As executives across industries grow used to cost savings from low-cost offshore labor, they're exploring ways of tapping this workforce to generate additional revenue, improve core business processes, and offer more value to customers (see "Taking offshoring beyond labor cost savings"). Credit card companies, for example, use offshore workers to lower the threshold for identifying fraud, while airlines use them to rebook passengers on connecting flights if the first one is delayed. Inexpensive labor is what makes these opportunities possible, but the value of the new services extends well beyond cost arbitrage.

Most pharmaceutical companies came late to offshoring, but a few leaders are already moving quickly to capture gains beyond labor cost savings in back-office operations. Eli Lilly and Novartis, for example, have conducted several significant clinical trials in India. Bristol-Myers Squibb, Merck, and Pfizer are moving some basic chemical-synthesis functions there and to China as well.

Most of the industry, however, has been more cautious. Some pharma companies are outsourcing selected functions (such as certain IT activities) only for cost savings rather than looking more broadly at the development of new processes that would improve business productivity or generate revenues. Many executives still worry that it won't be possible to protect intellectual property in developing countries, even though the most important ones are tightening their IP laws (see sidebar "IP's evolution").

Rising pressure on the sector's earnings and growth expectations, however, may now spark pharma companies to adopt more ambitious offshoring plans—particularly because overcoming the barriers offers immense opportunities in an industry that relies on its long-term potential for shareholder value. At a time when getting a drug to market six months faster might mean an extra $200 million to $250 million in profits, productivity improvements are far more valuable than near-term cost savings. A top-tier pharma company that takes advantage of global resources across its value chain, from R&D through manufacturing and sales, could add $300 million to $500 million in value over the next two years—an impact equivalent to that of a blockbuster drug.

Beyond costs

When pharma companies go offshore, they should expect to generate cost savings and productivity benefits in the same functions that other companies do, including back-office operations, manufacturing, information technology, and customer support (see sidebar "IT's contributions"). But in the pharmaceutical industry, two areas in particular offer unique (and largely unexplored) potential: speeding up global clinical trials and improving the effectiveness of the sales force.

Clinical trials

Clinical trials, which represent 50 to 60 percent of a new drug's development cost, take place mostly in the United States, Europe, and Japan (exhibit). Extending these trials globally offers a huge opportunity not only for cost savings but also for improving productivity, since more than 70 percent of clinical trials miss their deadlines because they can't recruit patients quickly enough. By broadening the base of physicians and patients to include lower-cost countries, companies reduce their costs per patient by 40 to 60 percent and speed up recruitment by 20 to 30 percent. As a result, AstraZeneca, Eli Lilly, Novartis, Pfizer, and others (including most clinical-trial outsourcers) are significantly ramping up their efforts to recruit physicians and patients in Eastern Europe, India, and China.

In lower-wage regions, companies can even afford to hire counselors to check up on trial participants and encourage them to stick to the regimen, thus boosting the compliance rate or detecting noncompliant patients earlier. These measures make trials more productive and less prone to failure. Companies can also afford to hire teams of nurses and doctors to monitor and analyze the results of trials around the globe and to flag issues that could affect the outcome.

Similarly, the data-management and bioinformatics functions are rapidly going global, though experienced teams in the European Union and the United States continue to carry out the higher-end functions of biostatistics and biometrics. Novartis has made India one of its global data-management hubs, with more than 100 statisticians analyzing data from more than 75 global clinical trials. Pfizer and Wyeth have launched similar operations. Early reports indicate that once companies overcome their initial challenges (such as recruiting the right people and handing over projects) the impact is substantial, with at least one leader improving its cycle times by 10 to 30 percent. Another promising idea, not widely implemented, is hiring low-cost offshore teams to analyze clinical-trial failures.

Pharma companies should approach these opportunities by building up clinical-trial and data-management centers, staffed by teams of expatriates and locals, in developed and developing markets. As the centers evolve, companies will have to develop networks that provide for the sharing of data and decision making across geographic boundaries—while retaining the confidentiality of data and protecting intellectual property. These global development centers would start out by executing basic but cost-effective tasks (such as recruiting patients), eventually taking on more advanced jobs (such as analyzing data and recruiting physicians). Ultimately, they would evolve into full-fledged sites like those in Europe and the United States today, able to design and own clinical trials. They may even pioneer new (and now economically unfeasible) activities, such as developing and conducting trials of niche drugs or vaccines whose target markets include fewer than several hundred million patients.

Using workers in lower-wage regions offers an opportunity to generate richer insights by applying analyses more frequently and at a finer level of detail

Sales and marketing

Low-cost labor makes it affordable to analyze sales and marketing data in ways that would be prohibitively expensive in the multinationals' home markets. An offshore team could, for example, monitor the efforts of a sales force and spot market trends as they emerge, as well as investigate data on competitors. Other offshore specialists could refine a pharma company's market segmentation efforts by correlating marketing inputs with prescription-writing behavior gleaned from existing industry or point-of-sales data. Companies could also afford to expand their market analyses to smaller geographic markets and noncore brands, such as those that are late in the life cycle. European and US pharma companies already conduct all of these analyses at a high level, but using workers in lower-wage regions offers an opportunity to generate richer insights by applying analyses more frequently and at a finer level of detail.

Take the example of one leading pharma company that had invested millions of dollars in a system to analyze sales data but wasn't satisfied with the insights that onshore analyses were generating. Some executives felt that the sales team lacked the analytical sophistication to draw rich insights from the data. When the company moved the function offshore, it filled out its team with a group of MBAs and PhDs who had experience analyzing statistical models. The new team's findings are illuminating sales patterns more insightfully and delivering real value.

Other possibilities involve personal sales and customer care models. Many physicians, for example, prefer to discuss products with their peers rather than salespeople. Assigning doctors to do this work would be prohibitively expensive in the European Union or the United States but feasible in lower-wage regions. Patients in developed markets could also opt to receive follow-up calls from counselors in lower-wage regions.

Getting started

Basic cost-oriented offshoring lays a foundation for higher-value processes whose importance goes beyond costs. Some elements of both kinds of offshoring are more or less the same—especially transferring knowledge, assessing and retaining talent, managing projects and performance, and maintaining oversight. Others are different, including the choice of functions to offshore, the places to locate them, and the commercial models to deploy. When companies look abroad to save money, for example, they map out the details of their current processes and identify specific tasks or activities that could be undertaken in lower-cost offshore locations. But new opportunities to add value in ways that go beyond cost savings won't emerge from this kind of analysis. New thinking is required.

Assembling the team

To build a team that can seek out new opportunities in global resourcing, pharma CEOs must work against the "not invented here" mentality, which is all too common in the industry, by assembling groups of functional experts with reputations for challenging the status quo. Because pharma is complex and highly regulated, seasoned executives who understand the industry's limits should also serve on the team to ensure that new processes meet regulatory standards.

Once a cross-functional team has been formed, it should begin exploring possibilities and identifying opportunities, especially in areas where value is lost (for example, clinical trials that must be redone as a result of low compliance) or unrealized (such as unanalyzed data). One approach is to examine instances when low-cost talent could help companies take advantage of opportunities that otherwise can't be exploited (for example, because high costs make it impossible to enter a small market or to serve niche segments). Teams should consider visiting companies in industries that have achieved benefits beyond costs (for instance, the mobile-telephone carriers that can now interview customers several months after activating their service). Brainstorming sessions with functional specialists and external thought leaders can also help generate ideas. One major challenge is going beyond conventional wisdom in order to invent new processes—such as calling patients in a trial each week to remind them to take their medications.

Finding the location

Choosing the location is critical. India, whose large talent pool and experienced providers make it the most popular destination for outsourcing business processes and IT, is also the top spot for outsourcing R&D. Most of the top ten pharma companies have some Indian R&D operations, ranging from chemistry services to data management to clinical trials. Top pharma companies also undertake research in China, including Wyeth (in clinical trials for Tygacil) and Roche (which since 2004 has had a captive operation in Shanghai with more than 40 medical chemists). Eli Lilly, Merck, and Pfizer have partnered with Chinese companies. Some of these efforts aim to leverage the benefits of traditional Chinese medicines.

Pharma executives should also consider the strengths of other regions. Israel, for example, is a good location for biology research and bioinformatics work—albeit at a cost higher than in China or India—because of the country's highly qualified and experienced researchers, excellent infrastructure, and very strong patent protection. Eastern Europe has the advantage of a population that speaks several languages.

Determining the operating model

Vendors often undertake routine IT activities more efficiently than a captive operation does, because of their scale advantages and focus on retention and training. But the experiences of high-tech vendors suggest that when companies develop new processes, a captive model may be more effective because this kind of work requires a high degree of communication, integration, and familiarity with a company's current processes and leaders. As innovative processes become routine, they can be outsourced to suppliers so that the company can concentrate on the next wave of innovation.

The trend in pharmaceuticals already follows this pattern. At least half of the top ten pharma companies have outsourced their basic finance and IT activities. In R&D, which has the most potential for innovation, companies such as Bristol-Myers Squibb, GlaxoSmithKline, Novartis, and Pfizer are now building "captive ecosystems"—internal centers that work with a web of external suppliers.

Scaling up

The pharma industry's first pilot offshoring projects are nearing completion. Their sponsors regard most of them as successful, given the lower costs and cycle times and the higher capacity they made possible. Now, however, companies must confront several critical issues to remain competitive while scaling up these new operations. The first challenge is to select the right organizational model. Of the many available, most multinationals opt for one of three ways to organize their global service divisions. Some prefer a single unit that acts as an internal service provider, delivering functional services to business units. This approach works well for commodity activities that benefit from scale and for easily codified services. Other companies let each function develop its own offshore strategy, a method that works well when business services are hard to standardize across functions. The risk here is that different units in the same company may work with different vendors or compete for the same employees, thus losing possible synergies.

A third model blends these two by designating a small global team to ensure common approaches while allowing functions to identify opportunities and to migrate them offshore. This model seems to be the most appropriate one for pharma companies, since it recognizes the independence and specific business needs of functional units and the fact that opportunities beyond costs may be peculiar to each function. What's more, this approach can be used to provide cross-functional support for location analysis and strategy (so companies avoid ending up in too many different places), to select and negotiate with vendors (thus leveraging scale and avoiding a multiplicity of vendor agreements), to transfer knowledge, and to hire and retain employees (since it doesn't make sense to have every function set up a recruiting and training administration).

As more companies enter emerging markets, however, there will be more competition for the same talent pool. To compete for talent with local employers, multinational pharma companies will have to improve the type of training they offer. Indian providers are setting the bar for global competitors by building vast professional training centers that offer sophisticated curriculums and accredited courses.

Companies will also need to integrate the career paths of their offshore operations into those of the larger global organization if they are to retain their most talented employees. Indians, for example, seek a complex value proposition that includes going abroad and receiving payment in dollars. Many of these employees work their way up the ladder to hold management jobs throughout the global organization, in developed countries as well as emerging ones.

The pharmaceutical industry came late to offshoring for cost savings. Rising pressures on profit margins should prompt companies to move more quickly into the next phase of global resourcing: developing value in ways that go further than cost advantages. To begin that process, executives will have to look beyond their functional silos to identify cross-functional opportunities and create new processes that not only reduce expenses but also generate new revenues and improve productivity.