Procurement guru Professor Andrew Cox says it straight on pharma outsourcing

...and he didn't pull his punches.

Pharma outsourcing in question?

I bang on quite a bit about how much damage pharma’s excursion into outsourcing has done to the industry. If you don’t quite believe it, hear from Professor Andrew Cox on the subject

The professor is world renowned in strategic procurement and outsourcing practices and in my estimation is the only academic who truly understands the nature of the business of procuring goods and services from third parties. He is in great demand across all industrial sectors and has kindly offered his views for a couple of my books.

Here is a Q&A we had a few years ago now:

Q&A with Professor Andrew Cox

Q. Is Big Pharma alone in adopting less-than-optimal practices in outsourcing?

A. Many industries have extensive experience of less-than-optimal make versus buy decision-making and outsourcing, and the major pharmaceutical companies are no different in this respect. Most poor practice arises from low levels of professional competence and a lack of rigorous and robust make versus buy and outsourcing management methodologies.

Q. What is your perspective on Pharma specifically?

A. In the last few decades, the major pharmaceutical companies appear to have been influenced by a number of factors when outsourcing many of their former key internal resources and capabilities (critical assets) to the suppliers in its supply chains. The key factors appear to have been:

1. a desire for more flexible use of assets

2. lower perceived costs of external (developing country) supply

3. short-term headcount cost reduction targets to meet quarterly financial targets

4. copying the latest fad.

Q. I can see your first bullet could be for strategic reasons, but the other three appear to be based on ill-informed decision making. Is that right?

A. I’m glad you raised the point and of course you are right. The remaining three bullets reflect incompetence in the make-versus-buy decision, and knock-on management issues that can occur once the contract is signed, normally caused by three major factors:

1. Unforeseen loss of critical assets. By this, I mean inadvertent outsourcing of assets that provide the basis for differentiating your product from the competition.

2. Unforeseen postcontractual moral hazard. This may sound a difficult concept, but in fact it is easily explained. It means that once the contract is signed, there is a shift in the power and leverage position of the buyer and supplier over time. I sometimes lightheartedly use the analogy of my marriage contract with Mrs. Cox and how our power and leverage positions have changed over time.

3. Inability to drive improvement in the supply and value chain. This last point relates to the relative weakening of a buyer’s position so that it cannot drive through the necessary improvement work that is going to make them more competitive in the market. More powerful suppliers will not be obliged to offer up improved quality, reduced costs or end-user value enhancements in the end-to-end value stream unless there is a consequent return for them. If the contract assures their return anyway, then more often than not it does not make business sense for suppliers to offer things up.

Q. What evidence have you to offer up from your professional expertise in this area?

A. Unfortunately for the major pharmaceutical companies that used to be the “channel captains” who controlled the industry and all of its major supply chains through a judicious control internally of critical assets, there has been considerable evidence of very poor practice in outsourcing in recent years. This has led to the loss of critical assets, postcontractual moral hazard and poor postcontractual management of suppliers. Evidence of this poor practice is listed below:

Unforeseen loss of critical assets: There has been a loss of internal intellectual property (IP) and technical design, manufacturing and quality-control competencies, with growing dependency on suppliers for these key competencies.

Unforeseen postcontractual moral hazards:

1. There has been an Increase in regulatory and supply-chain complexity, with increased threats to corporate reputation and litigation.

2. There has been an increasing and unanticipated dependency on supply-chain partnerships with distributors and manufacturers.

3. There has been a failure to predict the size of switching costs and high exit barriers for Big Pharma companies with their key suppliers.

Inability to drive value for money improvement in the supply and value chain:

1. There has been increasing evidence of poor quality control and adulteration of raw materials, products, and services across the industry.

2. There is widespread evidence of poor schedule compliance and on-time delivery.

3. The major Pharmaceutical companies have been experiencing rising rather than falling prices and total costs of ownership.

4. There is considerable evidence that the major pharmaceutical companies still lack cross-functional supply-chain value and process optimization competence.

Q. How would you sum up all of this?

A. All of these recent developments lead to a serious questioning of the strategic outsourcing undertaken by the major pharmaceutical companies in the recent past.

Not only has there been an inadvertent loss of critical assets, but also an increase in competition and a loss of control of key suppliers and supply chains. Unfortunately, this has occurred at a time when competition from generic companies has increased and when profits from patented products have been in decline.

The result has been an industry experiencing widespread decline in profitability, now responding with short-term knee-jerk merger and acquisition strategies. This is a telling indictment of the failure of strategic outsourcing in the pharmaceutical industry.

ENDS

These are powerful words and should send a chill through the hearts of industry executives. “This is a telling indictment of the failure of strategic outsourcing in the Pharmaceutical industry,” the professor concludes.

Need I say more?

Best, Hedley