the further deployment of rugged handheld digital assistants to enhance and expedite service delivery. The deployment of standardized asset management and reliability engineering platforms will optimize maintenance, reduce energy consumption, increase reliability, reduce capital expenditures and improve safety.
The skills that are considered most important are customer service, operational, communications, project management, general management, finance and strategic planning. In addition, with the potential acquisitions by big IFM (integrators) players of other specialized service providers, the direct labor saving will become visible with the ability to self-perform specialized services. Other services that the integrator can offer include customized reporting procedures, subject matter expertise for consultations, and energy management and sustainability, as well as new technology implementation. Most of these offers will become a regular feature as a part of the service offering. Customizations and innovations will help reduce redundancies in the client’s process and in turn reduces cost.
Additional market considerations
We believe that as large CRO and CMO companies mature and their labor arbitrage leverage diminishes, cost pressures will also force this industry to embrace strategic sourcing in their business model to find additional cost efficiencies to achieve reasonable operating margins, and the integrated model described here will be a valid option.
The Foundations: Built on a robust enterprise IT platform to execute transactions, data and processes across all service portfolios; one call center to simplify customer engagement, to track performance, SLA, WO; an overarching function that ensures safety and environmental compliance across functions.
The Columns: Discreet bundles of services either self-performed or subcontracted to specialist partner(s) will include facility and space planning, a lab asset management program, consumable and soft services (requisitions, inventory stock management, controlled temperature storage program management, waste management, cleaning, GXP and non-GXP, hazardous waste management, glassware washing, sterilization, distribution and collection); logistics and material management (internal and external, shipping, receiving, archiving, reagent inventory management, storage/retrieving); ancillary scientific services (media, plasmid prep, low complexity bio/chemical analytics, small-scale fermentation: yeast, E. coli, cell culture), other time-sensitive activities as appropriate; vivaria services (space planning/optimization, husbandry services, veterinary procedures); electronic and hard-copy record management
Trabeazione: Project management function to drive process innovation and continuous improvement across the entire portfolio of services, working in partnership with SME within functions, in addition to engineering projects and capital planning services.
The Pediment: Provides the business integrator function to cap all structures and make it work holistically; its responsibility will include the governance and business strategy alignment; accountability for overall performance management, outcome and relationship with client and other partners. This role will be the key interface into the client-retained organization and to ensure a strong and lasting partnership and should be embedded within the leadership team of the retained organization.
This model can deliver the efficiencies and the value that R&D is demanding from its suppliers and, at the same time, it can provide optimal performance in a highly coordinated and cost-effective manner.