Magazine Article | December 7, 2010

The Positive Impact Of Outsourcing On Economic Value, Cost Reduction, And Capital Outlay

Source: Life Science Leader

By Ross Bjella, president, Mark Wiesman, COO and Dan Dietz, VP of fonanace, DDN

According to Karl Pichler, an associate at Stern Stewart — the company that conceptualized and trademarked the term economic value added (EVA) — looking at outsourcing simply as a technique to reduce capital costs is too narrow a view. “Outsourcing is a key strategic component in capital management,” said Pichler. “Not so much to avoid the capital charge, but more to make capital variable and to reduce overall operating costs and capital costs.”

In the field of corporate finance, economic value (EV) is a way to measure management’s ability to create value for stakeholders. Economic value is defined as company’s net operating profit after taxes minus a capital charge for the investment on capital employed in the business. Economic value is positively impacted by outsourcing’s avoidance of capital deployment. By outsourcing, EV is boosted by taking capital assets off the books.

Whether your financial metric is EV, ROI, or internal rate of return (IRR), the strategic use of outsource partners can improve the financial health of your company.

Cost Reduction Achieved through Shared Services
As life science executives contemplate outsourcing options, strong consideration should be given to the savings achieved through shared services. In the shared services outsource model, multiple companies within the same industry are able to further increase efficiencies and reduce costs by using third-party providers, also referred to as shared-use distribution providers. To achieve optimum benefit from 3PL shared services, it is important to utilize an industry-specific provider. The warehousing, tracking, and distribution of drugs, biotechnology products, and hazardous materials requires FDA- and Drug Enforcement Administration (DEA)-level compliance such as high-level security and the use of pharmaceutical grade warehouses.

Perhaps the most regulated of all industries, the life sciences industry presents one of the most demanding distribution and supply chain management challenges. Regulatory requirements, the need for lot control, and quality assurance require 3PLs servicing the life sciences market to create and maintain best practice levels of accuracy, productivity, and efficiency.

By sharing space in an FDA/DEA-compliant 3PL facility and by outsourcing related IT services and systems — such as warehouse management systems, contract management, order to cash, and accounts receivable — 3PLs are able to spread costs across multiple client manufacturers. As a result, the overhead required for each client is lower, and start-up risks for new products are minimized.

Capital Outlay
Internal business units fight a continuous battle for the resources necessary to keep pace with changing technology and business standards set by customers and regulatory agencies. Often, internal groups don’t receive authorization for needed capital investments until after a regulatory observation has been made or a customer complaint received.

Outsource companies are required to look at the changing healthcare landscape and invest proactively in best practice as a means of remaining competitive. They are quick to adapt to changing market demands and regulation and are able to spread required investments across multiple client companies. This aggregation eliminates the redundancy and expense of each company building a unique solution and ultimately removes cost for the entire channel; companies may look to outsourcers as a way to maintain a competitive base without maintaining expensive infrastructure.