News | September 7, 1999

Bioinformatics Outsourcing: The Gains of Letting Go

David George, NetGenics Inc.

Outsourcing IT
IT Outsourcing and the Pharmaceutical Industry

"I think more and more organizations are realizing that there are things the maturing IT services market can do for them that they don't necessarily want to do in-house, or can't afford to do in-house. Based on our research, by the year 2002, most large organizations will be outsourcing 25 to 30% of their IT budget."

Leslie P. Willcocks, co-author,
Global Information Technology:
In Search Of Business Advantage

Introduction (Back to Top)
Outsourcing in the Information Technology (IT) arena has grown far beyond its roots in data and payroll processing to serve widely diverse, and often distinctive, markets. Certainly the apogee of this strategy today is in the field of bioinformatics—information management aimed at such goals as accelerating pharmaceutical discoveries.

In the 1970s, outsourcing was limited to such activities as time-sharing arrangements and facilities management. Then along came services such as those provided by Kinko's and FedEx. Today, the rationale that first created those inchoate forms of outsourcing remains the underpinning of far more sophisticated outsourcing: providing the business with a more rapid production cycle or the operational advantage in moving a product or service to market.

In 1998 Pricewaterhouse Coopers, a management consulting firm, issued a landmark "satisfaction" study on business process outsourcing (BPO) that clearly identifies key market drivers behind a business' decision to outsource:

  • 87% of the decision makers surveyed said BPO allowed management to focus on its core competencies;
  • 76% said BPO fostered greater efficiency within the organization, allowing for a useful redirection of resources; and
  • 66% believe BPO would help the company become more profitable.

It is important to appreciate the savings in capital investment and the ability to contract advantageously with vendors (so-called "investment avoidance") through outsourcing. But it is outsourcing's ability to "collapse the time line" in delivering a product or service that remains the critical advantage to any competitive business, especially one that traffics in strategic technology.

Outsourcing IT (Back to Top)
Just about everyone in business agrees that information technology is as critical to business success today as are sound financial practices and focused managerial strategies. It is no surprise, then, that IT outsourcing is in its second or third generation in some forward-thinking organizations. Eastman Kodak, for example, was an IT outsourcing pioneer, garnering a great deal of public attention when in 1989 it sold its computer mainframes to IBM and asked Big Blue to manage its data processing.

Between 1992 and 1998, the annual growth of IT outsourcing was between 15 and 20 %, according to research by Leslie P. Willcocks, fellow in Information Management and lecturer in Management Studies at Templeton College, and Mary C. Lacity, associate professor of management systems at the University of Missouri. Growth continues today, with 97% of the executives attending the recent Outsourcing World Summit saying that outsourcing expenditures at their companies would increase in 1999.

As Fortune magazine notes, "[these] executives reported an overall expected growth rate in spending for outsourcing in 1999 of 17%—a 21% increase over the previous year." By 2001, Willcocks projects, IT outsourcing will generate global market revenues of $121 billion. In fact, in just three years, it will be commonplace for a large corporation to outsource 25 to 30% of its IT budget.

Such commitment to a strategy bespeaks a corporate appreciation for outsourcing's basic advantages. Forty-two percent of the attendees polled at this year's Outsourcing World Summit were calling "realized financial benefits" the single most important factor driving executive satisfaction with outsourcing.

Outsourcing, however, must be seen as more than a simple accounting tactic. Business consultant and author Michael F. Corbett declares: "In the future, innovation will be the single most important factor in outsourcing decisions. In fact, companies that aren't changing—that don't feel compelled to reinvent themselves to meet the challenges of their marketplace—don't outsource. It's only once companies feel that compelling need for change that they start to look outside. They come to realize that innovative thinking is what fuels change and that outsourcing is the best way to capture and integrate the experiences, capabilities and investments of outside innovators."

A company committed to concentrating on its own core competencies can, in effect, "extend" its human resources pool by outsourcing. "The advantage is that you can collapse the time line, the time to completion and the time to market. That is very powerful," says Erran Carmel, associate professor of global information technologies at American University.

Powerful, yes; but difficult as well. Regardless of the product produced or the service offered, outsourcing cannot be considered a "plug and play" strategy. In fact, the idea of total IT outsourcing—that is, 80 % or more of the IT budget is earmarked for outsourcing—remains largely ignored. According to Willcocks, total outsourcing is used by only eight % of the companies engaged in the strategy in the U.S. And for good reason: Data gleaned from more than ten-dozen of the world's largest total-outsourcing arrangements show a 35 % failure rate. To Professor Willcocks' way of thinking, selective outsourcing—in which the outsourcing represents 15 to 20 % of the budget--is the preferable commitment.

Of course, success in selective outsourcing needs to be an act of managing on a par with handling capital financing or redesigning a corporate subsidiary. Among the critical issues to be addressed:

  • Contracts: Short-term contracts (four years) prove to be more successful than longer ones. In addition, the contracting parties need to know from the start what kind of commitments they are making for the duration of the contract.
  • Cooperation: The company outsourcing must maintain a genuine working relationship with the IT vendor, making an effort to understand issues and collaborate, when necessary, in solving problems.
  • Accountability: "We've been so consumed by the phenomenal growth of hardware and software technology that we have not spent enough time or focus on the managerial and organizational aspects of IT in organizations," says Medhi Khosrowpour, professor of information systems at Pennsylvania State University. Accordingly, managers must provide a clear set of goals to the vendor, stating the kind and amount of return on investments expected.

Serious management skills are brought to bear on IT outsourcing because, to quote Xerox Corporation executive Tom Dolan, outsourcing "has evolved from an option to a strategic necessity…[it] has come to encompass even the most critical business activities."

IT Outsourcing and the Pharmaceutical Industry (Back to Top)
Certainly among those critical business activities today are aspects of product development in the pharmaceutical industry, which has embraced outsourcing as a way of better focusing on its core strengths of research, sales and distribution. Relationships among pharmaceutical companies, clinical research organizations and contract manufacturing companies are commonplace. Indeed, the pharmaceutical industry has been extraordinarily aggressive in licensing new data-generating technologies developed by an array of biotechnology companies. Not surprisingly, the shift to horizontal integration has made pharmaceutical companies quite comfortable with the idea of relying on external relationships for key services, including the need to handle an enormous amount of data integration.

Making just such an integration "fit hand-in-glove" was the goal when American Home Products Corporation (AHP) outsourced IT work to NetGenics Inc. in 1998, says Manuel Glynias, NetGenics CEO. Under the terms of the four-year contract, NetGenics is integrating and enhancing AHP's bioinformatics, genomics and drug-discovery initiatives. The system devised by NetGenics comprises cross-platform, client-server based bioinformatics software. As BioWorld Today reports, the software is "in an environment that integrates legacy, third-party and proprietary data—organizing and mirrors the way multi-disciplinary drug teams are set up."

NetGenics created a systems for AHP that is standardized to an extent but also customized for AHP's particular needs. NetGenics installed Synergy, its application framework and collaborative software engineering service, in three divisions of AHP. Synergy uses the Common Object Request Broker Architecture (CORBA), a set of standards agreed to by a consortium of more than 700 hardware and software companies. It was developed in response to the need of pharmaceutical and biotechnology companies to more effectively manage the growing volume of drug discovery information, particularly genomics data. Synergy features a team-structured interface that mirrors the organization of multidisciplinary drug discovery teams, enabling members to share data and collaborate effectively.To further enhance the customization strategy, AHP will meet regularly with NetGenics to maximize the use of the technology.

NetGenics' Glynias understands the impact of the data flood on pharmaceuticals firms, and is happy to partner with them to find solutions. "Suddenly the information available just exploded," he says. "There is an onslaught of data, particularly in gene expression, and they're trying now to deal with it."

Summary (Back to Top)
In dealing with it successfully, AHP is working with NetGenics on the key managerial issues affecting outsourcing—contacting, cooperation, and accountability. As Glynias points out, pharmaceutical companies "are realizing that they have to have better control all the information." And they're willing to constructively partner with others to take that control.

David George has more than 20 years' experience designing and developing informatics systems for biological research. George was recently appointed Director of Customer Strategy and Consulting for NetGenics Inc.

For more information: David George, Director of Customer and Strategic Consulting, NetGenics Inc., 1717 East 9th St., Suite 1600, Cleveland, OH 44114. Tel: 216-861-4007.

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