In my definition, outsourcing is the act of taking a process you don’t compete on and extracting value from it without investing your time, money or talent.
The pharmaceutical industry has prescribed outsourcing as an Rx for its success. Drug manufacturers realize they don’t compete in the marketplace on drug testing studies required by the Food and Drug Administration. Instead, they differentiate themselves by bringing new drugs to market.
All other processes are a drag on precious resources that prevent senior management from concentrating on the search for new drugs. By outsourcing any non-core process, drug executives don’t have to take two aspirin in the morning to handle the headaches. Outsourcing has replaced double vision with tunnel vision; now executives can focus on innovation instead of crucial but non-core processes.
Pharmaceutical companies are outsourcing every non-core process, including IT, logistics, sales and marketing, finance and accounting, and human resources (HR).
The chemical industry is lagging behind the pharmaceutical companies’ lead. Dow Chemical has outsourced its applications development and maintenance to Arthur Andersen (AA). Shell Oil has drilled into outsourcing by creating its own outsourcing company and entering into alliances with Commerce One.
Chemical companies were originally attracted to outsourcing because it precipitated out noticeable cost savings. But these manufacturers have noticed there were other positive reactions, too. One is protecting capital. Another is the transfer of risk and accountability to the outsourcing provider. This is particularly important to the chemical industry where a situation can literally blow up. Many refineries, for example, have outsourced their maintenance function to Halliburton or Brown and Root.
Keeping Up with Regulations
This is a classic outsourcing study: an industry is drawn to outsourcing for cost savings and learns the value proposition is far broader.
In both the chemical and pharmaceutical industries, regulatory compliance is constant instead of following a periodic table. Outsourcing providers, by definition, can perform the process better than buyer companies. This is particularly true in cases where federal regulation is voluminous and constantly changing. The provider is far better at handling life in a test tube.
Because outsourcing can extract lead from gold, I predict the trend to outsource even more processes in the chemical field will continue. The business model is just too compelling in today’s competitive world.
Lessons from the Outsourcing Primer:
- Outsourcing non-core processes allows drug manufacturers to concentrate on the innovation required to bring new drugs to market.
- Outsourcing transfers the risk to the provider. This is valuable in the chemical industry where things can literally blow up.
- Outsourcing providers can keep up with constantly changing regulation better than their buyers can.