Outsourcing's Modest Role as a Cost-Containment Strategy

Outsourcing is weighing in more as a tactic for cost-cutting, but it is still not the primary weapon.
Jun 05, 2013
Volume 9, Issue 6

Eric Langer
Companies are outsourcing now more than ever before, but there are indications that these choices are based on strategic calculi rather than as an actual cost-cutting mechanism, although cost is slowly entering more into the decision to outsource. Part of BioPlan Associates' 10th Annual Report and Survey of Biopharmaceutical Manufacturers evaluated the ways in which companies are addressing cost issues in biopharmaceutical manufacturing (1).

The study found that the most significant action taken in the past 12 months was the "implementation of programs to reduce operating costs," indicated by 69.2% of respondents, down from 80.7% in 2012 and 73.1% in 2011. Various other activities, such as negotiating harder with vendors to reduce costs, implementing lean manufacturing programs, and accepting single-use systems into clinical manufacturing operations, were undertaken by at least one-third of respondents. Outsourcing to reduce costs, however, was not a key priority (1). Of the 19 cost-cutting actions examined in the study, the five actions relating to outsourcing occupied the bottom spots in the survey results, an indication that when it comes time to tightening the reins, calling a CMO is not the first option. In fact, it is one of the last.

Changing fortunes

Figure 1: Percentage of respondents taking actions to reduce costs during the past 12 months, respectively in 2011, 2012, 2013. (FIGURE 1 IS COURTESY OF THE AUTHOR.)
That tendency, however, might be slowly changing. During the past several years, the percentage of respondents indicating that they outsourced activities as a cost-cutting mechanism has grown. The 2013 survey showed the following (see Figure 1 ):
  • 16.8% of respondents in 2013 outsourced jobs in manufacturing, up from 14.4% in 2012 and 11.8% in 2011.
  • 14% outsourced manufacturing to domestic service providers, an increase from 9.4% in 2012 and 7.1% in 2011.
  • 13.3% outsourced jobs in process development, on par with the 13.3% in 2012 and 13.2% in 2011.
  • 12.6% outsourced manufacturing to nondomestic service providers (offshoring), up from 9.4% in 2012 and 5.7% in 2011.
  • 11.2% outsourced jobs in R&D, up from 9% the past two years.

The relatively low priority assigned to outsourcing as a cost-cutting tool may reflect companies viewing these activities more as means to fill temporary gaps in capacity and as a way for biopharmaceutical companies to focus on their core competencies. Another explanation may be that although outsourcing is seen as a useful cost-reduction tool, it does not compare as favorably with other cost-cutting tactics. Biopharmaceutical companies are not alone in this result; in previous BioPlan surveys, few vendors approached cost containment by outsourcing.

The data from 2013, however, show that outsourcing is increasingly considered as a cost-cutting mechanism. This trend may be related to CMOs expanding their manufacturing competence through novel technologies, single-use/disposable bioreactors, and other differentiated bioprocessing services. These expansions result in increased adaptability, lower costs, faster turnaround, and higher yields. These trends create greater competition among CMOs and more choice for biopharmaceutical companies. Increased competition that results in downward pricing pressures among CMOs might lead clients to more heavily figure cost into the equation when making a decision about outsourcing. When bio/pharmaceutical companies were asked about critical issues when considering outsourcing biomanufacturing to a CMO, 42% said that it was "very important" that the CMOs demonstrate the cost effectiveness of their services. That percentage is the highest level of response to this factor since 2007, when it was also cited by 42% of respondents. In 2012, only 29% of respondents cited this factor as such.

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