Offshoring: Is it the ultimate cost reduction solution for animal health?
Following a major successful cost-cutting strategy from industry leader Zoetis, others in the sector may have taken notice. With this in mind, Animal Pharm editor Joseph Harvey spoke to expert Kris Wadia about offshoring and its potential role in the animal health space.
One key lever for dramatic cost reduction throughout many global industries is the strategy of offshoring but, according to Kris Wadia, it is a process that is not well understood. Below, Mr Wadia demystifies offshoring and builds a case for it in animal health.
About Kris Wadia
Kris Wadia was most recently senior vice president at Quintiles, which is a leading services provider to the human pharmaceutical industry. Previously, he was managing director at Accenture – the global technology consultancy.
He is now a senior advisor to animal health businesses and can be contacted at firstname.lastname@example.org.
Joseph Harvey: What exactly is 'offshoring' and can it be applied successfully to any type of services industry, including animal health?
Kris Wadia: In a word, yes. Offshoring is the contracting of internal operations or technology, regardless of function or industry, to an entity based outside the borders of your own country.
If done inside your country, it is referred to as 'outsourcing'; if done within a neighboring country, it is called 'near-shoring'; and if done in a distant country, typically with low labor costs, it is commonly referred to as 'offshoring'.
It is applicable to the animal health industry across the board – drugs, diagnostics, devices, feed, breeding, manufacturing and more.
JH: Is it a model that can be adopted by any size of company?
KW: Yes, the model works regardless of the size of the company or the project. So, a global corporation could offshore activity that needs only five resources or a biotech with only a handful of employees could offshore its entire R&D process requiring dozens of people in overseas locations.
Both ends of the spectrum work although the financial savings will vary significantly based on the number of resources needed and the type of work offshored.
JH: Even if a company did want to offshore, wouldn't it only apply to back office functions like HR, finance and IT?
KW: It's a common misconception that only back office, manually intensive, repetitive or commodity tasks can, and should, be offshored. This hasn't been true for at least a decade or more. Low-cost locations have their fair share of scientists, PhDs, medical doctors, veterinarians and other skilled professionals. This has allowed specialist services such as project management, pharmacovigilance, data management, biostatistics and testing to be provided to human pharma for years.
JH: But the savings from any functions or roles that have been offshored wouldn't really be significant, would they?
KW: The differential (labor cost arbitrage) between the total annual compensation cost for a local employee in a high cost location (e.g. the US, western Europe, Japan, etc.) and an offshore worker is just too great to ignore.
Animal Pharm also discussed process automation and digital solutions in great depth with Kris Wadia in the next installment of the interview.
Let's do the arithmetic. Payroll typically comprises 70% of the cost base (excluding manufacturing) for any company. Let's assume half of the roles can be offshored and labor cost arbitrage savings are 75%. That works out to a bottom line reduction of over 25% not including additional savings from the reduced need for office space and infrastructure.
JH: How easy is it to push through offshoring strategies? Don't governments and employee unions oppose these sorts of plans? And can management risk a large number of experienced employees being made redundant and the rest continually worried about their job security?
KW: Despite public statements to 'bring jobs home', several federal and state governments around the world continue to outsource actively (to service providers whose offshore teams do the work) because it offers value-for-money to taxpayers.
Admittedly, governments set up 'enterprise zones', often in deprived areas within the country itself, offering tax breaks that reduce the labor cost arbitrage compared to offshoring. Unfortunately, these zones find it challenging to attract the volume and type of talent needed to be world class. Unions and the remaining workforce tend to accept offshoring when they recognise the alternative might be the closure of the entire business if their cost base remains non-competitive.
One way to reduce friction is to invite objectors to recommend practical alternatives to offshoring and evaluate their financial impact as well. Objectors should also note companies with successful offshoring track records have typically grown and reinvested in hiring local employees with newer skill sets.
JH: From a regulatory and compliance perspective, is it not safer for animal health companies to scrutinize all their activities and data close to their headquarters?
KW: Not really. Let's begin by defining 'safe'. That implies at least two pre-conditions. First, that the animal health company has sound internal processes and technology and, second, these are followed correctly.
If the first condition does not apply, it does not matter who is doing the work. And if the offshore people are trained to use the company's internal processes and technologies, there is no reason why they cannot perform to the same quality standards as local, internal employees as the tools and data they need are accessible remotely and securely.
JH: I'm assuming we are talking about sending work to places like India. But aren't they also facing their own challenges with rising costs and employee attrition, especially amongst high performers?
KW: That's a valid concern. But the supply of offshore talent continues to grow, with millions of new graduates entering the workforce annually, even in lesser-known locations. For example, Argentina, Bulgaria, South Africa and Sri Lanka are undervalued given their high educational standards and (unfortunately for them) declining currencies. They clearly have talent pools qualified (or rapidly trainable) to the same professional standards as employees in more expensive locations. In the interests of balance, it is also important to recognise that retaining high performing local employees can be difficult as their skills will be sought by other local employers offering higher salaries and benefits.
JH: OK, suppose the business case is so strong that an animal health company makes the decision to proceed. What sort of skills and tools would its management team need to have if it wants to make a success of offshoring?
KW: As a first step, senior management should get the right help to figure out how offshoring could work specifically for their company. That means educating all the key stakeholders on the pros and cons (and alternatives to offshoring) until a genuine consensus is reached.
Unfortunately, companies often start the journey by comparing pre-packaged solutions from offshoring vendors without truly understanding the impact on their business. An experienced advisor would consider their corporate culture; geographic locations, lines of business, etc. and help them plot a route that includes quick wins for inspiring confidence.
Once the journey has been mapped, it needs to be communicated clearly and regularly to the employees by the chief executive and backed by supportive actions. Employees don't object to change as much as they object to the manner in which change is implemented, especially if it is done to them rather than with them. If they see 'redundancies by spreadsheet' where only the longest serving employees are being released or management ranks not sharing in the pain, they have a right to be concerned.
JH: You're making offshoring sound like the panacea for all cost-related challenges an animal health company might have. Surely that can't be right?
KW: Whilst offshoring may not be a cost-saving panacea, it is a proven lever available to senior executives today. When combined with process automation and digital solutions, it is possible to make a significant difference not just to the bottom line but also to customer service, productivity, and the speed with which differentiated offerings can be brought to market.
Naturally, there will be challenges to overcome during implementation, but these can be resolved. Offshoring failures at scale have also declined dramatically as the underlying reasons – poor initial contracting, delayed decision-making, and inadequate knowledge transfer to service providers – are well documented.
Looking ahead, as the domestic animal health markets in China and India become ever larger, it will not be possible to service them profitably given the corporate overheads of western companies, so change is inevitable.
JH: Offshoring is clearly a journey. What advice would you offer on starting and continuing this journey to the senior executives and business owners who read Animal Pharm?
KW: The typical reaction to offshoring is: "It won't work here because…"
Against this backdrop, the advice would be to begin the journey with a "How can we make offshoring work for us?" mindset and refuse to accept unsubstantiated statements that it won't.
Along the journey, recognize the greatest risk lies not with suppliers or offshore processes, but with a minority of your middle management. They may seek to undermine the initiative as it requires them to give up their teams and corporate status.
Finally, publicly reward and recognise those internal employees and offshore workers who are jointly executing the offshoring plan. They are the true heroes and heroines who will ensure your business continues to survive – and thrive – for the next decade.