Tuesday, June 26, 2007

Beware of outsourcing myths, warns survey

Source: Outsourcing-pharma

A number of outsourcing misconceptions are luring companies into viewing offshoring as an easy process, new research reveals.

The outsourcing market is booming and more and more companies are relying on external firms to save on costs and improve efficiency.

Indeed, outsourced pharmaceutical R&D spending is set to increase at twice the expected rate of general R&D expenditure for the next five years, according to recent data, and in particular outsourcing clinical trials is seen by many pharma companies as a means to make the process cheaper, quicker and more efficient.

However, companies that think transferring an operation to an overseas provider is a trouble-free, straightforward task can get a rude awakening, warns new research , and companies often find that their high hopes about cost savings and greater efficiency don't pan out.

The study based on an industry survey found seven common myths that outsourcing vendors and clients cling to about offshore outsourcing - false assumptions about how the process should work - and gave some advice on how to overcome them.

The first common myth is the idea that the three main objectives of outsourcing a development stage - cost reductions, improvement in service, and flexibility - can be achieved at the same time.

"The kind of skills you need to achieve cost reductions, production flexibility or enhancement, are usually different. Even when you offshore, where in principle you can get low cost and quality, it is better to begin with just one objective." , Phanish Puranam, one of the researchers, told the WSJ.

The second most common myth was to see outsourcing services as simple as buying commodities, such as stationery.

In reality, the process does involve significant transaction costs, starting with finding a vendor and negotiating a contract, and followed by the costs of moving operations from one location to another while maintaining the connection with the rest of the company.

A third false assumption, according to the survey, was relating to negotiation of the contract. The outsourcing process should not be seen as a one-off deal, but instead as a relationship that keeps evolving and needs constant updating. The researchers found that writing a highly complex contract, trying to include clauses covering all possible situations, usually proves to be a waste of time.

On the other hand, there is another mistaken belief that a company does not need a contract because the deal with the vendor is seen as a partnership rather than a simple procurement relationship.

Furthermore, the number five on the list of common misconceptions that clients and services providers accept as true is to view the vendor as an insurance company who should bear greater liability in case of problem.

"The sharing of risk between client and vendor is one of the most contentious issues in outsourcing, leading to acrimonious negotiations and poor relationships," said the research.

Moreover, the survey found that sometimes companies think once they have outsourced an operation, they can just forget about it and rely completely on the service provider. The researchers explained that it was crucial for the client firm to retain the knowledge of the process outsourced to avoid difficulties down the road.

Finally, the seventh most common myth in outsourcing is to think that the first attempt will automatically be a success and relinquish at the first failure.

"Very few companies report great success with their very first outsourcing project but that doesn't mean they should give up," the researchers said.