Outsourcing - A strategic Opportunity

Way back in the early 2000's a Pharma industry newsletter asked me to write a article for them and I had written about "Outsourcing" which was published. Sadly I never saved a copy or even if I did, have lost it. But cleaning up a old computer I stumbled upon the soft copy of what they had sent me. I share that verbatim here. Note that this is easily 15 to 20 years old as an opinion and the contents must be judged accordingly.

Outsourcing enables companies to utilise every available resource be it finance, manpower, infrastructure for the core business and for development of new products and markets, says Ravindra Vasisht

The Indian economy over the last decade has developed as a knowledge-based industry in the global arena. With a population of over one billion, the condition of healthcare facilities for the majority of the citizens is abysmally poor and that is a contradiction considering that the Indian pharmaceutical industry is one of the knowledge based industries to get noticed in the global economy.

The healthcare industry in India is often identified with pharmaceuticals since the other areas have found little or no focus over the years. Healthcare comprises of not just drug formulation/ manufacture but delivery systems, hospitals, insurance, diagnostics, medical/surgical devices, disposables and general medical care. One of the major problems plaguing the Indian healthcare industry is that the citizens have to pay (high) costs for quality healthcare and the cash strapped government institutions are unable to cater to the demand.

Insurance while available in some form or other has not really addressed the complete needs. For example a patient needing dialysis or any other sustained medical support may not get his costs covered by insurance. Overall development has been less than expected. Most companies working towards keeping costs low have chosen to produce whatever required inhouse. This has been due to the impression that costs could be controlled better and also vendors have not been able to invest in facilities. High quality production facilities when inhouse could be spread over different applications thus spreading cost. One major casualty of this was that development activities across different areas of healthcare suffered due to the inbuilt inefficiency in such a system and the lack of specialised focus.

Liberalisation of the economy resulting in competition, a greater awareness of overall healthcare needs among the public, opening up of insurance to the private sector means that more people can afford and will demand quality healthcare. This will require organisations to concentrate on their core competencies and have a serious relook at doing everything inhouse. Vendors can and will invest in facilities that meet global healthcare standards. This article looks at areas other than drug manufacture since these are areas that are as yet not fully developed in India.

Let us first examine what are the areas that can be outsourced. These can include though not limited to, product design and development, manufacture of disposables, manufacture of components, assemblies and sub assemblies, diagnostic equipment, drug delivery systems, etc.

Next what are the advantages of outsourcing. The competition in the market place is increasing, quality expectations from customers is high, prices are being driven down all the time and an organisation has to maximise its resources for being ahead all the time. Hence every available resource be it finance, manpower, infrastructure should be utilised for the core business and for development/improvement of new products/markets.

Outsourcing frees up substantial resources of various kinds. Some examples. An international company was planning a project in three different countries to launch their product. It was important that they launch and recover their investment before competition drove prices down and grabbed market share. If they had tried working the project whereby they scouted and installed facilities in each country the expense would have been substantial not to speak of time. If they had tried locating a vendor in each location, once again the time and effort in locating, training and establishing the base would have taken time apart from the confidentiality of the project.

Instead they asked one of their existing vendors who had a complete exposure to their organisation, quality protocols to execute the project in all three countries. As a service provider, the vendor took care of all aspects of the project and the customer did not have to visit any of the countries. The project which took about 6 to 8 months meant that the customer spent his manpower and resources planning and working his next project/ product which can make a major difference to an organisations success.

A healthcare company which traditionally developed all its products inhouse decided as an experiment to utilise a service provider to work on their next product. They found that the product development which involved many aspects apart from the drug itself was taken care of by the service provider in a more efficient manner and the company’s development personnel had ample time on their hand to work on new projects.

One can go on with many examples, but the message is that unless an organisation seriously examines their business and the direction their industry is taking, they would continue investing in resources that are not required, thus spelling an end to their business. Strategic management dictates that an organisation must bring inhouse that part of their activity which threatens their survival and the rest can be outsourced.

Let us now examine the issues that an organisation must address while taking a decision on outsourcing. The roadmap that they must follow.

Firstly, healthcare sector products need quality systems of the highest order. Today the main OEM companies have excellent global quality standards and systems but their vendors (barring those who supply drugs/ formulations) do not have systems that are anywhere near international standards. This in the long run can prove very costly in the event of their product failing in the marketplace or having to withdraw a batch of products.

Also as the society evolves accountability will be a factor. Companies must and should insist on downstream vendors having quality systems/processing facilities that match their own standards and work towards getting components that can directly be used. For example a vendor with class 100000 clean room processing capability, quality registrations like FDA approvals, GMP, traceability systems in place is always a better choice than someone whose price is attractive. So the first step is inspecting the technical/ quality facilities in a vendor.

Secondly they must examine whether the “culture” of the vendor is in line with their own business scenario. A vendor with good facilities but who traditionally caters to say the automobile sector may not be able to fully appreciate the healthcare sector needs. The supply chain in the automobile sector is focused on timely supplies, JIT whereas in the healthcare sector uncompromising quality, reliability, shelf life need attention.

To give some examples: A overseas visitor to a healthcare component manufacturing facility, found the unit manager showing proudly a dozen inspection stages and the dozens of quality personnel at work. He was obviously proud that they invested so much attention and resources to quality. After the visit the visitor commented that because the unit produced “junk” they had so many quality people/stages.

The USP of the unit ended up as the failure in the eyes of this experienced visitor. A plastics unit showed off its “deflashing” section leaving the overseas visitor shocked. A senior manager of a global healthcare company in India, when spoken about “flash free” plastic components commented that he had never heard an Indian plastic moulder use the term flash free. If a beneficial long term relationship is to develop, then one must understand and be comfortable with the culture/outlook/language of the proposed vendor in keeping with healthcare industry needs.

Only after the first two stages have passed, should one come to examining cost of outsourcing and not price. The “price” is often never and cannot be cheaper than “inhouse cost.” This is because the infrastructure established for the core business absorbs the real cost and the “inhouse cost” of such outsourced items is subsidised in reality. If a detailed study is undertaken to find the Actual inhouse cost, factor in the cost of failure and examine the opportunity cost of resources freed up, then the outsourced “price” will be far lower.

The difference in price is actually being made up by additional costs inhouse which is often not accounted for. Most importantly, opportunity cost of resources that will become free need to be examined and only after that is known should an organisation move towards discussing price.

Top management with its long term business goals must get directly involved so that the purchase manager can select an apparently “higher priced” vendor with confidence. This is the step where most companies falter. Purchase managers, to avoid the uncomfortable questions from finance, select vendors on price and the entire advantage of strategic outsourcing is compromised. And when there is a “failure”, the tendency is once again to bring things inhouse which takes an organisation back to where they started.

Lastly but not the least, there must be a planned effort to enlarge the scope of the vendors work with a long term perspective because initial investments to establish state-of-the-art quality facilities are high and unless the investments can be spread over a larger basket no vendor can recover and reinvest in upgrading facilities. One can begin small but ensure that there is a long-term plan in place which can be discussed with the vendor in advance to gain his commitment.

After all the primary objective of outsourcing is to bring down costs in the long run and work towards faster development.

When such a detailed exercise is carried out, an organisation can look forward to join hands with a vendor and have a force multiplier effect in its business. They must carry the vendor forward with them and initially at least invest in time and manpower resources to develop the relationship. They must appreciate what value the vendor is bringing to the table and accordingly develop the relationship. A focus on “price” can only be a short lived solution to outsourcing and actually likely to fail as a strategy in the long run.

The other area in outsourcing where immense long term benefits can accrue is product development. But that is a specialised area that needs to be addressed separately.

Today as the focus on healthcare grows, insurance facilities become available to the citizens, the demand for quality healthcare at reasonable cost will increase and unless companies consciously develop local manufacturing facilities (as against imports), adopt outsourcing as a strategic opportunity and work towards constant product development/ innovation such companies cannot look for growth and profitability and for some even their survival may be at stake.

The views expressed in this article are the authors own and do not reflect the organisations opinion. The writer is sales manager - India at Nypro Forbes Products Pvt Ltd, Hosur