From The Editor | April 10, 2017

The Argument Against Outsourcing

Louis Garguilo

By Louis Garguilo, Chief Editor, Outsourced Pharma
Follow Me On Twitter @Louis_Garguilo

The Argument Against Outsourcing

You never thought you’d see a headline like that in Outsourced Pharma.

But I’ve rarely if ever heard so clearly articulated the case against – or spun more positively, the deep rationalization needed  for – outsourcing.

The articulator is Rick Patterson, former Vice President and General Manager, Alcon Research Ltd. Patterson also spent parts of his career at J&J, and KPMG.

If you live and – in a business sense – die by the sword of development and manufacturing outsourcing, or are deciding on the merits and degree of which to do so, this is for you.

We Do It Better At Home

Of his experience at J&J years ago, Patterson says: “I still love the company. I learned a lot about the medical device and pharma business.” But his career was mostly shaped by over 20 years devoted to ophthalmic-powerhouse Alcon, including his time under Novartis, who completed purchasing the company from Nestle’ in 2011.

“If outsourcing is in fact a real strategic decision, then that's okay,” Patterson starts our conversation. “But if it's simply the easiest decision for cutting costs – like it mostly is – then I’d say it's almost never okay. Outsourcing has to be a strategic election taken within your whole product-supply thinking. On a strategic business level, we have to ask, ‘Are we doing this simply because it’s the easy way to get out of doing a better job on our own operations side?’”

When Patterson joined Alcon in 1994, sales were below a billion dollars, and the company was looking for growth. The Alcon strategy was to invest in itself, including in manufacturing technologies and proprietary processes. Patterson says a key for a company with a diverse product line is to think about portfolio management from an investment standpoint. For example, his division implemented a very flexible, mid-level automation platform across numerous operations that was “highly reasonable as an initial investment, returning multiple times its worth over the years.”

“Investing prudently in our own manufacturing processes allowed us to establish a 20-year record of reducing our costs annually,” Patterson continues. He helped establish a culture of “marching consistently towards cost reduction, but with wise investment decisions and controlled overhead growth.” An ongoing cost-reduction mind set was put in place throughout Alcon manufacturing operations even as the company grew from that sub-billion-dollar mark to around ten-plus billion dollars in sales. By the time Novartis completed its purchase of all Alcon shares in 2011, Patterson’s division had grown from 300 to over 800 associates. All the while, he iterates, manufacturing continued to reduce costs.

“From a perspective of outsourcing, it never really came into serious discussion, because this was the Alcon philosophy and reality: Manufacturing was seen as a key part of the success of the company.”

Manufacturing Has A Seat At The Table

And that meant “manufacturing sat at the table with all key functions,” Patterson explains. “Unfortunately, in many big companies, rather than being viewed as a key to the success of the organization, I tend to see manufacturing relegated to a single point in the overall supply chain.”

He worries that as pharma companies became more finance-driven – and with more Wall-Street involvement – most can be seen as buckling under the pressure. However, Patterson says, Alcon had always lived under similar pressures, including those associated with areas such as CMS reimbursement, noting that cataract is the most performed surgery. “We were always under the pressure of ever-reducing reimbursements and other financial challenges. Those pressures were always there, but in-house manufacturing helped lead the way in reducing costs. It wasn’t the first place to look for easy cuts.”

“Unfortunately in my view, nowadays outsourcing seems the initial reflex when looking for reduced costs, regardless of industry. Cutting is easy, but ultimately, that’s not why I work on a management team. It’s simple to go through a budget and spreadsheets, and make cuts – or decide to outsource. The real challenge, and cost benefits, accrue from figuring out how to do things better at home, how to continue to invest in yourself and your business to be successful.”

“That's why I’ve always argued against outsourcing.”

Big Pharma Understands Results

Patterson says this “Alcon way” was mostly understood by Novartis; he felt for the most part the transition and discussions on manufacturing strategy went well.

But when the option of outsourcing did come up in management discussions as a cost-cutting solution? “I would argue that a consistent, annual cost-of-goods reduction realized from a culture of manufacturing improvements was much better for the organization than the benefit of a reduction from an outsourcing decision, and the associated impact on the culture going forward. Delivering consistent reductions in cost of goods over the long term makes it very hard to argue for outsourcing.”

Again, says Patterson, it comes down to manufacturing having a seat at the table, being recognized as a strategic partner in the overall success of a company, and justifying decisions in dollars and cents. “Investing capital funds wisely and leading with a good dose of common sense goes a long way in keeping manufacturing vital.”

Patterson understands different models have arisen in drug discovery and development, and recognizes “virtuals” and other startups are wholly reliant on outsourcing and external partners. But he says like the case at Alcon, bigger companies should look to take advantage of attaining three important components: growing volumes, a diverse product line, and the room to make investments that can facilitate internal productivity improvements.”

There’s a list of companies, though, which may have been just as fortunate in these regards as Alcon, but chose not to employ the same strategies. These “finance-driven companies” automatically start with going after cost-of-goods as a means to cut costs.

“I’ve seen their P&Ls,” says Patterson, “and their SG&A might be multiples of their COG … they could have reduced their SG&A by 10% and essentially get the equivalent reduction of 30-50% of their cost of goods. A lot of financial transactions and pressures lead to gutting the easiest target: manufacturing. Management and financiers say: ‘Manufacturing is used to cost reduction all the time; let's push them for more, and for moving to outsourcing.’

“However, I honestly believe there are no ‘ifs-ands-or-buts,’” continues Patterson. “First, you lose control of many key operational components when you outsource. Your purchasing group’s cost reduction strategy then has to become ‘squeeze the vendor.’ But what's that going to do? That's going to be adversarial.

“So little of outsourcing starts out positive, in my opinion. You try to create partnerships, but despite proclamations to the opposite, you create adversarial relationships almost by definition. It potentially compromises your quality, and in many ways it compromises your ability to impact your supply chain. In fact, over my career, I’ve been a proponent of in-sourcing and on-shoring, and have brought numerous operations back to the U.S. from overseas.”

That last statement will have to serve as segue to part two with Patterson, in which we’ll continue on the topic of manufacturing in the U.S., and some key analysis on career development and leadership.

As I mentioned to start this article, the case against outsourcing is not something we often focus on in these pages. But the industry won’t continue its amazing progress unless clearly understanding the points against as well as those in support.