Description
Strategic planning is an organization's process of defining its strategy, or direction, and making decisions on allocating its resources to pursue this strategy.
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Leadership and Strategic Change in Outsourcing Core Competencies
Lessons from the pharmaceutical industry
A Trestle Group Research Publication
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TABLE OF CONTENTS
Executive Summary About the Author About Trestle Group Research Outsourcing Paradigms A Business Case for Strategic Sourcing Executing the Strategic Sourcing Decision Outsourcing the Clinical Trials – the experience of APCo Learning from APCo Leading Strategic Outsourcing Conclusions References
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Executive Summary
Every week, it seems, the popular business press showcases organizations across industries and geographies outsourcing yet another part of their operations. In a recent special report on outsourcing in Business Week[1], Engardio and Enhorn ask, “First came manufacturing. Now companies are farming out R&D to cut costs and get new products to market faster: Are they going too far?” According to the authors, Motorola, Royal Philips Electronics, Palm One, and Samsung are some of the companies that outsource core parts of their operations. Although these companies are well-known household brands, the firms that actually do the outsourcing are virtually unknown. Several large pharmaceutical companies (Big Pharmas) outsource not just routine commodity-like operations but parts of their internal value chain, which are considered core competence to the organization. According to the Business Week article, “CEOs are rethinking their R&D operations, wondering where mission critical research ends and commodity work begins[1]” . According to senior managers within the pharmaceutical industry however, these instances are not seen as outsourcing of commodities but instead viewed as strategic partnering with third party providers who can complete these tasks faster, cheaper, and at a higher quality than internally.
About the Author
Stephen John has focused his work on designing and deploying high performance organization and human capital development initiatives across a number of industries and geographies. Steve has worked with senior leadership at Andersen, Aventis, Brown Brothers Harriman, UBS Warburg, Marsh & McLennan and Coopers & Lybrand. Strategies designed and deployed include: Global Talent Management including Leadership Development, creating change leaders through Global Employee Surveys, Balanced Scorecard Performance Management and Reward systems, Business Process Re-engineering, Communities of Practice for knowledge creation/sharing, Diversity through Mentoring and Recruiting for Values. He has started up several HR Planning and Strategy functions to deploy these initiatives. Steve has a doctorate in Organizational Leadership and Learning from Columbia University. He has an MBA/CPA specializing in Tax M&A. He has a BS in Physics with a speciality in using Cyclotrons in Nuclear Pharmaceutical production. Steve is based in Bridgewater, New Jersey.
About Trestle Group Research
Trestle Group Research is committed to providing thought-provoking research and practical insights into such topics as corporate strategies, regulatory issues and global trends in sourcing. Their research enables organizations to maximize benefits from sourcing initiatives. Trestle Group Research is part of Trestle Group, an international management consultancy firm specialized in sourcing. Trestle Group works with companies to help develop sourcing strategies, locate the right location/service provider and support the implementation of the appropriate sourcing model.
Reprinted from Human Systems Management, 25, Stephen John, “Leadership and Strategic Change in Outsourcing Core Competencies: Lessons from the pharmaceutical industry” , Pages No. 135-143, 2006, with permission from IOS Press.
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Outsourcing Paradigms
Across industries, there are some common business drivers that justify outsourcing: (a) cost-saving, (b) free time to focus on core activities, and (c) lack of in-house resources needed to perform the operation according to time, quality and cost criteria. Firms engage in two major types of outsourcing: 1. “Commodity-like” activities are outsourced where the primary motivation is cost-savings. Little innovation is expected or required. The goal is for the company to obtain the best price, retain control, and sign detailed service level agreements to monitor compliance (e.g., payroll processing). 2. “Customized activities” are outsourced where company specific characteristics are incorporated. This requires the outsource provider to get to know the company’s internal processes in some detail in order to provide the customization in a high quality fashion (e.g., administering a flexible benefit program). In both cases, the organization must seek an outsourcing provider that can deliver quality service on time and at a savings. Although selecting an appropriate provider is critical there are usually a number of options. Networking with other companies who have already outsourced in that area or contracting with one of the consulting firms that offer advice in that area is helpful. The industry dynamics and competitive landscape of Big Pharma is now undergoing a massive change due to a number of economic, social, and political forces. In the new competitive scenario early entry advantages have increased, and reducing time to market of a blockbuster drug can generate large profits. This requires performance improvements throughout the drug discovery and commercialization value chain. Outsourcing parts of this value chain can facilitate an early entry strategy. The industry dynamics and competitive landscape of Big Pharma is now undergoing a massive change due to a number of economic, social, and political forces. In the new competitive scenario early entry advantages have increased, and reducing time to market of a blockbuster drug can generate large profits. This requires performance improvements throughout the drug discovery and commercialization value chain. Outsourcing parts of this value chain can facilitate an early entry strategy. Companies are now looking to outsource internal processes or services that may be core competencies of the organization. There appears to be two additional types of outsourcing:
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3. “Business Process Outsourcing” has significant customization and flexibility in designing and delivering the outsourced services. This kind of outsourcing requires close collaboration for both parties; the provider has a high degree of knowledge about the buyer’s business strategy and operations in order to provide the proper fit of their services to the buying organization (e.g., IT processes and services, HR). 4. “Strategic outsourcing” goes beyond 3 above to include full or near full integration of the process or services provided with appropriate level of shared responsibility for success or failure. Innovation is often an expected outcome of the arrangement with shared risk and rewards based upon performance. Processes or services outsourced in this category are often core competencies already existing within the organization. For the pharmaceutical industry, the outsourcing of clinical trials falls under this category.
A Business Case for Strategic Sourcing
This paper focuses on the last type of outsourcing and describes the situation in the pharmaceutical industry. Large pharmaceutical companies (Big Pharma) are feeling the need to significantly improve performance across the entire value-chain: from early molecule identification to commercializing the drug. The cost of bringing a drug from discovery to market can take 12 plus years and approximately 1 billion dollars in investment. Pricing pressures are now being felt in an industry where price was never an issue and where profit margins were the envy of many CEO’s in other industries. Governmental organizations, hospital chains, pharmacy benefit managers, among others, are all asking for reduced pricing due to their volume purchasing capability. Big Pharma is also being asked to look beyond blockbuster drugs to serving smaller patient populations that have unmet medical needs. Developing countries are asking for assistance in meeting drug needs at substantially reduced prices. These issues, along with globalization, are pressuring the pharmaceutical industry to be both a product innovator as well as a low cost producer. Having people who can adjust to a culture of “innovator” and “low cost producer” at the same time is key to the success of such a strategy. This is a challenge in the best of times. In an environment where the industry dynamics and career opportunities are in constant flux, recruiting, acculturating, developing, rewarding, and retaining highly educated talent require a high degree of sensitivity and skill. These human resource practices can also provide the needed competitive advantage. This is particularly true of knowledge intensive industries. Strategic outsourcing of core competency can provide significant business advantage to such an organization, but it can also cause massive disruption to strategy execution. Making a business case for strategic outsourcing, and communicating and implementing this strategy needs to be done with much care. Typically, in a pharmaceutical company, building a business case for strategic outsourcing requires measuring the value of the outsourcing arrangement. A cross-functional team is assembled and
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charged with coming up with a comprehensive business case to present to senior management. This team may involve finance, legal, human resources, marketing and research to determine key criteria for the case. Certain financial (such as cost savings, return on assets, or return on capital employed) and non-financial measures (such as deliverables on time, at quality and on cost, innovation and intellectual property, and opportunities created) are standard in the industry. However, managers with experience in strategic outsourcing are aware of a number of pitfalls in this process and include other criteria such as monitoring the quality of the working relationship between the two teams and the investment in time and energy needed to have two teams from different organizational cultures, performance management/rewards systems, and leadership. The business case must include ways of anticipating problems such as mistrust in relationships, handling of persistent problems, level and satisfaction of communication between the teams from the company and the outsourcing firm, and clarity in identifying responsibility centers. The business case must also include organizational issues. Successful cases have the following characteristics: highly collaborative working relationship where mutual trust is evident, with minimal need for enforcement through the legal contract. Collaboration is defined in terms of the teams’ ability to adhere to specific, mutually agreed to ground rules regarding keys issues such as communication, control of team meetings and project assets, data collection and analysis, and decision making. The business case must include how and when unanticipated situations are to be handled. Guidelines should be provided for teams to “escalate” an issue to the next level in their respective organizations. Legal issues, including potential for conflicts of interest, are clearly laid out in the business case. Several potential outsourcing providers are identified and a comparative analysis is done. This phase is often very long, protracted, and frustrating. Internal project champions to this outsourcing decision are a critical factor in its success. At this stage, discussions and negotiations with the outsourcing firm moves into the actual contracting stage. There are usually numerous discussions and rewriting of the contracts before both parties begin discussing the substantive goals of the outsourcing project. Then begins a “project management” phase, which details the expected deliverables, roles/accountabilities, timelines and budget responsibilities. Both parties often appoint specific personnel to handle the project. In building a business case, there are a number of typical risks and benefits to be evaluated. For example in clinical trials, recruiting patients is the most expensive part of drug development – up to 40% of the budget. In its August 8, 2005 issue, Fortune Magazine[2] reported that Big Pharma had rapidly moved this part of their value chain into strategic outsourcing arrangements. In 1999, 10% percent of clinical trials were outsourced; but by 2005, the number had risen to 40%, with an increase expected over the
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next few years. The cost savings can be enormous. For example, the cost per patient in the US is $30 000.00, while in Romania it is only $3000. In addition, patients can be recruited up to ten times faster than in the US, because certain Eastern European countries, such as Romania, have a centralized healthcare system, which provides an efficient, single point of entry to identify suitable patients. Such acceleration of the speed from development to market is a major cost benefit as well. On the other hand, placing clinical trials in an emerging country or in countries with high levels of corruption, poses significant risks. Questions concerning such potential risks include: (1) Will USFDA standard of policy and procedures be properly established and enforced in the local clinical setting? (2)Will ethical standards regarding issues such as human subject protection and informed consent be adequately met? (3) Do data management and analysis conform to the review standards and protocols of international regulatory bodies? Finally, there is ultimate risk of major financial loss should a strategic outsource vendor default or subcontract the work to another organization with lower standards.
Executing the Strategic Sourcing Decision
The Executive Committee of the firm may evaluate the business case and recommend proceeding after all stakeholders have been briefed and their questions and concerns answered. In this phase questions around inancial, legal, quality, security, timeliness, and impact on the overall strategy execution and competitive positioning of the organization are addressed. In large complex organizations, this phase can take up to a year or longer to wind through all the pathways and to satisfy internal and external stakeholders. Vendor selection is often done in parallel to this phase if the executives leading the outsourcing initiative are confident that internal and external stakeholders will bless the project. Vendors that most closely follow the existing internal processes to minimize the internal team’s learning curve are sought. The reputation of the vendor for building strong relationships with internal team personnel is also a crucial element in the selection. Relationship problems are expensive and highly time-consuming to resolve. Poor or adversarial relationships impact quality, speed, and drain the benefits that the outsourcing organization is trying to achieve. Collaboration, joint problem solving and decision-making are critical elements of an effective outsourcing arrangement. These are hard to achieve across different organizations whose own employees share an internal culture, values, performance/rewards, and development processes unique to their respective organization. As a result, companies considering outsourcing may develop vendor company profiles that specify the level of product and technology capability as well as the vendor’s track record of performing across the entire outsourcing value chain. There are consulting organizations that provide this service. They conduct contract negotiations as well, and build the internal team and infrastructure – including IT support – needed to make the outsourcing arrangement operational.
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An internal Negotiating Vendor Team comprised of representatives from legal, finance, and technical may be formed for the vendor selection decision. There may be several layers of review for this team’s recommendations depending on the complexity of the deal and the amount of capital required to fund it, along with the “risk of loss” analysis. Once the arrangement has been approved, the outsourcing process is taken over by the outsourcing operations team. The outsourcing team manager and members are appointed. The negotiating team works with the outsource team to ensure a smooth transfer from negotiation to implementation. The roles and expectations of the outsourcing team members are set using the existing performance management process and system. Some organizations have knowledge management databases and tools that the outsourcing teams can tap into. In addition to setting specific project management goals and metrics with the outsourcing provider, the internal team will research and understand their partner’s culture – i.e., what drives, incentivizes, and motivates the outsource company’s behaviors. Further the team may discuss and draft a plan that will foster a collaborative work environment between the two companies. Checkpoints are scheduled into the project plan that focuses not only on compliance to the legal agreement but also on the effectiveness of the relationship between the parties. Some organizations foster strong team bonds between the two companies by having a formal 1 or 2 day “Kick Off “ meeting that launches the outsourcing. Critical to the success of the project is a clearly defined problem solving and decision-making process in place before the outsourcing arrangement starts. For complex arrangements, a special governance committee may be established upfront by the negotiation team to ensure speedy resolution of disputes between the outsourcing operations team and the vendor’s team.
Outsourcing the Clinical Trials – the experience of APCo
APCo (A Pharma Company) is a large European pharmaceutical company, which decided to outsource some of its core (R&D) operations across some therapeutic areas. They went through a number of issues and processes discussed above. In what follows, a brief description of their outsourcing experience in the clinical trials area is provided. APCo was formed through a merger of two large pharmaceutical companies A and P. During the postmerger integration phase, the senior team was careful to involve both internal and external stakeholders in formulating and implementing strategy. This included their decision to scale up their involvement in strategic outsourcing. Significant differences of opinion surfaced. Champions of outsourcing discovered that they had to play the roles of diplomats as well as technical gurus. The most compelling part of the business case focused on freeing up the brainpower and on the ability to drive innovation across the research and development value chain, as opposed to managing clinical trials. The business case is bolstered by showing an increase in the speed of completing the trials at quality, reliability, ethical standards, and at low cost. As background, “A” had already been involved in outsourcing clinical trials. Each therapeutic area handled its own outsourcing. “A” had outsourced approximately 40% of their clinical trials prior to
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merger. “P” had never engaged in outsourcing anything in the R&D area. “P” had outsourced some of its sales activities. APCo was facing a very enviable situation. A rich pipeline across all the phases of research and development was pressuring the organization to speed up its commercialization cycle. Both internal and external stakeholders were confident in their proposed change in strategic direction because of “A’s” expertise in the area. More innovative products delivered to patients in a shorter time period would put APCo ahead of its competition economically. Each therapeutic area designed the outsourcing specifications and sought vendor proposals. “A” had some experience in this area and took the lead. The vendor list was expanded through contacts at association meetings, with business development professionals and with the purchasing function. The primary criteria for all vendors were: experience in the clinical area being outsourced, quality of trial operations, and experience in data collection and entry. Pricing was not considered to be the primary criteria for selection. A vendor selection committee was formed for each clinical trial being outsourced. Vendor selection became more complex than anticipated. Each trial area had a number of very highly qualified vendors to choose from. They were almost indistinguishable from each other in terms of the criteria discussed above. The post-merger integration issues of teams working together from two different organizations added to the frustration of coming to a decision. The internal team would do a rigorous post mortem discussion with vendors that did not get the contract. This, in turn, added significantly more data to be discussed internally for the next vendor proposal. Final decisions were often left to the internal team leader of the clinical trial being considered for outsourcing. APCo decided on a three-function internal structure housed at the country level. “Clinical trial design” was a function responsible for hypothesis and primary trial protocol design. A “strategic outsourcing management” function was charged with operationalizing the clinical trial outsourcing contract and managing the relationship with the vendor. Finally a “post-trial function” was made responsible to integrate the outsource vendor’s work into the pre-launch development phase. APCo believed that this three-function approach would be the most effective way to introduce outsourcing of clinical trials into the newly merged company. Although in some ways these functions are sequential and independent, there is considerable need to share information at different points of time. The “strategic outsourcing management” function could, over the long term, become a “center of excellence” that would support other functions where outsourcing core competence seemed appropriate. Strategic outsourcing management would act as a “governance-like” function since they were not designing the protocol but ensurensuring that the vendor delivered on the contract against the protocol specifications. This would free up the design function to focus on the important area of clinical trial design and not have to handle the day-to-day project management functions. A leader of the entire clinical trial function was appointed to supervise each separate therapeutic area and to overlook the implementation of the entire clinical trial outsourcing. This would enable sharing of the lessons learned, and maximize the benefits. As APCo gained more and more experience in strategic outsourcing, it also recognized the need to invest in more internal resources dedicated to outsourcing. As a result, APCo ran the following
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advertisement for a manager: Manager, Strategic Outsourcing Management APCo, a world leader in developing Pharmaceuticals in a number of therapeutic areas, is committed to expanding its leadership position. Embrace this opportunity to join a group of diverse and talented individuals championed to take on innovation and change in our rapidly expanding organization. Manage all aspects of strategic outsourcing including vendor management, financial management, and contract development/negotiation for clinical trials . . . role requires the ability and foresight to proactively identify operational and/or relationship issues and to resolve issues in a timely manner so that time, cost, and/or quality targets are achieved . . . No direct oversight of other employees. Indirectly the role is responsible for other employees in various capacities . . . [on] crossfunctional team members. No one involved in strategic outsourcing would deny the need for such a manager. However, was this enough? APCo’s experience in outsourcing clinical trials has been mixed. There have been some resounding success and some very visible failures. The salient issues have been problems in leadership, not in structuring or design. It appears as though a different kind of managerial leadership is needed to implement strategic outsourcing decisions. One senior business leader of APCo said: It’s not about project management – it’s about leadership, team leadership; global teams across at least two different organizations and god knows how many cultures and time zones. You can’t bet the farm [core competence] and have anything less than your best leaders stepping up and delivering on the promise. That’s the organizational challenge we have ahead. At APCo no one interviewed could explain the “strategic outsourcing manager” position advertised and how it fit into the organization’s overarching strategy. The position description just appeared one day without context or explanation. A number of questions came to mind regarding APCo’s strategic intent around this outsourcing position. There were serious questions concerning the impact of this job specification on the very culture and values of the organization. Was this a pilot to gain experience in the area or a commitment to strategic outsourcing as part of its core strategy to gain an innovation edge on its competition? In either scenario, APCo could have followed some very basic principles in working with their employees to understand the senior leadership’s thinking about and level of commitment to strategic outsourcing. Outsourcing of any type has a profound impact on an organization’s culture and, so it did with APCo. At APCo, the job posting for the strategic outsourcing position caused a wave of curiosity followed by a wave of uncertainty and fear. There had been no communication from senior management about their intent concerning strategic outsourcing. It seemed clear that an external candidate would fill the position. There was uncertainty about its impact on the performance management, talent management, and leadership development processes.
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The rumor mill went immediately to work in the worst possible way. In the absence of facts, rumor had it that major portions of the internal value chain, as well as existing jobs and future jobs were being outsourced. People indicated unease about their ability to deliver on their current goals – especially those at the interfaces of the areas mentioned in the job announcement. Failure to deliver at high performance levels would preclude consideration in talent management for leadership development reserved for high potential individuals. Employees understood the systemic connection among performance management, talent management, and leadership development and the impact of this on their careers. They expressed concern that senior leadership did not seem to understand these connections.
Learning from APCo
Announcement of strategic outsourcing can create fear in an organization. This fear is palpable in the employee ranks since no one feels safe in their jobs. Service levels are often improved by outside vendors, and management can reduce overhead processing costs in the short term. Outsourcing can negate years of effort that an organization spends in building a strong sense of community among its employees. This, in turn, can make retention difficult. Companies where senior leadership can create and sustain a feeling of community are highly admired. Strategic outsourcing tests the leadership of even such companies. The deeper a leader understands the connections between culture and the organization’s strategy and their people, the more effectively they can compete in today’s competitive marketplace. Preserving a sense of community is critical to mitigating the adverse effects of strategic outsourcing. It is widely acknowledged that culture, while easy to discuss, is very difficult to change in any meaningful way. Outsourcing done poorly can trigger very serious problems in an organization’s culture. The feeling of connectedness and belonging, so important to community and high performance, can very rapidly disappear if employees sense that their area of core competence is to be outsourced. outsourcing can seriously destabilize an organization; a challenge, that most leadership teams are ill equipped to handle. Strategic outsourcing offers the leadership teams the opportunity of strengthening employee commitment at the individual, team and organizational level. Employees will look for strong and clear signs from senior leadership. Is the proposed strategic outsourcing a pilot or a major shift in strategy for the organization? Senior management can use a number of different media to communicate its intentions in this area. A President’s page on the company intranet, town hall meetings with all employees, briefings for managers to communicate key strategic outsourcing messages to their people are different ways in which this can be achieved. Sufficient detail should be provided for employees to understand how strategic outsourcing fits into the strategy, mission, vision and values of the organization. Communication, while critical, is not sufficient to maintain employees’ trust in the culture and leadership
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of the organization. Employees must also be able to see how the proposed strategic outsourcing will impact their current and future positions. Senior leadership should be able to explain in some detail, anticipated changes to the organization’s structure, performance management, rewards, talent management, and leadership development philosophies and processes. These changes need to be thought out by senior management before announcing a strategic outsourcing initiative in the organization. All of the above areas must be well defined and openly communicated to secure employee support. This requires trust in senior management, which is a leadership quality that needs to be developed. Similar to alliances or joint ventures, problematic issues surfaced very quickly after the contract for outsourcing was signed by APCo. The taking of swift and direct action by both teams was critical to fixing the project and getting it back on track. Projects that proceeded smoothly were most often attributed to interpersonal chemistry and not to the skill of the team leaders. Projects were frequently terminated if relationship issues could not be quickly resolved. It was crucial that both teams assumed the responsibility to ensure open communication and to preserve management processes, such as the monitoring of team progress that would propel the project forward. A subtler trend emerged concerning the skills of project leaders: few had been trained to lead or to participate in a strategic outsourcing project. As a rule, they were very experienced project managers but they lacked the confidence to successfully lead a strategic outsourcing team. They expressed the necessity for a skill set was most likely different from the ones they possessed but couldn’t articulate what that skill set might look like. Most indicated that they did strategic outsourcing as part time in addition to their “real job” .
Leading Strategic Outsourcing
What, when and how to communicate are age-old questions with no easy answers. It gets much easier if the senior team has decided where and how strategic outsourcing fits into the company’s strategic plan. This is particularly important since it is clear that strategic outsourcing will require substantial change to the organization’s reporting structure. Strategic outsourcing should be positioned in the organization to attract the best and brightest an organization has to offer. When a strategic outsourcing manager reports to the CEO, it is sure to attract the best candidates internally as well as externally. Word goes out quickly into the industry environment how much an organization values the function’s contribution to its strategy execution efforts. A direct report to the CEO conveys the importance to the organization and is best equipped to deal with the strategic implementation necessary. The strategic outsourcing manager position can also be placed within support functions. Senior management must always remember that they are outsourcing parts of their core competence, not a commodity service or process. A very different perception about the significance of strategic outsourcing is evident if the reporting relationship is not at the CEO level but within each specific functional area. There is much less scope and potential impact on the strategy and its execution.
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A well-designed and implemented performance management process is also needed to ensure that strategic outsourcing will be understood by employees and implemented as effectively as possible. Six performance differentiators may be identified: – Clarity of executives about their role in strategic outsourcing implementation. – Clarity of managers about their roles and responsibilities. – Clarity of purpose and goals of strategic outsourcing in terms of the overall business strategy. – Performance measurement aligned to strategy. – Accountability of executives individually and as a team for outsourcing decisions. – Ability of senior leadership to improve teamwork, collaboration and culture and making this their top priority. All of the above differentiators need to be embedded in a well-designed and implemented performance management process. It was clear from APCo’s job description of their strategic outsourcing manager that the firm was unclear as to how the position fit into the overall strategy of a firm. And yet, it expected the manager to set goals around quality, time and costs of the outsourced part of the internal value chain without much effort. However, the strategic outsourcing process is much more complex. There are interfaces, such as trial design and post-trial regulatory approval, that need to be addressed. The strategic outsourcing process is not linear. There need to be discussions and modifications along the way. It is difficult to write specific service level agreements with quantifiable outcome measures. In strategic outsourcing it may even be difficult to identify all the players. It would seem nearly impossible for APCo’s manager of strategic outsourcing to orchestrate this without face-to-face meetings with all of the work groups as well as with the provider’s work team. APCo had a well-designed and developed strategic alliance/joint venture framework that could assist the organization in successfully implementing strategic outsourcing. The work groups from both companies in the alliance met frequently to discuss strategy, goals, measures, roles, etc. before the alliance was activated. Both sides had to feel equally prepared to execute the strategy to which they agreed. Team meetings took place virtually with occasionally face-to-face meeting needed to resolve issues. A person from each team involved in the goal and deliverable was designated to be the problem-solving liaison to the alliance and could initiate discussion around changes in strategy, goals, measures, roles, and deliverables. Scheduled into the alliance were face-to-face debriefing sessions where the teams involved were encouraged to present their experience of the alliance to date in the form of a story. A facilitator and a graphic artist who rendered the stories in pictures as they were being told categorized the stories. Team participants allowed no formal presentations. The story’s lessons learned were captured, and changes to the alliance strategy and processes were formalized in a report and sent to the senior executives for approval. Senior executives were encouraged to attend the story telling debriefings rather than reading about it a standard power point presentation. Strategic
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outsourcing is a form of strategic change. It needs to be implemented in the same manner. The organization’s policies and systems of strategy implementation should be applied to the implementation of strategic outsourcing. Implementing such outsourcing as just an operational decision can be fraught with risks. Strategic outsourcing needs to be incorporated into an organization’s talent management and leadership development.
Conclusions
Outsourcing is stressful for employees. Strategic outsourcing is even more stressful. Organizational cultures are fragile ecosystems that are easily damaged and difficult to repair. Trust and sense of community, when shattered, can have significant impact on an organization’s ability to execute its strategy and to attract and retain the best talent. C.K. Prahalad in a recent Wall Street Journal[3] article stated: The current outsourcing phenomenon is the start of a new pattern of innovation in the way we manage. The ability to fragment complex management processes and reintegrate them into the whole is a new capability . . . the time to learn to manage with a global system of knowledge, products, services, and component vendors is now. Employees at APCo expected their senior leaders to lead the way in the strategic outsourcing area. APCo had invested heavily in developing their business leaders through formal executive educational experiences and challenging job assignments. Yet, most business leaders felt they were forced to take a reactive approach instead of a more productively proactive one. The convergence of various factors in APCo’s outsourcing process – APCo’s uneven communication of the leadership’s intent behind strategic outsourcing, the organizational structure used to support strategic outsourcing, the search for external candidates to fill the new strategic outsourcing manager’s role – created an environment of uncertainty for the employees regarding the current and potential status of their career at APC. Fortunately, the investment APC had made in developing their business leaders allowed these leaders to quickly identify and address the concerns of their employees. Summarizing some of the lessons from APCo’s implementation of its outsourcing strategy, we see: • It is critical for senior leaders to articulate strategic direction before the outsourcing strategy is implemented. Where the strategic outsourcing function reports into and how it will be staffed are critical bits of information.
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• Leadership must be capable of working with employees in the performance management arena, including interdependent goal setting between employee and vendor, as well as creating rewards for successfully delivering the outsourcing project’s goals. Coaching employees in conflict resolution as well as in leading a team where direct reporting relationships are non-existent must be part of every senior leader’s toolkit. • HR must take a leadership role in the talent management area by coaching line leaders who are responsible for strategic outsourcing implementation, by modifying talent management definitions, process, and communications. In addition, HR can play a major role in redefining the philosophy and guidelines found in the talent management materials that are available to employees. • Leadership development must be redesigned to reflect the strategic outsourcing reality. Case studies, simulations, scenarios, etc. should be part of the supervisory, management and leadership curriculums. Preparing line leaders to manage complex and ambiguous situations that arise from strategic outsourcing implementations, as well as to lead teams composed of people from two different organizations. • A culture must be created that supports people, as strategic outsourcing becomes more and more prevalent in the strategic plan. The extent to which employees feel part of a community and that the community will openly communicate with them about the strategy and its impact on their current positions and rewards and on their continuing development and career growth in the organization defines the depth of community feeling. • Globalizing the strategic outsourcing function as well as the HR function provides the platform for articulating a coherent people strategy that fully supports the business strategy. A global head of strategic outsourcing would most likely report to the CEO. This sets the stage for properly resourcing the strategic outsourcing strategy from a business perspective. Strategic outsourcing is complex as well as risky from a business intelligence perspective. It needs careful thought and visible leadership that is not seen in many organizations.
References
[1] P. Engardio and B. Einhorn, Outsourcing innovation, Business Week (March 21) (2005). [2] A. Lustgarten, Developing countries, LDCs, Clinical trials,Fortune Magazine 152(3) (2005). [3] C.K. Prahalad, The art of outsourcing, The Wall Street Journal (June 8) (2005).
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doc_161117234.pdf
Strategic planning is an organization's process of defining its strategy, or direction, and making decisions on allocating its resources to pursue this strategy.
EXECUTIVE BRIEFING
Leadership and Strategic Change in Outsourcing Core Competencies
Lessons from the pharmaceutical industry
A Trestle Group Research Publication
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TABLE OF CONTENTS
Executive Summary About the Author About Trestle Group Research Outsourcing Paradigms A Business Case for Strategic Sourcing Executing the Strategic Sourcing Decision Outsourcing the Clinical Trials – the experience of APCo Learning from APCo Leading Strategic Outsourcing Conclusions References
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Executive Summary
Every week, it seems, the popular business press showcases organizations across industries and geographies outsourcing yet another part of their operations. In a recent special report on outsourcing in Business Week[1], Engardio and Enhorn ask, “First came manufacturing. Now companies are farming out R&D to cut costs and get new products to market faster: Are they going too far?” According to the authors, Motorola, Royal Philips Electronics, Palm One, and Samsung are some of the companies that outsource core parts of their operations. Although these companies are well-known household brands, the firms that actually do the outsourcing are virtually unknown. Several large pharmaceutical companies (Big Pharmas) outsource not just routine commodity-like operations but parts of their internal value chain, which are considered core competence to the organization. According to the Business Week article, “CEOs are rethinking their R&D operations, wondering where mission critical research ends and commodity work begins[1]” . According to senior managers within the pharmaceutical industry however, these instances are not seen as outsourcing of commodities but instead viewed as strategic partnering with third party providers who can complete these tasks faster, cheaper, and at a higher quality than internally.
About the Author
Stephen John has focused his work on designing and deploying high performance organization and human capital development initiatives across a number of industries and geographies. Steve has worked with senior leadership at Andersen, Aventis, Brown Brothers Harriman, UBS Warburg, Marsh & McLennan and Coopers & Lybrand. Strategies designed and deployed include: Global Talent Management including Leadership Development, creating change leaders through Global Employee Surveys, Balanced Scorecard Performance Management and Reward systems, Business Process Re-engineering, Communities of Practice for knowledge creation/sharing, Diversity through Mentoring and Recruiting for Values. He has started up several HR Planning and Strategy functions to deploy these initiatives. Steve has a doctorate in Organizational Leadership and Learning from Columbia University. He has an MBA/CPA specializing in Tax M&A. He has a BS in Physics with a speciality in using Cyclotrons in Nuclear Pharmaceutical production. Steve is based in Bridgewater, New Jersey.
About Trestle Group Research
Trestle Group Research is committed to providing thought-provoking research and practical insights into such topics as corporate strategies, regulatory issues and global trends in sourcing. Their research enables organizations to maximize benefits from sourcing initiatives. Trestle Group Research is part of Trestle Group, an international management consultancy firm specialized in sourcing. Trestle Group works with companies to help develop sourcing strategies, locate the right location/service provider and support the implementation of the appropriate sourcing model.
Reprinted from Human Systems Management, 25, Stephen John, “Leadership and Strategic Change in Outsourcing Core Competencies: Lessons from the pharmaceutical industry” , Pages No. 135-143, 2006, with permission from IOS Press.
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Outsourcing Paradigms
Across industries, there are some common business drivers that justify outsourcing: (a) cost-saving, (b) free time to focus on core activities, and (c) lack of in-house resources needed to perform the operation according to time, quality and cost criteria. Firms engage in two major types of outsourcing: 1. “Commodity-like” activities are outsourced where the primary motivation is cost-savings. Little innovation is expected or required. The goal is for the company to obtain the best price, retain control, and sign detailed service level agreements to monitor compliance (e.g., payroll processing). 2. “Customized activities” are outsourced where company specific characteristics are incorporated. This requires the outsource provider to get to know the company’s internal processes in some detail in order to provide the customization in a high quality fashion (e.g., administering a flexible benefit program). In both cases, the organization must seek an outsourcing provider that can deliver quality service on time and at a savings. Although selecting an appropriate provider is critical there are usually a number of options. Networking with other companies who have already outsourced in that area or contracting with one of the consulting firms that offer advice in that area is helpful. The industry dynamics and competitive landscape of Big Pharma is now undergoing a massive change due to a number of economic, social, and political forces. In the new competitive scenario early entry advantages have increased, and reducing time to market of a blockbuster drug can generate large profits. This requires performance improvements throughout the drug discovery and commercialization value chain. Outsourcing parts of this value chain can facilitate an early entry strategy. The industry dynamics and competitive landscape of Big Pharma is now undergoing a massive change due to a number of economic, social, and political forces. In the new competitive scenario early entry advantages have increased, and reducing time to market of a blockbuster drug can generate large profits. This requires performance improvements throughout the drug discovery and commercialization value chain. Outsourcing parts of this value chain can facilitate an early entry strategy. Companies are now looking to outsource internal processes or services that may be core competencies of the organization. There appears to be two additional types of outsourcing:
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3. “Business Process Outsourcing” has significant customization and flexibility in designing and delivering the outsourced services. This kind of outsourcing requires close collaboration for both parties; the provider has a high degree of knowledge about the buyer’s business strategy and operations in order to provide the proper fit of their services to the buying organization (e.g., IT processes and services, HR). 4. “Strategic outsourcing” goes beyond 3 above to include full or near full integration of the process or services provided with appropriate level of shared responsibility for success or failure. Innovation is often an expected outcome of the arrangement with shared risk and rewards based upon performance. Processes or services outsourced in this category are often core competencies already existing within the organization. For the pharmaceutical industry, the outsourcing of clinical trials falls under this category.
A Business Case for Strategic Sourcing
This paper focuses on the last type of outsourcing and describes the situation in the pharmaceutical industry. Large pharmaceutical companies (Big Pharma) are feeling the need to significantly improve performance across the entire value-chain: from early molecule identification to commercializing the drug. The cost of bringing a drug from discovery to market can take 12 plus years and approximately 1 billion dollars in investment. Pricing pressures are now being felt in an industry where price was never an issue and where profit margins were the envy of many CEO’s in other industries. Governmental organizations, hospital chains, pharmacy benefit managers, among others, are all asking for reduced pricing due to their volume purchasing capability. Big Pharma is also being asked to look beyond blockbuster drugs to serving smaller patient populations that have unmet medical needs. Developing countries are asking for assistance in meeting drug needs at substantially reduced prices. These issues, along with globalization, are pressuring the pharmaceutical industry to be both a product innovator as well as a low cost producer. Having people who can adjust to a culture of “innovator” and “low cost producer” at the same time is key to the success of such a strategy. This is a challenge in the best of times. In an environment where the industry dynamics and career opportunities are in constant flux, recruiting, acculturating, developing, rewarding, and retaining highly educated talent require a high degree of sensitivity and skill. These human resource practices can also provide the needed competitive advantage. This is particularly true of knowledge intensive industries. Strategic outsourcing of core competency can provide significant business advantage to such an organization, but it can also cause massive disruption to strategy execution. Making a business case for strategic outsourcing, and communicating and implementing this strategy needs to be done with much care. Typically, in a pharmaceutical company, building a business case for strategic outsourcing requires measuring the value of the outsourcing arrangement. A cross-functional team is assembled and
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charged with coming up with a comprehensive business case to present to senior management. This team may involve finance, legal, human resources, marketing and research to determine key criteria for the case. Certain financial (such as cost savings, return on assets, or return on capital employed) and non-financial measures (such as deliverables on time, at quality and on cost, innovation and intellectual property, and opportunities created) are standard in the industry. However, managers with experience in strategic outsourcing are aware of a number of pitfalls in this process and include other criteria such as monitoring the quality of the working relationship between the two teams and the investment in time and energy needed to have two teams from different organizational cultures, performance management/rewards systems, and leadership. The business case must include ways of anticipating problems such as mistrust in relationships, handling of persistent problems, level and satisfaction of communication between the teams from the company and the outsourcing firm, and clarity in identifying responsibility centers. The business case must also include organizational issues. Successful cases have the following characteristics: highly collaborative working relationship where mutual trust is evident, with minimal need for enforcement through the legal contract. Collaboration is defined in terms of the teams’ ability to adhere to specific, mutually agreed to ground rules regarding keys issues such as communication, control of team meetings and project assets, data collection and analysis, and decision making. The business case must include how and when unanticipated situations are to be handled. Guidelines should be provided for teams to “escalate” an issue to the next level in their respective organizations. Legal issues, including potential for conflicts of interest, are clearly laid out in the business case. Several potential outsourcing providers are identified and a comparative analysis is done. This phase is often very long, protracted, and frustrating. Internal project champions to this outsourcing decision are a critical factor in its success. At this stage, discussions and negotiations with the outsourcing firm moves into the actual contracting stage. There are usually numerous discussions and rewriting of the contracts before both parties begin discussing the substantive goals of the outsourcing project. Then begins a “project management” phase, which details the expected deliverables, roles/accountabilities, timelines and budget responsibilities. Both parties often appoint specific personnel to handle the project. In building a business case, there are a number of typical risks and benefits to be evaluated. For example in clinical trials, recruiting patients is the most expensive part of drug development – up to 40% of the budget. In its August 8, 2005 issue, Fortune Magazine[2] reported that Big Pharma had rapidly moved this part of their value chain into strategic outsourcing arrangements. In 1999, 10% percent of clinical trials were outsourced; but by 2005, the number had risen to 40%, with an increase expected over the
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next few years. The cost savings can be enormous. For example, the cost per patient in the US is $30 000.00, while in Romania it is only $3000. In addition, patients can be recruited up to ten times faster than in the US, because certain Eastern European countries, such as Romania, have a centralized healthcare system, which provides an efficient, single point of entry to identify suitable patients. Such acceleration of the speed from development to market is a major cost benefit as well. On the other hand, placing clinical trials in an emerging country or in countries with high levels of corruption, poses significant risks. Questions concerning such potential risks include: (1) Will USFDA standard of policy and procedures be properly established and enforced in the local clinical setting? (2)Will ethical standards regarding issues such as human subject protection and informed consent be adequately met? (3) Do data management and analysis conform to the review standards and protocols of international regulatory bodies? Finally, there is ultimate risk of major financial loss should a strategic outsource vendor default or subcontract the work to another organization with lower standards.
Executing the Strategic Sourcing Decision
The Executive Committee of the firm may evaluate the business case and recommend proceeding after all stakeholders have been briefed and their questions and concerns answered. In this phase questions around inancial, legal, quality, security, timeliness, and impact on the overall strategy execution and competitive positioning of the organization are addressed. In large complex organizations, this phase can take up to a year or longer to wind through all the pathways and to satisfy internal and external stakeholders. Vendor selection is often done in parallel to this phase if the executives leading the outsourcing initiative are confident that internal and external stakeholders will bless the project. Vendors that most closely follow the existing internal processes to minimize the internal team’s learning curve are sought. The reputation of the vendor for building strong relationships with internal team personnel is also a crucial element in the selection. Relationship problems are expensive and highly time-consuming to resolve. Poor or adversarial relationships impact quality, speed, and drain the benefits that the outsourcing organization is trying to achieve. Collaboration, joint problem solving and decision-making are critical elements of an effective outsourcing arrangement. These are hard to achieve across different organizations whose own employees share an internal culture, values, performance/rewards, and development processes unique to their respective organization. As a result, companies considering outsourcing may develop vendor company profiles that specify the level of product and technology capability as well as the vendor’s track record of performing across the entire outsourcing value chain. There are consulting organizations that provide this service. They conduct contract negotiations as well, and build the internal team and infrastructure – including IT support – needed to make the outsourcing arrangement operational.
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An internal Negotiating Vendor Team comprised of representatives from legal, finance, and technical may be formed for the vendor selection decision. There may be several layers of review for this team’s recommendations depending on the complexity of the deal and the amount of capital required to fund it, along with the “risk of loss” analysis. Once the arrangement has been approved, the outsourcing process is taken over by the outsourcing operations team. The outsourcing team manager and members are appointed. The negotiating team works with the outsource team to ensure a smooth transfer from negotiation to implementation. The roles and expectations of the outsourcing team members are set using the existing performance management process and system. Some organizations have knowledge management databases and tools that the outsourcing teams can tap into. In addition to setting specific project management goals and metrics with the outsourcing provider, the internal team will research and understand their partner’s culture – i.e., what drives, incentivizes, and motivates the outsource company’s behaviors. Further the team may discuss and draft a plan that will foster a collaborative work environment between the two companies. Checkpoints are scheduled into the project plan that focuses not only on compliance to the legal agreement but also on the effectiveness of the relationship between the parties. Some organizations foster strong team bonds between the two companies by having a formal 1 or 2 day “Kick Off “ meeting that launches the outsourcing. Critical to the success of the project is a clearly defined problem solving and decision-making process in place before the outsourcing arrangement starts. For complex arrangements, a special governance committee may be established upfront by the negotiation team to ensure speedy resolution of disputes between the outsourcing operations team and the vendor’s team.
Outsourcing the Clinical Trials – the experience of APCo
APCo (A Pharma Company) is a large European pharmaceutical company, which decided to outsource some of its core (R&D) operations across some therapeutic areas. They went through a number of issues and processes discussed above. In what follows, a brief description of their outsourcing experience in the clinical trials area is provided. APCo was formed through a merger of two large pharmaceutical companies A and P. During the postmerger integration phase, the senior team was careful to involve both internal and external stakeholders in formulating and implementing strategy. This included their decision to scale up their involvement in strategic outsourcing. Significant differences of opinion surfaced. Champions of outsourcing discovered that they had to play the roles of diplomats as well as technical gurus. The most compelling part of the business case focused on freeing up the brainpower and on the ability to drive innovation across the research and development value chain, as opposed to managing clinical trials. The business case is bolstered by showing an increase in the speed of completing the trials at quality, reliability, ethical standards, and at low cost. As background, “A” had already been involved in outsourcing clinical trials. Each therapeutic area handled its own outsourcing. “A” had outsourced approximately 40% of their clinical trials prior to
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merger. “P” had never engaged in outsourcing anything in the R&D area. “P” had outsourced some of its sales activities. APCo was facing a very enviable situation. A rich pipeline across all the phases of research and development was pressuring the organization to speed up its commercialization cycle. Both internal and external stakeholders were confident in their proposed change in strategic direction because of “A’s” expertise in the area. More innovative products delivered to patients in a shorter time period would put APCo ahead of its competition economically. Each therapeutic area designed the outsourcing specifications and sought vendor proposals. “A” had some experience in this area and took the lead. The vendor list was expanded through contacts at association meetings, with business development professionals and with the purchasing function. The primary criteria for all vendors were: experience in the clinical area being outsourced, quality of trial operations, and experience in data collection and entry. Pricing was not considered to be the primary criteria for selection. A vendor selection committee was formed for each clinical trial being outsourced. Vendor selection became more complex than anticipated. Each trial area had a number of very highly qualified vendors to choose from. They were almost indistinguishable from each other in terms of the criteria discussed above. The post-merger integration issues of teams working together from two different organizations added to the frustration of coming to a decision. The internal team would do a rigorous post mortem discussion with vendors that did not get the contract. This, in turn, added significantly more data to be discussed internally for the next vendor proposal. Final decisions were often left to the internal team leader of the clinical trial being considered for outsourcing. APCo decided on a three-function internal structure housed at the country level. “Clinical trial design” was a function responsible for hypothesis and primary trial protocol design. A “strategic outsourcing management” function was charged with operationalizing the clinical trial outsourcing contract and managing the relationship with the vendor. Finally a “post-trial function” was made responsible to integrate the outsource vendor’s work into the pre-launch development phase. APCo believed that this three-function approach would be the most effective way to introduce outsourcing of clinical trials into the newly merged company. Although in some ways these functions are sequential and independent, there is considerable need to share information at different points of time. The “strategic outsourcing management” function could, over the long term, become a “center of excellence” that would support other functions where outsourcing core competence seemed appropriate. Strategic outsourcing management would act as a “governance-like” function since they were not designing the protocol but ensurensuring that the vendor delivered on the contract against the protocol specifications. This would free up the design function to focus on the important area of clinical trial design and not have to handle the day-to-day project management functions. A leader of the entire clinical trial function was appointed to supervise each separate therapeutic area and to overlook the implementation of the entire clinical trial outsourcing. This would enable sharing of the lessons learned, and maximize the benefits. As APCo gained more and more experience in strategic outsourcing, it also recognized the need to invest in more internal resources dedicated to outsourcing. As a result, APCo ran the following
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advertisement for a manager: Manager, Strategic Outsourcing Management APCo, a world leader in developing Pharmaceuticals in a number of therapeutic areas, is committed to expanding its leadership position. Embrace this opportunity to join a group of diverse and talented individuals championed to take on innovation and change in our rapidly expanding organization. Manage all aspects of strategic outsourcing including vendor management, financial management, and contract development/negotiation for clinical trials . . . role requires the ability and foresight to proactively identify operational and/or relationship issues and to resolve issues in a timely manner so that time, cost, and/or quality targets are achieved . . . No direct oversight of other employees. Indirectly the role is responsible for other employees in various capacities . . . [on] crossfunctional team members. No one involved in strategic outsourcing would deny the need for such a manager. However, was this enough? APCo’s experience in outsourcing clinical trials has been mixed. There have been some resounding success and some very visible failures. The salient issues have been problems in leadership, not in structuring or design. It appears as though a different kind of managerial leadership is needed to implement strategic outsourcing decisions. One senior business leader of APCo said: It’s not about project management – it’s about leadership, team leadership; global teams across at least two different organizations and god knows how many cultures and time zones. You can’t bet the farm [core competence] and have anything less than your best leaders stepping up and delivering on the promise. That’s the organizational challenge we have ahead. At APCo no one interviewed could explain the “strategic outsourcing manager” position advertised and how it fit into the organization’s overarching strategy. The position description just appeared one day without context or explanation. A number of questions came to mind regarding APCo’s strategic intent around this outsourcing position. There were serious questions concerning the impact of this job specification on the very culture and values of the organization. Was this a pilot to gain experience in the area or a commitment to strategic outsourcing as part of its core strategy to gain an innovation edge on its competition? In either scenario, APCo could have followed some very basic principles in working with their employees to understand the senior leadership’s thinking about and level of commitment to strategic outsourcing. Outsourcing of any type has a profound impact on an organization’s culture and, so it did with APCo. At APCo, the job posting for the strategic outsourcing position caused a wave of curiosity followed by a wave of uncertainty and fear. There had been no communication from senior management about their intent concerning strategic outsourcing. It seemed clear that an external candidate would fill the position. There was uncertainty about its impact on the performance management, talent management, and leadership development processes.
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The rumor mill went immediately to work in the worst possible way. In the absence of facts, rumor had it that major portions of the internal value chain, as well as existing jobs and future jobs were being outsourced. People indicated unease about their ability to deliver on their current goals – especially those at the interfaces of the areas mentioned in the job announcement. Failure to deliver at high performance levels would preclude consideration in talent management for leadership development reserved for high potential individuals. Employees understood the systemic connection among performance management, talent management, and leadership development and the impact of this on their careers. They expressed concern that senior leadership did not seem to understand these connections.
Learning from APCo
Announcement of strategic outsourcing can create fear in an organization. This fear is palpable in the employee ranks since no one feels safe in their jobs. Service levels are often improved by outside vendors, and management can reduce overhead processing costs in the short term. Outsourcing can negate years of effort that an organization spends in building a strong sense of community among its employees. This, in turn, can make retention difficult. Companies where senior leadership can create and sustain a feeling of community are highly admired. Strategic outsourcing tests the leadership of even such companies. The deeper a leader understands the connections between culture and the organization’s strategy and their people, the more effectively they can compete in today’s competitive marketplace. Preserving a sense of community is critical to mitigating the adverse effects of strategic outsourcing. It is widely acknowledged that culture, while easy to discuss, is very difficult to change in any meaningful way. Outsourcing done poorly can trigger very serious problems in an organization’s culture. The feeling of connectedness and belonging, so important to community and high performance, can very rapidly disappear if employees sense that their area of core competence is to be outsourced. outsourcing can seriously destabilize an organization; a challenge, that most leadership teams are ill equipped to handle. Strategic outsourcing offers the leadership teams the opportunity of strengthening employee commitment at the individual, team and organizational level. Employees will look for strong and clear signs from senior leadership. Is the proposed strategic outsourcing a pilot or a major shift in strategy for the organization? Senior management can use a number of different media to communicate its intentions in this area. A President’s page on the company intranet, town hall meetings with all employees, briefings for managers to communicate key strategic outsourcing messages to their people are different ways in which this can be achieved. Sufficient detail should be provided for employees to understand how strategic outsourcing fits into the strategy, mission, vision and values of the organization. Communication, while critical, is not sufficient to maintain employees’ trust in the culture and leadership
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of the organization. Employees must also be able to see how the proposed strategic outsourcing will impact their current and future positions. Senior leadership should be able to explain in some detail, anticipated changes to the organization’s structure, performance management, rewards, talent management, and leadership development philosophies and processes. These changes need to be thought out by senior management before announcing a strategic outsourcing initiative in the organization. All of the above areas must be well defined and openly communicated to secure employee support. This requires trust in senior management, which is a leadership quality that needs to be developed. Similar to alliances or joint ventures, problematic issues surfaced very quickly after the contract for outsourcing was signed by APCo. The taking of swift and direct action by both teams was critical to fixing the project and getting it back on track. Projects that proceeded smoothly were most often attributed to interpersonal chemistry and not to the skill of the team leaders. Projects were frequently terminated if relationship issues could not be quickly resolved. It was crucial that both teams assumed the responsibility to ensure open communication and to preserve management processes, such as the monitoring of team progress that would propel the project forward. A subtler trend emerged concerning the skills of project leaders: few had been trained to lead or to participate in a strategic outsourcing project. As a rule, they were very experienced project managers but they lacked the confidence to successfully lead a strategic outsourcing team. They expressed the necessity for a skill set was most likely different from the ones they possessed but couldn’t articulate what that skill set might look like. Most indicated that they did strategic outsourcing as part time in addition to their “real job” .
Leading Strategic Outsourcing
What, when and how to communicate are age-old questions with no easy answers. It gets much easier if the senior team has decided where and how strategic outsourcing fits into the company’s strategic plan. This is particularly important since it is clear that strategic outsourcing will require substantial change to the organization’s reporting structure. Strategic outsourcing should be positioned in the organization to attract the best and brightest an organization has to offer. When a strategic outsourcing manager reports to the CEO, it is sure to attract the best candidates internally as well as externally. Word goes out quickly into the industry environment how much an organization values the function’s contribution to its strategy execution efforts. A direct report to the CEO conveys the importance to the organization and is best equipped to deal with the strategic implementation necessary. The strategic outsourcing manager position can also be placed within support functions. Senior management must always remember that they are outsourcing parts of their core competence, not a commodity service or process. A very different perception about the significance of strategic outsourcing is evident if the reporting relationship is not at the CEO level but within each specific functional area. There is much less scope and potential impact on the strategy and its execution.
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A well-designed and implemented performance management process is also needed to ensure that strategic outsourcing will be understood by employees and implemented as effectively as possible. Six performance differentiators may be identified: – Clarity of executives about their role in strategic outsourcing implementation. – Clarity of managers about their roles and responsibilities. – Clarity of purpose and goals of strategic outsourcing in terms of the overall business strategy. – Performance measurement aligned to strategy. – Accountability of executives individually and as a team for outsourcing decisions. – Ability of senior leadership to improve teamwork, collaboration and culture and making this their top priority. All of the above differentiators need to be embedded in a well-designed and implemented performance management process. It was clear from APCo’s job description of their strategic outsourcing manager that the firm was unclear as to how the position fit into the overall strategy of a firm. And yet, it expected the manager to set goals around quality, time and costs of the outsourced part of the internal value chain without much effort. However, the strategic outsourcing process is much more complex. There are interfaces, such as trial design and post-trial regulatory approval, that need to be addressed. The strategic outsourcing process is not linear. There need to be discussions and modifications along the way. It is difficult to write specific service level agreements with quantifiable outcome measures. In strategic outsourcing it may even be difficult to identify all the players. It would seem nearly impossible for APCo’s manager of strategic outsourcing to orchestrate this without face-to-face meetings with all of the work groups as well as with the provider’s work team. APCo had a well-designed and developed strategic alliance/joint venture framework that could assist the organization in successfully implementing strategic outsourcing. The work groups from both companies in the alliance met frequently to discuss strategy, goals, measures, roles, etc. before the alliance was activated. Both sides had to feel equally prepared to execute the strategy to which they agreed. Team meetings took place virtually with occasionally face-to-face meeting needed to resolve issues. A person from each team involved in the goal and deliverable was designated to be the problem-solving liaison to the alliance and could initiate discussion around changes in strategy, goals, measures, roles, and deliverables. Scheduled into the alliance were face-to-face debriefing sessions where the teams involved were encouraged to present their experience of the alliance to date in the form of a story. A facilitator and a graphic artist who rendered the stories in pictures as they were being told categorized the stories. Team participants allowed no formal presentations. The story’s lessons learned were captured, and changes to the alliance strategy and processes were formalized in a report and sent to the senior executives for approval. Senior executives were encouraged to attend the story telling debriefings rather than reading about it a standard power point presentation. Strategic
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outsourcing is a form of strategic change. It needs to be implemented in the same manner. The organization’s policies and systems of strategy implementation should be applied to the implementation of strategic outsourcing. Implementing such outsourcing as just an operational decision can be fraught with risks. Strategic outsourcing needs to be incorporated into an organization’s talent management and leadership development.
Conclusions
Outsourcing is stressful for employees. Strategic outsourcing is even more stressful. Organizational cultures are fragile ecosystems that are easily damaged and difficult to repair. Trust and sense of community, when shattered, can have significant impact on an organization’s ability to execute its strategy and to attract and retain the best talent. C.K. Prahalad in a recent Wall Street Journal[3] article stated: The current outsourcing phenomenon is the start of a new pattern of innovation in the way we manage. The ability to fragment complex management processes and reintegrate them into the whole is a new capability . . . the time to learn to manage with a global system of knowledge, products, services, and component vendors is now. Employees at APCo expected their senior leaders to lead the way in the strategic outsourcing area. APCo had invested heavily in developing their business leaders through formal executive educational experiences and challenging job assignments. Yet, most business leaders felt they were forced to take a reactive approach instead of a more productively proactive one. The convergence of various factors in APCo’s outsourcing process – APCo’s uneven communication of the leadership’s intent behind strategic outsourcing, the organizational structure used to support strategic outsourcing, the search for external candidates to fill the new strategic outsourcing manager’s role – created an environment of uncertainty for the employees regarding the current and potential status of their career at APC. Fortunately, the investment APC had made in developing their business leaders allowed these leaders to quickly identify and address the concerns of their employees. Summarizing some of the lessons from APCo’s implementation of its outsourcing strategy, we see: • It is critical for senior leaders to articulate strategic direction before the outsourcing strategy is implemented. Where the strategic outsourcing function reports into and how it will be staffed are critical bits of information.
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• Leadership must be capable of working with employees in the performance management arena, including interdependent goal setting between employee and vendor, as well as creating rewards for successfully delivering the outsourcing project’s goals. Coaching employees in conflict resolution as well as in leading a team where direct reporting relationships are non-existent must be part of every senior leader’s toolkit. • HR must take a leadership role in the talent management area by coaching line leaders who are responsible for strategic outsourcing implementation, by modifying talent management definitions, process, and communications. In addition, HR can play a major role in redefining the philosophy and guidelines found in the talent management materials that are available to employees. • Leadership development must be redesigned to reflect the strategic outsourcing reality. Case studies, simulations, scenarios, etc. should be part of the supervisory, management and leadership curriculums. Preparing line leaders to manage complex and ambiguous situations that arise from strategic outsourcing implementations, as well as to lead teams composed of people from two different organizations. • A culture must be created that supports people, as strategic outsourcing becomes more and more prevalent in the strategic plan. The extent to which employees feel part of a community and that the community will openly communicate with them about the strategy and its impact on their current positions and rewards and on their continuing development and career growth in the organization defines the depth of community feeling. • Globalizing the strategic outsourcing function as well as the HR function provides the platform for articulating a coherent people strategy that fully supports the business strategy. A global head of strategic outsourcing would most likely report to the CEO. This sets the stage for properly resourcing the strategic outsourcing strategy from a business perspective. Strategic outsourcing is complex as well as risky from a business intelligence perspective. It needs careful thought and visible leadership that is not seen in many organizations.
References
[1] P. Engardio and B. Einhorn, Outsourcing innovation, Business Week (March 21) (2005). [2] A. Lustgarten, Developing countries, LDCs, Clinical trials,Fortune Magazine 152(3) (2005). [3] C.K. Prahalad, The art of outsourcing, The Wall Street Journal (June 8) (2005).
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From Owner of Activities …
Trestle Group Value Proposition
Focus Trestle Group focuses entirely on IT and BPO sourcing. This emphasis provides clients with concentrated specialists that understand how to best design and implement sourcing strategies. Company Trestle Group’s current client portfolio and past project experience establishes a solid foundation of market knowledge, expertise, methodologies, and best practice experience. Experts Trestle Group market experts bring professional personalities, rst-hand market knowledge and innovative approaches to deliver solutions to complex sourcing challenges. Research Trestle Group demonstrates thought leadership through market publications and remains current by following industry trends and peer research.
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Identifying sourcing potential Analyzing status quo Planning target state Transformation to target state Continuous optimization
… to Recipient of Activities
Contact Trestle Group
For more information about the services Trestle Group provides, please contact one of our o ces or visit our website.
New York City, USA 245 Park Avenue 10167 New York Tel: +1 212 672 1740 Fax: +1 212 792 4001
London, United Kingdom 1 Ropemaker Street EC2Y 9HT London Tel: +44 207 153 1006 Fax: +44 207 153 1111
Frankfurt, Germany Friedrich-Ebert-Anlage 36 60325 Frankfurt am Main Tel: +49 69 244 333 162 Fax: +49 69 244 333 207
Zurich, Switzerland Limmatquai 94 8001 Zurich Tel: +41 43 500 1740 Fax: +41 43 500 1744
Bangalore, India Bangalore Raheja Towers 26-27 Mahatma Gandhi Road 560 001 Bangalore Tel: +91 80 41 800 880 Fax: +91 80 41 800 900
www.trestlegroup.com
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