INTRODUCTION

In discussing the competitive process in the pharmaceutical industry, Graham Leask of Aston Business School commented that entrenched core competencies could become 'core rigidities'.¹ He explained how pharmaceutical sales representatives familiar with one therapy area could not easily switch to another. This is not the only flexibility problem faced by pharmaceutical companies trying to change business and marketing strategy in the face of increasingly difficult market conditions.

For example, in the UK, substantial changes in the National Health Service have required nimble responses from pharmaceutical companies. Many companies are partnering with contract sales organisations (CSOs) to speed up their implementation of change. Speed to market is critical when a new drug has been approved for use. Some CSOs are equipped with the knowledge to set up sales teams in new territories or for new treatments in a matter of days. Equally, new types of relationship at health authority level are needed, which require different skills from detailing to doctors. This entails risk that some CSOs are able to share.

According to the theory of the firm, a changing business environment challenges strategists to revisit where the boundaries of the firm should be. Economists argue that boundaries should be redrawn on the basis of transaction cost analysis, business strategists tend to focus their judgment of what should be insourced and what should be outsourced on the competitive value of the company's assets, including knowledge.²

Many business-to-business companies who have taken a cost-driven approach to outsourcing have been disappointed. In contrast, the pharmaceutical industry has pioneered outsourcing not just for service functions (such as IT and logistics), which have been generally accepted as 'non-core' to most organisations, but for functions such as research, manufacturing and selling, which companies in other sectors seem more inclined to keep in-house. Partnering for 'value creation' appears to be an industry strength. This has a knock-on effect for the service providers. CSOs specialising in the pharmaceutical sector seem to be ambitious organisations, recognised for their contribution to their industry and to the sales profession.

Flexibility and speed are often mentioned in the trade press as the competitive advantage of CSOs over in-house sales. While they are often still used by clients for short-term impetus for product launches or to cover staff shortages, some pharmaceutical companies are also exploring new business models with CSOs in order to address a dwindling return on investment from their salespeople.

This paper explores in brief the lessons from the history of outsourcing and the current state of play in the outsourced sales market within the pharmaceutical sector, leading to discussion about its future direction.

THE BUSINESS DRIVERS FOR OUTSOURCING

'Outsourcing involves contracting with a third party to provide goods and services to the host organisation that would otherwise have been available in-house'.³

In the 1950s, only specialist functions such as advertising and legal services were 'outsourced' by large firms. Self-sufficient, vertically integrated organisations were the norm. In the 1990s, outsourcing became widespread in developed economies, with both public and private sector organisations contracting many business processes, such as logistics, information technology and customer support, to third-party specialists. Clearly the ideas about what functions could be contracted out had changed.

Zhu et al.⁴ noted that rapid technological change together with increased competitiveness and globalisation drove companies' desire for flexibility and reduced risk in operations, leading to the popularity of outsourcing. For the most part, companies have focused on outsourcing 'service' functions — those classified in the accounts as some kind of overhead.

Transaction cost theory states that the most efficient structure for governing a transaction depends on its cost. It appears that cost saving is still the primary benefit sought by financial decision-makers when making outsourcing decisions. It was identified as the primary objective of accountants in the USA⁵ and Smith et al.⁶ found that cost-saving was the most important reason for outsourcing in their UK study.

Cost-saving may be an initial driver, but an outsourced resource needs careful management, or the act of outsourcing it may generate complexity and hidden costs. A Deloittes report in 2005 suggested that 70 per cent of managers involved in outsourcing had experienced significant difficulties. Forty-four per cent did not see the expected cost savings, and 25 per cent had brought some outsourced functions back in house.⁷ Nevertheless, the report concluded that with the right reasons, the right model and talented in-house management of the relationship with the provider, value could be realised.

Morgan⁸ found that some companies were looking for innovation, expert skills, shared risk, accelerated time to market, and improved customer service and growth from outsourcing. He pointed out that soft factors such as shared goals and willingness to partner should be considered in outsourcing arrangements. So cooperation theory, which suggests that the best outcomes are achieved through parties to an agreement perceiving their goals to be interdependent,⁹ might be more helpful to companies that wish to create value with their outsourcing providers.

OUTSOURCING IN THE PHARMACEUTICAL SECTOR

Strategic value creation is a driver for outsourcing in the pharmaceutical sector. Some commentators advocate that firms should only employ resources that are difficult to find externally and critical to value generation;² in other words, no particular function is 'core'per se. Most companies in the pharmaceutical sector are familiar with outsourcing research and development, manufacturing, and sales, indicating that the capability of managing 'the virtual organisation' could be a strength in the sector. Lin and Darling¹⁰ comment that the sector is 'special' in firms' success depending on collaborating with external knowledge and skills.

Forty per cent of drug development expenditure is committed to contract research organisations (CROs) according to CanBiotech,¹¹ who estimated that the market size of outsourced pharmaceutical research would reach $14.4bn by 2007. They estimated the market size for outsourced pharmaceutical manufacturing (CMOs) at $36bn in the US alone in 2005, with a growth rate of 10–15 per cent. Pharmaceutical companies also outsource data processing and other support services, regulatory work, for example data submission, FDA approvals and marketing services such as PR.¹¹

Pharmaceutical companies do make use of outsourcing to reduce costs, but gaining access to expertise, gaining access to production capacity and shortening the time to market for new products are also significant factors.¹² Shortening the time to market for new products was a key driver in the early development of CSOs focused on the pharmaceutical sector. Industry analysts Datamonitor describe sales force outsourcing as 'common practice' in the pharmaceutical industry to achieve speed to market, improve sales efficiency and gain access to expertise in a new market or product category, while avoiding upfront investment.¹³

The CSO market in the pharmaceutical sector was $2.5bn in 2006 and forecast to exceed $5bn by 2011 according to market research firm Kalorama Information. The report attributes this to smaller pharmaceutical and biotechnology companies preferring to outsource rather than develop in-house sales expertise.¹⁴ Nevertheless, CSO websites feature many case studies where they are working with very large pharmaceutical companies. Innovex claim to serve 90 per cent of pharmaceutical companies in the UK¹⁵ with contract field sales, sales recruitment, customer care, marketing, medical representatives and nurse advisers.

WHY OUTSOURCE SALES?

Bousfield¹⁶ comments that companies may outsource call centres 'to gain access to world-class capabilities in customer management, an area, that, though vital to any organisation's success, is not a core business skill for most'.

Just as individuals often feel that they are not the best person to sell themselves, companies that make something are not always best-placed to sell it or to manage customer relationships after the sale. CSOs have longstanding relationships with customers in their geography or category, together with sales expertise and focus that their clients could not achieve on their own.

Contract sale organisations share the need to succeed with their clients; they are organisations with the single purpose of generating sales for clients. As they look after their clients' top line, sales effectiveness and performance is critical to both. According to US census data, 10 per cent of business-to-business sales in the US are conducted by manufacturers' representatives, outsourced sales professionals or CSOs.¹⁷

The reasons why companies in any business-to-business market use CSOs include minimising costs, achieving speed to market, the need for their capabilities and reducing financial risk. As with general outsourcing, however, researchers find that the drive to reduce costs is where the debate usually starts.¹⁷

By a method in keeping with transactional cost theory, the justification for outsourcing selling is usually driven by breakeven analysis. Ross et al.¹⁸ found a number of flawed assumptions in common cost models. For example, the costs of the direct sales force are usually calculated without consideration of hidden administration costs and the time cost of money. The outsourcing option is costed without consideration of the financial benefits of better coverage of sales territories, the quality of selling effectiveness and value of the CSO's existing customer relationships.

Although some texts assume that CSOs are for small companies until they achieve a size that justifies employing salespeople, large companies can also benefit. Within large companies, Anderson and Trinkle¹⁷ noted a lack of understanding of the extent of the hidden costs in employing a field sales force, partly due to costing systems not being sensitive enough to report them. They estimated that the average in-house representative costs 2.6 times his or her pay, plus the legal risks associated with direct employment. CSOs, besides being 'pure selling machines' for clients, absorb a great deal of financial and legal risk for them.

The financial arguments should carry appropriate weight in any decision to outsource the sales function, but increasingly firms are also seeking strategic advantage, such as sales effectiveness and access to expertise. Anderson and Trinkle¹⁷ also cite as a reason for outsourcing 'freedom to focus'. The authors speculate that this means overcoming internal political problems: 'Many top executives can see what they need to do, but can't break down organizational resistance to doing it'. They suggest that, unlike some in-house sales teams, CSOs have every reason to be outcome-oriented, flexible and willing to share risk.

Although the empirical evidence for value creation through CSOs is limited, customer-endorsed case material is available from CSO websites. According to these sources, sales outsourcing has been instrumental in turning around failing companies, launching new products, enabling small companies to grow and enabling large companies to address customer segments that had lacked focus from the in-house sales organisation. The potential for CSOs to be tools of strategic change in their clients probably deserves more exploration from both practitioners and academics.

THE DRIVERS FOR OUTSOURCED SELLING IN THE PHARMACEUTICAL SECTOR

Selling pharmaceutical products is difficult and getting more difficult. Pharmaceutical companies spend $5.3bn per year on detailing and $16.4bn on the samples distributed during the detailing process.¹⁹ In the 1990s Wall Street analysts highlighted a correlation between market share and sales force size in the pharmaceutical sector. Companies are engaged in an 'arms war' to recruit more and more representatives.²⁰ It could not go on forever without diminishing returns.

A report by Accenture in 2001 described a changing business environment for pharmaceutical companies, including legislative constraints on marketing exclusivity, less differentiation between products, more buying groups, more active interest from patients, price challenges and virtual consolidation of doctors and pharmacists. The difference between the integrated US market and fragmented European markets would preclude a global response.²¹

In a massive study of 24 monthly observations of 74,075 doctors, that contradicted previous 'received wisdom' in the sector, Mizik and Jacobsen²² noted that the effect of sales force activity on prescribing activity was 'modest'. The authors explained in a separate article that visits from representatives lasted 2–5 min, doctors held negative attitudes towards the representatives and they claimed that their prescribing behaviour was influenced more by other sources of information such as scientific papers.¹⁹ The findings of the authors' main study suggested that representatives' visits might be justified for new, high profit drugs, but for drugs with lower margins, the detailing system was 'sub-optimal'.²²

For several years, the Hay Group Annual Sales Force effectiveness Survey of 53 US pharmaceutical companies noted that the number of pharmaceutical sales representatives calling on a virtually static population of doctors was increasing. In the 2006 survey, a change in mood was identified. Companies were willing to tackle the 'dwindling profitability' of their representatives, observing that many were drawing high salaries for a job limited to merchandising by constraints on the time that doctors are prepared to spend with them.²³

The UK subsidiary of Japanese pharmaceutical company Takeda (one of the top 15 pharmaceutical companies in the world) and CSO Ashfield Healthcare launched a radical new approach in 2004. Takeda identified the key characteristic of the UK health market as its fragmentation into geographically based health trusts. Partnering with Ashfield, Takeda replaced sales representatives with Regional Account Directors, who focus on building strategic relationships with local health trusts.²⁴ Takeda UK Limited was shortlisted for 'Company of the Year' in the Pharmaceutical Effectiveness Awards in 2005, and for the first half of 2006 saw sales growth of 25 per cent.²⁵ Although the terminology of strategic relationships/partnering is often over-used by optimistic suppliers, the long-term nature of this arrangement suggests that there is strategic intent in this example.

It is interesting to note the number of awards that pharmaceutical CSOs, such as In2Focus and Innovex, win from their industry and the sales profession. They seem to endeavour to be leading edge in both. Pharmaceutical CSOs employ experienced salespeople, with track records in relationship building, and equip them with useful information technology. Although CSOs may offer syndicated services, where they detail the products of two or more clients in one sales call, increasingly they are likely to be dedicated to products or markets for one client. For pharmaceutical companies needing to improve flexibility in the light of difficult market conditions, partnering with the expert resources of CSOs must be worth exploration.

Of course, there are counter-arguments. Even if the only 'core' element of a firm is its brand, how can it leverage that in the market without in-house brand ambassadors? A pharmaceutical company's sales force is an important indicator of corporate identity to doctors, according to a study in Greece by Dimopoulou and Fill.²⁶ Many of the images doctors have of pharmaceutical companies are related to experience of the sales force. This might suggest that control of the sales force is very important, so CSOs are perhaps more likely to be a successful option when they are dedicated to the client.

A report by Health Strategies Group Inc. in the US²⁷ suggested that contracted representatives do have more difficulty accessing doctors than directly employed medical representatives — they had 33 per cent less 'sit-down' visits. CSOs responding to the report mentioned that generally they have less well-known products to sell from scratch than drug companies' full-time representatives. Where CSOs are closely partnering with clients and integrating with their in-house teams, both client and CSOs claim that results are much better and their effectiveness does not erode over time.

Last but not least, working with CSOs will affect power structures within an organisation. Rational advantages might be outweighed by the potential for internal disruption. Anderson and Trinkle¹⁷ noted that: 'too many senior managers consider that having their own in-house field sales organization is a form of status'. Only where CSOs are integrated are they likely to be able to counteract concerns about loss of control.

FROM TACTICAL TO STRATEGIC

Perceptions of 'tactical' and 'strategic' vary from firm to firm and even from decision-maker to decision-maker. From military history, we have Clausewitz'²⁸ explanation that tactics are the conduct of the battle and strategy is the conduct of the war. When this is translated into the business context, tactics are associated with short-term gain, and strategy with long-term competitive advantage.

In the case of strategic alliances, Lin and Darling¹⁰ describe long-term arrangements to exchange resources with other firms that go beyond the letter of the contract in the commitment of both parties to achieve common objectives. Phelan and Lewis²⁹ suggest that a strategic alliance is somewhere between the firm and the market, that is in-between employing staff and contracting out to an agent. They describe it as a tool to unlock value. Managers must weigh up its costs and benefits compared to alternatives. It is certainly a serious option, since research by Mohr and Spekman³⁰ found that coordination, commitment, joint goal-setting and joint planning are associated with increased sales volumes for the business relationship.

Founders of CSOs are quite explicit about where they have come from and where they are going with their clients. Lynn O'Connor Vos is CEO of a global CSO headquartered in New York. She describes³¹ CSOs in the early 1990s as small companies offering support for new product launches: a source of ad hoc support, not integral to marketing strategy. By the late 1990s, large CSOs emerged, financially secure enough to employ full-time representatives and provide them with competitive training, development and compensation packages. They focused on providing a quality service and aimed to partner with clients.

O'Connor Vos³¹ argues that in recent years, CSOs have emerged as full partners. Product launches are still important, but they also work post-launch in a variety of market segments, generating perceived value in a client's products, and integrating into a client's organisation. The cost of CSOs is still predominantly variable rather than fixed, they can offer a wide spectrum of services, and invest heavily in sales process tools such as Sales Force Automation (SFA). In2Focus in the UK have also noted that clients are shifting from syndicated to dedicated services, and are interested in new models, such as key account management of multiple decision-makers at health authority level.

For new medical companies, the CSO option offers considerable strategic advantage. Start-up costs are minimal, the resource is flexible and scalable, and the CSO provides and supports specialist salespeople.³² Clearly, a biotech with an innovative product must ensure that the CSO representatives are capable of dealing with leading edge science and acting as an adviser to medical staff. In some arrangements, the CSO staff may transfer to the client after the company has grown.

CSOs also enable strategic flexibility for larger companies. Mölnlycke Health Care reported a significant increase in their sales in the UK wound-care market after partnering with a CSO to set up and develop a sales team for the home care sector of the National Health Service. The team was set up within two months.³³

Steve Budd of PDI, a US CSO claims that CSOs provide the ultimate flexibility for pharmaceutical companies, enabling them to 'upsize and downsize quickly and painlessly' while staying in charge of targets.³⁴ Although there is little empirical research tracking the advantages and disadvantages of CSOs, the case studies on CSO websites suggest that their growth is based on versatile professional capabilities. Of course, CSOs would present themselves in the best light; but since most are growth businesses, clients must be getting something from their services. Researching the reality behind the claims is the challenge.

CONCLUSION

It would be foolish to discount the history of correlation between quantity of salespeople and product sales, and the importance that must play in sales management. But it would also be short-sighted not to pilot new and potentially more profitable ways of achieving top line revenue objectives. In-house sales may be good for ensuring the quality of corporate identity cues, but stark market realities would lead anyone to question how much that is worth in a call that lasts only a few minutes. The pharmaceutical industry faces price pressure; CSOs can reduce fixed costs. The industry faces customer cynicism; CSOs can pilot new business models. The return on investment in in-house sales is declining; CSOs can absorb the legislative and financial risks of employing salespeople. Speed to market is essential; CSOs can deploy sales resource speedily.

The pharmaceutical industry is facing unfavourable changes in its business environment, and has to respond more quickly than ever before. It is clear to the author from exploratory discussions with CSOs and their clients that sales outsourcing has a role in the industry in facilitating change.

Nevertheless, switching resources to a CSO is a business risk, and one that cannot be taken lightly. Companies using CSOs need to study the history of outsourcing core and noncore functions in order to avoid the pitfalls. Developing mutually beneficial relationships that will have momentum requires some strategic thought. It will not suit every company's culture, but perhaps a vertically integrated culture does not suit today's business environment.

In short, there are indications in trade information sources that partnerships with CSOs can be effective instruments in achieving strategic change as well as tactical advantages. Given the relative lack of academic literature, empirical primary research is required so that objective comparisons can be made. The biggest challenge in conducting that research will be access to decision-makers and performance management data. For the time-being, by gathering secondary evidence and comment, it appears that some CSOs are delivering sustained benefits to some companies in the pharmaceutical sector. Therefore, the potential to partner with a CSO should at least be on strategy makers' radar.

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Acknowledgements

The author acknowledges the help of Penny Mitchell, Marketing Director of In2Focus (www.in2focus.com) and Mike Smith, Director of Tennyson (www.tennyson.uk.com).