Outsourcing Strategy
Companies have different reasons for the outsourcing of manufacturing activities but they tend to coalesce around two major drivers of need: (1) outsourcing as the default means by which all of a company’s products are manufactured and (2) outsourcing as a means to augment a company’s existing in-house manufacturing capacity. As one might expect, the path that any particular company chooses is highly related to that company’s size. Large pharmaceutical and biotech companies tend to have a degree of internal manufacturing capacity and therefore use contract resources to supplement their own. Smaller companies—often with shorter corporate histories—rarely choose to go the route of the large-scale capital expenditures necessary to build these facilities. As a consequence, when they maintain ownership of a product into commercialization, external manufacturing resources are nearly always necessary.
Regardless of the primary driver for outsourcing these activities, the process by which contract manufacturing organizations (CMOs) are selected is crucial to a company’s success. For some very legitimate reasons, the pharmaceutical industry has been late to the game of outsourcing. And this holds true across the industry’s entire value chain from drug discovery through drug development, manufacturing, and commercialization. The amount of regulatory oversight throughout this value chain has made the industry very cautious in the development of its outsourcing strategies and practices. Even now, according to Industry Standard Research’s recent study, only about half of the industry report using preferred provider lists as a tool to vet and select CMOs. A third continue to make this selection on a one-off basis, and 15% use a single CMO for all of their outsourced manufacturing activities. However, the data indicate an increasing tendency to use preferred provider arrangements with 62% of respondents indicating a likelihood to use preferred provider lists by 2017.
Figure 1.The good news for CMOs trying to break onto preferred lists is that the lists do not seem to be terribly restrictive or exclusive. Thirty-four percent of respondents have 4 to 9 CMOs on their preferred list while another 34% have 10 or more CMOs on their current list.
The increasing prevalence of preferred provider lists may mean a more strategic selling environment for CMOs. They must ensure they make the cut for preferred provider list inclusion or else be shut out of a company for some time. For pharmaceutical and biotech companies, this means the development of a more sophisticated selection process for the shortlisting of potential CMO partners. If a company is in the business of narrowing its options, it will want to do so thoughtfully, in a way that maximizes the company’s access to a full complement of services without sacrificing the necessary quality—and desired attentiveness—over the length of its preferred provider terms.
Selecting CMOs
If you have ever conducted or commissioned service quality research, you have almost certainly run into the construct of Quality as an important factor in how a service provider’s delivery is evaluated. This is no less true for CMO services. But rarely is quality sufficiently well-defined to enable service providers to make informed business decisions about how to build or market their services. Nor is it well enough defined to allow a service buyer to make specific and meaningful comparisons among the available service provider choices.
Figure 2.ISR asked 68 contract manufacturing service buyers to tell us how they judge the quality of CMOs. Eighty percent of respondents indicated highly objective, observable characteristics such as QA/audit results and whether or not the CMO meets regulatory requirements.
Respondent Quotes:
- “Audit results, image of the company, regulatory entity audit results, quality systems, etc.” Director, Large Pharma Company
- “Compliance track record with both FDA and foreign regulatory authorities.”C-Level leader, Midsize Biotech Company
Contract manufacturing service buyers are more varied in their thinking when posed with a somewhat broader question: How do you select your CMO? Having a Strong regulatory track record remains the single most important attribute when buyers evaluate potential CMOs. However, many factors emerge as important during this process.
Among the other important attributes are Reliable on-time delivery; Ability to smoothly scale up manufacturing andtransfer technology; Has capacity to meet our demands; Low cost; and Experience level of staff. For CMOs, this highly varied group of attributes represents a double-edged sword. On the one hand, a service provider must be capable of demonstrating varied capabilities and strengths to entice a broad industry of buyers. On the other hand, it offers service providers an opportunity to segment their buying audience, target certain segments within the audience, and position their services to meet each segment’s needs. Differentiation is difficult in most service-to-business environments, and while that remains true here, the broad array of important selection drivers gives CMOs options.
CMO Performance
On the topic of differentiation, one thing is certain. A handful of CMOs stand out from the crowd, as rated by their customers (Source: ISR Reports—2014 CMO Quality Benchmarking Study). In ratings of CMOs across different Delivery Factors, Organizational Factors, Capabilities, and Staff Characteristics, 3 of the 13 assessed CMOs stood out as consistent leaders and 2 stood out as consistently lagging the field. In ISR’s experience, this split of leaders and those lagging behind is about standard.
What is interesting is how these performance data do not necessarily translate to higher loyalty scores. In this research, loyalty is assessed as a compilation of a CMO’s ratings on Overall Satisfaction, Likelihood to Use Again, and Willingness to Recommend. While the stand-out performers for individual attributes are toward the top of this loyalty chart, those CMOs do not show significantly higher loyalty scores than other CMOs, even compared to those at the bottom of the list.
Figure 3.
Figure 4.This presents a very difficult environment for CMOs: you build your brand credibility, win the business, and deliver the work—yet a meaningful degree of loyalty can remain elusive.
So how can a CMO deliver its services in ways that differentiate the CMO from others in a highly regulated space where differentiation isn’t exactly applauded? Perhaps the same way sophisticated marketers differentiate and sell a service that is substantially similar to its competitors. When it comes down to it, buyers all have to have the same thing when they buy CMO services: regulatory compliance. But just because all buyers have to have the same thing doesn’t mean all buyers want the same things from their CMO. This is where marketers live: in the World of Want. They identify segments of buyers with specific, similar wants and mold their service offering around those wants to become more appealing—not to everyone, but to a specific subset of buyers. The practice of segmenting, targeting, and positioning doesn’t need to end at the sale.
In practice, what this means is that CMOs need to understand what it is that will lead to satisfaction with their delivery—not in general, but with specific customers—and then shape their service to fit the wants in addition to the needs. Again, in a highly regulated environment, all customers need the same things but they do not all want the same things. Is the customer communications driven? Relationship driven? Do they want the CMO to behave like a consultant or a feefor- service vendor? Identifying the unique motivators of each customer can allow a CMO to specifically position its service to each customer and increase the odds of a differentiated experience in the context of a difficult-to-differentiate service environment.
Kevin Olson has nearly 20 years of experience researching, reporting on, and shaping buying behavior in business-to-business environments. Mr. Olson has dedicated much of this time to understanding the purchase and delivery relationships between drug development sponsors and their service provider partners. He is currently CEO at Industry Standard Research, a syndicated and custom market research company in the life sciences industry. For more information about Mr. Olson or Industry Standard Research, visit ISRReports.com.