Strategic outsourcing of noncore activities can maximize resources while increasing the quality of products and services.
Done right, outsourcing testing to independent contract laboratory providers can pay sizeable dividends to pharmaceutical, biopharmaceutical, personal care, and other related companies seeking to strengthen their competitive advantage. Anyone with material/product testing needs will benefit to some degree through the use of outsourced resources. The key is determining which operations to outsource—and then identifying the best partner with whom to collaborate.
Increasingly, companies are focusing on outsourcing as a competitive strategy rather than as an excess-work/low-labor tactic. In a recent industry survey, published in May 2008, 53% of the respondents described their outsourcing model as strategic rather than tactical, and more than half of the respondents also expected their outsourcing to grow by at least 6% over the previous year. Fueling this philosophical shift is the recognition that outsourcing of noncore activities can help companies maximize their internal resources, increasing the quality of products and services they offer.
Outsourcing Delivers Critical Quantitative and Qualitative Benefits
Strategic outsourcing can deliver multiple benefits—both in terms of cost savings and expertise. Outsourcing enables companies to capitalize on the economies of scale developed by their supplier, whose volume of business translates to lower resource costs. With outsourcing, companies also have the flexibility to convert fixed costs to variable ones and to avoid continually investing in, maintaining, and upgrading expensive test equipment. As a result, partnering with that supplier enables the company to benefit from superior service and price in nonstrategic functions. Overhead is often reduced, since organizations tend to underestimate the costs associated with ongoing management of internal head count.
At the same time, it is important to recognize that some opportunity costs do not translate directly into dollars, yet still contribute positively. For example, outsourcing enables firms to focus energies on core competencies, resulting in better utilization of internal resources—and a stronger competitive advantage. Outsourcing can also strengthen competitive position by enabling firms to take advantage of the best suppliers available, accessing their specialized expertise. A supplier with core competency in the performance of a particular activity, for instance, can be counted on to execute it in a superior manner. Plus, suppliers often have a broad, invaluable base of industry knowledge
as a result of working with a variety of different clients. Their extensive experience in meeting compliance standards and maintaining good standing with regulatory agencies such as the EPA, FDA, or USDA can be a significant asset for companies pressured to bring products to market more quickly than ever.
Outsourcing Process Relies on Strategic and Analytical Decision Making
Making the decision to outsource involves several factors. First and foremost, firms need to identify their core competencies— those activities or processes that enable them to provide unique value to their customers. Core competencies should never be outsourced, because they comprise the foundation of an organization’s competitive advantage. Second, internal reviews should focus on which activities and processes make the most sense to outsource. Activities that require the least supervision and design usually are prime candidates for outsourcing, as are laboratory tests that fit the core competency of the supplier partner. Some firms will outsource work such as process or method development, since the outsource partner usually has a wider knowledge of methodologies. When deciding to outsource, the third consideration is to evaluate external market conditions, including efficiency, costs, and competition. And, last but not least, companies must conduct a thorough cost-and-opportunity analysis, comparing the expense of managing the outsourcing partnership with that of handling the task in-house.
Calculating the financial ramifications of investing in incremental labor versus the costs of outsourced testing can be challenging and time consuming. An analytical tool, such as the Celsis Workload Assessment Model, can assist companies in evaluating alternate scenarios and making informed, timely decisions. Based on input such as current in-house test capacity, anticipated test volumes, costs associated with incremental head count and variable in-house test costs, the model can identify when the volume or frequency of testing grows beyond in-house testing capacity. It can also compare the new-hire cost-per-test with the outsourced cost-per-test, based on the cost of new employees and the impact of higher volume on the organization. In addition, the model calculates annualized savings.
A workload assessment model provides valuable and versatile information for managing costs related to outsourcing. It can help firms:
- budget properly for labour requirements
- manage new project workload activity
- promote proactive management by performing volume-based "what if" scenarios
- identify cost savings available through outsourcing
- serve as a benchmark to justify head count requirements
Seamless Outsourcing Partnerships Drive Performance and Results
Once the decision has been made to outsource, the challenge becomes selecting the ideal partner. It goes without saying that not all suppliers are created equal. To optimize the potential for outsourcing, companies must select their partners wisely. Patterson and Hass (1999) have identified several elements that contribute to a win/win partnership. These include clear, shared objectives, mutual need, risk sharing, mutual trust, mutual reliability, cooperation, and commitment by top management. Most companies focus on a partnership with their suppliers and want to have confidence that the supplier can deliver on the company requirements and needs. Clearly, the bottom line numbers matter, but characteristics beyond cost play equally crucial roles.
Smart companies actually look for a relationship, not simply a supplier. It’s no surprise that 75 percent of the respondents in the aforementioned survey described their relationship with their contract service providers as a partnership. They also named more than a dozen factors that influenced their outsourcing decision making, ranging from geographic proximity and current good manufacturing practices (cGMP) to financial stability and confidentiality, to process optimization and value-added services. Even though specific requirements may vary by company, the ideal outsourcing partner provides high-quality services, every time, along with superior customer service. In fact, the supplier should not only have its own highly controlled quality system but also welcome its customers’ quality assurance audit process.
In addition, companies should seek out outsourcing partners that provide in-depth technical and scientific proficiency—a result of performing the same testing services on a regular basis. This honed expertise enables testing staff to more quickly interpret results, leading to faster throughput, as compared to internal staff that may only encounter certain tests sporadically.
The true value in strategic outsourcing lies in the ability to cost-efficiently expand resources for companies seeking to manage a profusion of workload testing deadlines within budget constraints—and without sacrificing quality. In today’s increasingly competitive marketplace, building an effective relationship with the right partner will consistently deliver a clear-cut advantage.