The Argument Against Outsourcing

Source: Outsourced Pharma

By Louis Garguilo, Chief Editor, Outsourced Pharma

Follow Me On Twitter @Louis_Garguilo

You never thought youd see a headline like that in Outsourced Pharma.

But Ive 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

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 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 Id
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 its 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,
Pattersons 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

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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 wasnt 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, thats not why I work on a
management team. Its 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 Ive 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

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three important components: growing volumes, a diverse product line, and the room to make
investments that can facilitate internal productivity improvements.

Theres 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.

Ive 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 groups 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, Ive 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 well 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 wont continue its amazing progress unless clearly understanding
the points against as well as those in support.

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