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Derek Lowe The 2002 Model

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Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases. To contact Derek email him directly: Twitter: Dereklowe

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« Where Drugs Come From: By Country | Main | Comment of the Day: Outsourcing and Architecture »

November 10, 2010

An Outsourcing Blast

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Posted by Derek

A reader from a large company sends this along - it's the text of a letter that he's wanted to send to C&E News, but since, as he puts it, "they don't publish anonymous letters and I still need to work", he decided that it would never see the light of day. I offered to help him out with that.

I've written many times on this blog about outsourcing, mainly on the theme of "it isn't going away, so we're going to have to learn to deal with it". And I've seen companies use it well, but there's no doubt that there are companies that are either (a) using it poorly, or (b) taking the idea further than it can go. Outsourcing to a cheaper country is not a magic wand, for sure - the problem is, perhaps, that to an accountant it might look like one. At any rate, here's the letter.

In a recent edition (25th Oct 2010 “The Grand Experiment”) you state that Merck &Co targets 25% external R&D and that AstraZeneca is striving for 40%. I recently talked to all the project managers which oversee our current collaborations. The stories of naivety, incompetence and missed deadlines by the outsource companies were legion. The managers I talked to mostly used in-house resource and expertise to paper over the cracks. Why?

When asked whether they had reported these problems up the chain of command, the answer was always no. The reasons?

1 “If we have four collaborations and mine is the only one reporting problems, which three project managers do you think will get a bonus?”

2 “They won’t believe me, they will just think I am trying to protect jobs here”.

3. “You can’t swim against the tide”.

4 “When it goes bad here, I might be able to get a job with the collaborator”.

5 “My next job will be outside chemistry as a project manager. The last thing I need is any negative vibes around this collaboration”.

6. “I want to be the out-sourcing manager when that is all that there is left here. Do you think I want any trouble to become visible”

So, as far as senior management know, it is all going very well.

Unfortunately I can’t attach my name and organization. I need a job too and telling the truth is not always that popular, as many out-sourcing managers will have experienced. . .

These are valid points, and any company that is using (or thinking of using) a significant amount of outsourcing should pay attention. Just as with internal efforts, Something Upper Management Wants can too easily turn into Something Upper Management Is Going To Do No Matter What. And with outsourcing, the problems can be both harder to detect and potentially more severe. Because what you don't want is Something Upper Management Will Be Told Is Going Great, if it's really not.

Comments (57) + TrackBacks (0) | Category: Business and Markets


1. gyges on November 10, 2010 8:48 AM writes...

Meanwhile, over a Blighty, a situation has arisen which can be added to the list.

It is becoming apparent that some services supplied by companies in the UK are cheaper than those supplied by Chindia.

When this was pointed out to the monopsonist who buys the services, they responded by saying that they've got a whole dept who outsource to Chindia, what will happen to the dept if they source in the UK?

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2. Lacerta Bio on November 10, 2010 8:50 AM writes...


There is no question that outsourcing to *any* company in *any* country is not a panacea. Problems will crop up, irrespective of geography. You're right, Derek. Outsourcing is not a magic wand. As with any other process, it has to be managed properly.

Also, let's not forget the old maxim; You get what you pay for. There are many outsourcing companies around the world who perform outstanding work. They may not be the cheapest, however.

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3. Jack Vinson on November 10, 2010 9:02 AM writes...

This issue is bigger than outsourcing. I would wager that there are internal projects that are going all pear-shaped too, but upper management either doesn't know or isn't listening. Look at how many of those items had to do with FEAR. Fear doesn't appear just when it comes to outsourcing. It's there year-round, every day. Find a way past the fear, and many of these issues (internal and external) can change.

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4. processchemist on November 10, 2010 9:10 AM writes...

Working in the western outsourcing side of this business, I recall that about 10 years ago a GSKer, old friend of mine, attending a company summit about outsourcing somewhere in UK, heard that prices of some european contractors were matching the prices of the indian ones. Good news? Not so much. Since then many customers approached our shop waving an indian quotation and saying "We want this project from you, with your quality, with THIS price".
All the process (that accelerated in the last 5 years) lowered the median quality of the service of many western contractors. I heard that a well known and reputable player (in western europe), forced to accept projects at one half of the prices of a couple of years before, started delivering lower quality services.
Only in rare cases it's possible to deliver high quality at the cheapest price (mostly a technology issue). Usually, the less you pay, the less you get.

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5. Analytical Chemist on November 10, 2010 9:22 AM writes...

In my experience money really is being saved, but it's being saved at the expense of quality and timeline delays. Upper managment is unable to discern the quality reduction (or they don't care?) but the $$$ savings are tangible and obvious.

Oh, and that helps them get big bonuses, which are also tangible in their pockets. I once had a senior manager insist on going to a third world supplier, even though 1) it wasn't actually cheaper and 2) we knew it was of lower quality, because his managment held the expectation that it must be cheaper and he had his own job to protect.

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6. RB Woodweird on November 10, 2010 9:24 AM writes...

1. Stories are not data. Doubtless this writer has been unwillingly indoctrinated in the groupthink which is Six Sigma. Use those tools against the Man. This is a job for Mr. Pareto and Mr. Ishikawa.

2. Unscrewable pooch. This may be one.

3. Good. Fast. Cheap. Pick two. This is a fundamental law. Probably falls out as a corollary to one of the Laws of Thermodynamics.

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7. You're Pfizered on November 10, 2010 9:49 AM writes...

Posts like this are what keeps me up at night. I've heard very similar stories within my company as well.

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8. Morten G on November 10, 2010 10:01 AM writes...

"Merck &Co targets 25% external R&D and that AstraZeneca is striving for 40%"

This means outsourcing? I thought that was how many projects they intended to license from biotechs. That doesn't leave much for internal development, does it?

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9. OldLabRat on November 10, 2010 10:03 AM writes...

Having worked at both internal pharma R&D and a CRO providing R&D services, there's a couple of items that really stand out in addition to the excellent previous comments:

1. Management isn't willing to quantitate CRO output quality and the bureaucracy necessary to manage it, since such a value could also be applied to their own jobs. One gets the value paid for, but this isn't an amount that can be put in spreadsheet like the FTE cost, thus the ROI can't be calculated. Thus, internal and outsourced results aren't comparable by accountants. This leads to more subjective decisions and lots of CYA by managers.

2. The competency variance in CROs is very wide, much wider than inside pharma today. The main difference is the larger number of employees at the lower end as the cuts over the last few years have really reduced the deadwood inside pharma. This means that very thorough due diligence is needed when contracting with a CRO, regardless of location. I'd suggest that taking the time to clearly describe expectations and work in exhaustive detail for both the science and communication. False assumptions about competency are frequently at the heart of poor CRO experiences.

Overall, managers that were/are able to effectively use internal resources will usually do the same with external ones. Unfortunately, with today's pharma abhorring risk on a regular basis, such managers are becoming rare.

End of novel, thanks for reading.

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10. Nick K on November 10, 2010 10:10 AM writes...

Once senior management starts not to listen to bad news you can be absolutely certain that the company is on the way out. The author of the letter would be well advised to sell any shares he has in his employer if he has any.

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11. Dole on November 10, 2010 10:31 AM writes...

What exactly is the endgame for all of this? These so called masters of the universe need to stop destroying everything they touch. The fact that the west has cut costs and they are still outsourcing to chindia is beyond belief.

If you outsource dont expect to come back and sell your drugs here. (I wish)

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12. pc on November 10, 2010 10:31 AM writes...

It's neither mysterious nor surprising at all. If everybody else outsources to China and/or India then we'll have to. "Herd mentality" that is. Problem is the real truth gets buried in a lot of noises.

#6: quite right about your point 3. We are a western CRO so usually we can't beat the number (price) from oriental shops. We can only win the projects by excelling on the other two. It's just the reality. But sometimes there are exceptions. We lately just finished one project. Our client asked for 3-4 week lead time. We got it done in a week. Even better, we beat the number from China and still make a profit.

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13. Sundowner on November 10, 2010 10:33 AM writes...

Another opinion from the CRO side in West Europe. I suppose it is a biased one, but it is my opinion.

In the last years we have seen an increasing number of outsourcing to Chindia companies, not only by Big Pharmas, but also by Mid size pharmas and biotech companies. The reason is always the same: Price.

Everybody here should take in account that quality is often, if not always, not perceived. It is a subjective experience, which can be supported by a spreadsheet in Excel taking some critical figures to evaluate ROI, but in the end if the figures, and specially price, do not support the perception of the customer, man, you are fired (or another word starting with f).

In my experience, the problem is that everybody wants everything as cheapest as possible. In the XXI century, with the low-cost model around, many clients perceive that quality comes for free. My own company has its own share of mistakes and failures, a success rate that we publish by the beginning of each year. But curiously the clients going to Chindia were not the ones affected by our mistakes, delays or failures. We generated five patents for a biotech company during one year and a half and they decided to move the chemistry to India because it was cheaper (they went to one of the finest CROs in India, however). Another client decided to move it because they perceived the chemistry we were doing was 'low value' and therefore we were too expensive (but we made no mistakes). A third client gave us a difficult problem and once solved they moved the production of the product (in hundreds of gram scale, not tons) to a company in China (it was cheaper). And so on.

And there is an additional perception which is hard to fight among outsourcing managers: 'In a western CRO, with X dollars I have one FTE. In China I have 2 or 3. Hey, I can have an army of chemists working there by the same price it would cost here a team of 5 people, and productivity will boost!'. But nobody has explained to them that management and coordination of bigger teams is more difficult and productivity is not a lineal function. Even the Army knows that an Special Forces team must be small, not division-size, because then effectivenes are lost. During the CPhI an old friend told me that Astra Zeneca had something like 2,000 chemists working in China. Problems were horrible, but it seems nobody cared because it was cheap.

To summarize: quality is usually not discussed by the outsourcing managers unless they have some technical background (biologists, chemists...) and it is hard to perceive and measure. Price is discussed because it is easy to compare and has a direct impact on the revenues/budget/accounting. The dollar commands the science, not the opposite.

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14. Wakjob on November 10, 2010 11:32 AM writes...

Companies ruined or almost ruined by India, Inc:

Adaptec - Indian CEO Subramanian Sundaresh fired.
AIG (signed outsourcing deal in 2007 in Europe with Accenture Indian frauds, collapsed in 2009)
AirBus (Qantas plane plunged 650 feet injuring passengers when its computer system written by India disengaged the auto-pilot).
Apple R&D CLOSED in India in 2006
Bell Labs (Arun Netravalli took over, closed, turned into a shopping mall)
Boeing Dreamliner ES software (written by HCL, banned by FAA)
Bristol-Myers-Squibb (Trade Secrets and documents stolen in U.S. by Indian national guest worker)
Caymas - Startup run by Indian CEO, French director of dev, Chinese tech lead. Closed after 5 years of sucking VC out of America.
ComAir crew system run by 100% Indian IT workers caused the 12/25/05 U.S. airport shutdown when they used a short int instead of a long int
Dell - call center (closed in India because Premji's conmen don't even know how to use telephones, let alone computers)
Delta call centers (closed in India because Premji's conmen don't even know how to use telephones, let alone computers)
Fannie Mae- Hired large numbers of Indians, had to be bailed out. Indian logic bomb creator found guilty.
GM - Was booming in 2006, signed $300 million outsourcing deal with Wipro that same year, went bankrupt 3 years later
HSBC ATMs (software taken over by Indians, failed in 2006)
Intel Whitefield processor project (cancelled, Indian staff canned)
Lehman (Spectramind software bought by Wipro, ruined, trashed by Indian programmers)
Microsoft - Employs over 35,000 H-1Bs. Stock used to be $100. Today it's lucky to be over $25. Not to mention that Vista thing.
MIT Media Lab Asia (canceled)
PeopleSoft (Taken over by Indians in 2000, collapsed).
Qantas - See AirBus above
Quark (Alukah Kamar CEO, fired, lost 60% of its customers to Adobe because Indian-written QuarkExpress 6 was a failure)
Rolls Royce (Sent aircraft engine work to India in 2006, engines delayed for Boeing 787, and failed on at least 2 Quantas planes in 2010).
Skype (Madhu Yarlagadda fired)
State of Indiana $867 billion FAILED IBM project, IBM being sued
State of Texas failed IBM project.
Sun Micro (Taken over by Indian and Chinese workers in 2001, collapsed, has to be sold off to Oracle).
United - call center (closed in India because Premji's conmen don't even know how to use telephones, let alone computers)
Virgin Atlantic (software written in India caused cloud IT failure)
World Bank (Indian fraudsters BANNED for 3 years because they stole data).

I could post the whole list here but I don't want to crash any servers.

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15. canchem on November 10, 2010 11:40 AM writes...

A shop I spent some time in was a North American CRO working primarily with a mid-large pharma. There were very clear rubrics in place to identify quality and productivity, and our company consistently lead all CRO's in the world by a wide margin. We certainly weren't the cheapest option out there, but when our contract came up it got renewed with more FTE's.

There are companies out there who are paying attention, and are still aspiring for quality over cost. Pity the publicly-traded large ones don't have much of this mentality.

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16. Doglotion on November 10, 2010 12:58 PM writes...

Good points. I'd observe there are a couple different issues here - outsourcing to CROs and in-licensing/collaboration between pharma and biotech. The former is a research service arrangement where pharma pays a CRO to carry out specific tasks. The latter is an IP transfer from biotech to pharma, typically involving a research collaboration as part of a license agreement. There are potential problems and benefits associated with each one, but they are different beasts.

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17. alig on November 10, 2010 1:15 PM writes...

I have worked with chemistry CROs in America, Western Europe, India and China. They have different cultures and expertise. A Western FTE is ~3-4 times the cost of a Chindian FTE, so they need to justify their higher cost with better performance. A good outsourcing manager knows how to use each and get the best performance from each. It requires lots of active management. If you are unwilling or unable to devote time to managing your outsourced projects, they will fail. The mistake I have seen in large pharma is that they do not put enough internal staff dedicated to managing their outsourced chemists. The mixed internal/external model can work, but requires people committed to making it work.

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18. anchor on November 10, 2010 1:33 PM writes...

# forgot mention that Haiti earthquake, Indonesian volcanic ash spew and the recent defeat of democrats in the just concluded election among other issues to Indian software industries. What a baloney!.

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19. AlChemist on November 10, 2010 2:01 PM writes...

quality and time were issues, on two occassions in house people completed the project in less time than the outsourced company, and they still wanted the money for no delivery

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20. HelicalZz on November 10, 2010 2:42 PM writes...

I do this sort of outsource management. I have never been smart enough to keep my mouth shut about anything.

Those that matter, tend to appreciate it.


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21. polyene on November 10, 2010 3:10 PM writes...

Use an American CRO that uses a hybrid model mixing Eastern chemists (within the CRO for everyday chemistry) and western chemists (for the more challenging chemistry and project mangement, slave driving techniques)

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22. Anonymous on November 10, 2010 3:21 PM writes...

You neglect to mention the carnage that these CROs are creating with lower environmental and safety standards. We were shocked to find out how many of our CRO scientists had been hospitalised in just one year, but our management weren't interested. As long as we told the CRO that something was potentially dangerous it was OK to give it to them, even if we wouldn't do it ourselves.

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23. Anon anon anon on November 10, 2010 4:29 PM writes...

A repeated statement in the comments above is that, while quality is difficult to measure, price is easy so decisions get made on price.

What kind of quantitative measures of quality have people seen in use? Time might be one but I'm sure there are others out there.

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24. GreedyCynicalSelfInterested on November 10, 2010 4:44 PM writes...

Since I have no job to lose and will never work in chemistry again, I can say what I want. : D

You gloss over some important issues:

1. Companies are run for the benefit of upper management and upper management cares mostly about bonuses and their next promotion or job.

2. The issue of it being cheaper to outsource is just a red herring. Outsourcing blame is the main motivation. If something does not get done properly, the manager can always blame those sleazy foreigners.

3. No. 22 hits on another critical and unspoken reason for outsourcing. You can outsource your accidents. Whether it is Bhopal or CRO scientists in this country getting sick or hospitalized, who in the outsourcing company really cares? They can just find someone else to do it.

4. Another reason is for competition with expensive Western labor with all their health insurance and expensive safety rules. If you can keep people in a constant state of fear, you can make them work harder and longer. Plus, you can fire anyone who is over 40 years old. They can either go on welfare, if European, or they can drive a courtesy bus if American.

5. Upper management gets to take exotic vacations in far away lands.

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25. DrSnowboard on November 10, 2010 5:27 PM writes...

Interesting tales here.
In some respects, outsourced chemistry is the new combichem. A promise of a shortcut to increased 'productivity' ie expressed as numbers , that management and financial providers can 'understand' ie parrot and achieve their objectives/ bonus by.

The question becomes, how do you communicate the impact of 'quality' or experience on a process that has a timescale of 12 years to market and for the most part is a lottery? An explanation that will work with VC funds, pharma execs, shareholders would be a bonus...

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26. k on November 10, 2010 6:09 PM writes...

Often, outsourcing in Asia (Chindia, Philippines, etc.) means people in Western countries get to clean up the messes, increasing costs by duplication of effort at minimum. Manglement at our place is finally beginning to see what we peons experience on a daily basis. Whether or not anything will be done to improve the situation remains to be seen.

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27. Jose on November 10, 2010 6:52 PM writes...

I find it ironic that so many pharma sites who hired hotshot architects to design labspaces that foster as much personal interaction as possible, are now pumping the virtues of collaborations across 10 time zones.

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28. jackass on November 10, 2010 7:04 PM writes...

"Obama is in India today.........visiting our jobs." -David Letterman (11-8-10).

On a serious note, globalization is killing the middle class, and killing the science in this country. Check out the book "Race to the bottom". Tonelson makes a forceful and engaging argument that globalization, with its attendant rush by multinational corporations to cheaper sources of labor, has been partially responsible for what he sees as a shift from high-wage to low-wage industries in the U.S. Our corporations are dumping our highest paying jobs overseas and/or importing Third World workers to do them (like Indian programmers). The result is a slowly sinking standard of living.

If a large corporation moves jobs overseas, then we should make them pay higher taxes to help pay for the unemployment for the people that lost their jobs. If they move their headquarters overseas, then a tariff should be placed on the items or services they sell.

The last company I worked for laid off all of there internal chemists and outsourced to Chindia. While I was there, we were still getting compounds in an unactive scaffold months later. With the mass layoffs of good scientists and the gloomy outlook for chemists in the US, we are killing the science in this country. I see gloom and doom.

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29. inthethick on November 10, 2010 7:13 PM writes...

A big CRO that I know just announced world-wide layoffs and cut backs.

A few days later, top management held a special meeting in China to assure staff that not only would China be spared any pain, but they had massive expansion plans, and that creative ways would be found to get around any announced salary/bonus freezes.

However, the main (stated) reason for all this was due to perceived growth potential in China. Not necessarily the cost advantage.

And there could be some truth to that. China has about 4x the population of the USA. That's a big potential customer base, and the growth potential appears to greatly exceed the West.

Like it or not, drug companies whose discovery and production is local will have an advantage competing for those future customers. Drug companies and the supporting industry knows this very well, and they are realigning themselves accordingly.

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30. Whackedjob on November 10, 2010 8:00 PM writes...

Outsourcing is a great tool, but it is being applied incorrectly by US manufacturing. Outsourcing was originally conceived to be a method to provide temporary, specialize, or contractual labor source for a fixed period of time, to prevent the hiring of labor (and addition of fixed cost facilities) which would likely be let go when the project was complete (the Y2K bug comes to mind). Any business major should be able to surmise that this "convenience" of outsourcing comes at an elevated cost (or decreased profit margin). The outsou