- Email: [email protected]
Outsourcing: evaluating alternatives
reviews
perspective
PSTT Vol. 1, No. 4 July 1998
Outsourcing: evaluating alternatives Brian Hausner The current economic, competitive and regulatory environments mean that companies have to find new ways of managing resources to maximize productivity and to ensure that projects meet strict timeline requirements. Often, managers are faced with difficult choices. The author considers the main factors that influence the selection of R&D resources and outlines some of the tools that can aid decision making.
Brian Hausner Pharmalytic 435 Creamery Way Exton, PA, USA tel: ⫹1 215 616 5100 fax: ⫹1 215 616 5104 e-mail: Brian Hauser@MicronTechnologies. com
▼ The pharmaceutical industry has experienced,
and continues to undergo, tremendous change. For example, in the USA, increased government scrutiny, the emergence of health maintenance organizations (HMOs) and other buying groups has introduced greater-than-ever cost pressures and, in some cases, restrictions on what is allowed on the formularies. Companies have responded in various ways. One very visible response is the current level of merger activity; for example, the agreement between Ciba and Sandoz to form Novartis and the recent manoeuvring by Monsanto and American Home Products, and Glaxo Wellcome and Smith Kline Beecham. Alliances abound and, in addition, companies are being re-engineered and resources reassessed. Indeed, companies such as Pharmacia & Upjohn have shifted production to low-cost facilities or regional manufacturing centers, while the recent trend towards globalization often means that facilities exist in Asia-Pacific regions. New challenges Laboratory personnel are now asked to undertake very different tasks to those that they performed ten years ago. More decisions are being made at operating levels and there is more data available than ever before. Such decisions and tasks can form part of project management, internally or externally, across numerous functions. Rapid transfer of materials and information between various sites and functions means that analytical methods must be more robust than in the past,
148
and employees are required to participate in audit teams, launch teams, focus groups and the ever-present ‘special projects’. All of these activities must be accomplished with fewer resources in shorter times. Resource alternatives The cost of managing drug development remains high, especially in the later phases. This is where automation can be used to increase productivity in areas where the volume of samples is high, the work is repetitive and the method has the potential to be transferred numerous times. Such is the case in Phase III stability studies, conducted initially at the developmental site and then in Phase IV (post-marketing) at the manufacturing site. The risk is the ‘up-front’ cost of the investment necessary for converting to automation versus the ultimate launch of the product. Developing manual methods that are amenable to automation (with careful planning of solvent use, dispersion techniques etc.) can reduce such risk. However, automation is only one alternative; this article will focus on three investment options that a laboratory can use to address today’s changing market (Box 1):
• • •
Laboratory automation Use of contract resources Hiring of temporary help
The hiring of internal resources will not be addressed here because this type of investment is difficult to justify in the current market, and each company has its own corporate policy. Major drivers in the market Speed-to-market One critical success factor is the speed with which a product can be brought to market. In a recent financial analyst’s report1, reductions in the drug development cycle were highlighted because of the impact that these can have on the bottom line (Fig. 1). Pfizer, for example, has cut
Copyright ©1998 Elsevier Science Ltd. All rights reserved. 1461-5347/98/$19.00. PII: S1461-5347(98)00017-0
perspective
PSTT Vol. 1, No. 4 July 1998
900
Box 1. Factors to consider for different resource options Lost revenue ($k/day)
800
Automation • Training of staff • When to convert to automated method • Initial cost • Hidden costs – more data for review • Lower cost per test • 24 h operation • Standard platform
700 600 500 400 300 200 100 0 IIA
Contract facilities • Technology transfer • Control • Time/cost to approve • Cost per test • Lab–lab and analyst variability • Source for expertise • Rapid capacity addition • Less oversight required Use of ‘temps’ • Time to train/quality issues • Turnover • Reliability • Supervision • Expertise • Control (in-house) • Easily replaced • Readily available
its average time to bring products to Phase I trials from 21.5 months to 16.3 months1. The traditional sequential project timeline, in which one ‘task’ is begun only when another is completed, is no longer acceptable. Any delay in one stage or task would delay the remaining tasks. Running multiple projects concurrently usually leads to reduced project time, but increases the risk. To obtain the desired ‘new’ timeline while balancing risks requires the use of more rigorous processes, one of which could be based on financial modeling. Capacity issues In any process, work is rarely received at a steady rate.The situation is made worse when internal resources that are already limited are redirected to a company’s strategic focal area. This is particularly true in the generation of new chemical entities, an area in which a tremendous amount of effort has been focused recently. Also, analytical support requirements are
reviews
IIB
III
Phase Figure 1. Opportunity cost of development delays [von Steiger, H. (1997) Make vs Buy, A Client Perspective, IBC USA Conferences, Philadelphia, PA, USA].
typically high during this phase of development because of the new methods that are being used. The traditional way to manage this situation is to set capacity at a level at which surges in workload could be handled. Some studies indicate that up to 30% internal capacity is needed to handle the swings in work2.This can be very costly because capacity addition is usually fixed, and this high level of investment impacts on the overall productivity of an organization. Possible causes of capacity constraints that magnify the volatility of work are:
• • • • • •
backlogs of previous work; extended process time (either manufacturing, product development or analysis); unplanned events; shifting project priorities; equipment failures; personnel issues.
Strategic choices Increasingly, companies are recognizing that productivity not only means cost reduction but also more effective utilization of resources. This is where finding the appropriate mix of the three alternatives (temporary help, contract resources or laboratory automation) can play a significant role, particularly when coordinated with, or used as, a key strategy. By focusing on strengths and leveraging other strengths to gain expertise in an area in which they may be relatively weak, companies can improve productivity and gain a competitive advantage. As a consequence, outsourcing is booming; services ranging from traditional contract manufacturing to the writing of chemical, 149
reviews
perspective
PSTT Vol. 1, No. 4 July 1998
manufacturing and control sections for new drug applications (NDAs) are now available and the use of contract employees has tripled in recent years. Sustainable competitive advantage requires innovation and the ability to deliver that innovation as fast as possible to the marketplace.Typically, pharmaceutical companies have operated in a high-quality, slow-innovation business as a consequence of regulation, but the emphasis has now shifted. Technology and innovation have become increasingly important keys to the pharmaceutical industry’s success; key tenets of strategic implementation include:
• • • • • • • •
Leverage of enabling technologies Avoidance of overinvestment in any single area Complete evaluation of processes and the determination of steps on the critical path Establishment of the dollar volume of time reduction Identification of impediments Introduction of scalability Adoption of flexible team structures Obtaining organizational and management ‘buy in’ (important)
Development costs ($k day−1)
Establishing a strategy It is good business practice to establish a strategy for a specific area. This strategy should also support the broad strategy set for the entire organization and complement those other closely interacting functions. It is important that the objectives that are set are realistic; if not, the morale of the group can suffer and this can cause damage to relationships with management or lead to unrealistic expectations. Setting achievable and ‘stretch’ objectives are a very good idea, as long as the meaning of ‘stretch’ is understood.
1200 1000 800 600 400 200 0 0
Phase IIA
Phase IIB
Phase III
Figure 2. Internal vs. external development costs. Internal costs (black); external costs (grey) represent contractor fees; external and coordination costs (white) are the internal costs for overseeing contractor costs such as travel, employees time, data review etc. [Jawadakar, M. (1997) Forming the Outsourcing Manufacturing Decision, IBC USA Conferences, Coral Gables, FL, USA].
150
Understanding what is driving or impacting a decision is paramount.Typically, during the drug development stage, there is a difference in managing the process between external and internal costs (Fig. 2). The aspect of ‘control’ also increases in the later phases of development, which probably contributes to the increased cost in Phase II (studies are also larger). Financial tools and the ways to assign value When using financial models, one of the most difficult tasks is to determine value in processes in which technical issues are involved. When this fact, together with the increasing demand of managing multiple projects, is considered, it becomes apparent that a technique for establishing priorities for projects and evaluating resources is needed. Cash-flow analysis For incremental projects (such as outsourcing), resource requirements change in a stepwise fashion rather than linearly. Most managers are familiar with profit and loss (i.e. standard costs) rather than cash flow, but more education is required. The most commonly used models are break-even analysis and discounted cash flow or just cash flow. Other commonly used financial tools are working capital, return on capital employed, return on sales and inventory turns. Financial statements that should be readily available when performing such analysis include balance sheet, profit-and-loss statement and all cash-flow statements. Breakeven analysis is simple to perform if the number of variables is kept low. As a standalone method, this method is used for a quick payback analysis, such as when a product is on the market and a revenue stream is consistent. A simple example would be whether to purchase a specific piece of equipment (costing $100k) for a specific test or continue to use an outside laboratory (which charges $5k/test). It takes only twenty tests to cover the cost of the equipment and if ten tests per year were forecast, breakeven would be achieved within two years. Discounted cash flow includes the element of risk as well as providing a payback. The outputs are rate-of-return and netpresent-value. Rate-of-return is the payback for an investment and net-present-value represents the cost of money. Both indicate the financial ‘soundness’ of the investment, incorporating time as a major variable. As a project takes longer, the risk increases and the financial aspects become less attractive. Some major inputs are required; one is the appropriate time period for the project. This could be based on the depreciation period used by a company (7–10 years is common). Alternatively, it could be based on technology timeframes, such as a patent file. It is necessary to identify the major variables and guage whether their values change in different situations.This is where value analysis helps because it forces a consistent ranking
perspective
PSTT Vol. 1, No. 4 July 1998
of the ‘desired’ variables.The rate of cost of money again could be determined based on company guidelines, industry standards or by financial markets. Choice and value analysis The use of choice or value analysis techniques is critical because it should help to highlight the technical issues by identifying the ‘know how’ of a department, which a simplistic approach could overlook. Some key points should be considered when undertaking this type of analysis.
• • •
The level of risk should be determined for the project. The development stage of the compound and probability of success should be assessed. All relevant scenarios should be examined to understand sensitivities.
There are many types of value analysis processes available. Value analysis is a process used to prioritize numerous criteria (variables) for a set of alternatives for a specific project or objective. Starting with ‘must haves’ or the criteria that are absolutely necessary for that project, the alternatives are then screened using these criteria. If the alternative doesn’t meet one criterion, it is rejected. If more than one alternative remains, the next step in the process uses desired criteria. These are usually criteria that aren’t essential, but could add some incremental value.This step forces a rank order of each desired criterion starting with one to the actual number. Then, for each alternative, a value is assigned (typically 1–10). That valued is multiplied by the rank order to obtain a ‘weighted value’. Each alternative’s desired criteria can then be totalled, hopefully providing clear delineation between the remaining alternatives. It is during these steps that an attempt can be made to assign financial values to each criterion. This, of course, depends on each company’s approach to costing, depreciation, etc. The sheet shown in Fig. 3 was developed by Decision Processes International (Plymouth, PA, USA)and illustrates the key steps in the process. Another company, Aliah International, markets a computer program and offers training for in-house ‘facilitators’. Alternatively, the company will send their own personnel to facilitate. This program is very time-intensive, but is probably the best in reducing biases that can occur when there are strong personalities in a group. It works on a weighted average, needs at least four participants and is based on participant input to assign a value to each variable. It will even calculate the major variables that will have the most significant impact. The steps for this process follow a ‘logic path’ (Box 2). The decision objective must be clearly defined and understood by all participants.Typically, this is given insufficient consideration,
reviews
Box 2. Value analysis logic path • • • • •
Decision objective Selection criteria Comparison of alternatives Risk evaluation Best balanced choice
because of the perception that the next few steps will be monumental and will involve much work. However, if the objective is not clearly understood, the process may have to be started again, with consequent loss in productivity. Selection criteria should be as generic as possible, but not too broad.They should be specific to an organization, function or even market, depending on how the objective is defined. It is at this point that brainstorming occurs regarding the alternative options. Judging each suggestion as it arises can inhibit the participants, so the main aim should be to develop as long a list as possible, within a set time period. These can be reviewed using the selection criteria developed earlier as a screening procedure.The resulting shortlist should then be reviewed critically using more stringent criteria, using the worksheet in Fig. 3 as a tool, for example. In evaluating alternatives, the team should start by developing ‘must haves’ for a project. The question is then, does each alternative meet these? Those that do not should be eliminated from consideration. If more than one alternative remains, the team must then take into account ‘wants’ or ‘desireds’.These receive a relative weighting for the project, but will be different for each alternative. A common example of assigning value to variables can be drawn from the manufacturing environment and can be readily identified by most cost accountants. The fixed costs for a plant would include equipment, waste treatment, buildings and, in some cases, the plant administration and perhaps support staff. Variable costs are energy, direct labour and raw materials. For a laboratory operation, the fixed costs are similar to those above (buildings, equipment and perhaps support staff, such as administrative support, QA personnel and the analyst performing the work, as well as consumables used being the variable costs). Once the costs have been set they should not be massaged, or manipulated, because the baseline and targets will change and bias can enter the analysis. Investment alternatives The factors or ‘variables’ associated with the resource alternatives (Box 1) will have a different value for each organization and even for different functions within the same organization. These lists will be different for each organization and will be 151
reviews
perspective
Figure 3. Decision analysis worksheet. (Source: Decision Processes International.) Key operating principles to apply when using the worksheet. The objective should be brief and to the point (clarity is important). For 'musts', make sure these are absolutely required. Don't forget to place 'wants' in rank order.
PSTT Vol. 1, No. 4 July 1998
DECISION ANALYSIS WORKSHEET
OBJECTIVE: CRITERIA MUSTS
NON-Negotiable Limits Measurable
ALTERNATIVES How well does each alternative meet each must?
A
B Info
WANTS
Go/ No Go
C Info
Go/ No Go
D Info
Go/ No Go
Info
Go/ No Go
Info
Score
WT SC
Info
Score
How well does each alternative perform against each want?
Include inverted Relative Which one gets best score? Musts weight WT Info Score SC
Info
Score
WT SC
WT SC
Total: index of performance EDA 5
of each decision. With experience, individuals or groups can become efficient in making such comparisons.
Table 1. Estimated costs by option Temps
Automation
$30–75 h⫺1 $45–75 h⫺1 Internal fixed costs Qualified automation Mallocation Mspecialist plus fixed Mcost allocation
Contract laboratory $75–200⫹h⫺1 Usually project Mdependent
refined during piloting of any of the alternatives, which is highly recommended. Each of these factors can have some relative value within the same project or versus other projects. In some cases it is possible to establish templates or minimum levels of acceptance (Table 1). Using previous factors for each project, cost comparison can be used as a guide or baseline to check the validity
Conclusion In general, a mix of the alternatives tends to provide the optimum flexibility, owing especially to differences between the phases of drug development.The use of financial models combined with other tools, particularly value analysis, provides the best way to select appropriate alternatives for any scenario. However, these should be employed taking into account the broader strategies of the organization and the department. References 01
Felz Analyst Report, 1997
02
Zenie, F. (1996) International Symposium on Laboratory Automation Symposium, 20–23 October, Boston, MA, USA
In brief... The biopharmaceutical company Andaris (Nottingham, UK) has announced changes to its Board. The lead founder of the company, David Heath, is to retire as chairman to become a non-executive director and consultant to the company and Stuart Collinson, formerly at Glaxo Wellcome, has been appointed chief executive officer. Gordon Hall becomes nonexecutive chairman. Andaris is a UK-based biopharmaceutical company using a proprietary microcapsule technology to develop a range of in vivo imaging and therapeutic products targeted at major pharmaceutical markets. The company’s core technology is a proprietary spray-drying technique which produces spherical microcapsules, in soluble or insoluble form, from a wide range of pharmaceutical materials, including proteins and conventional drugs. The products are aimed primarily at applications of diagnostic imaging and drug delivery.
152
perspective
PSTT Vol. 1, No. 4 July 1998
Outsourcing: evaluating alternatives Brian Hausner The current economic, competitive and regulatory environments mean that companies have to find new ways of managing resources to maximize productivity and to ensure that projects meet strict timeline requirements. Often, managers are faced with difficult choices. The author considers the main factors that influence the selection of R&D resources and outlines some of the tools that can aid decision making.
Brian Hausner Pharmalytic 435 Creamery Way Exton, PA, USA tel: ⫹1 215 616 5100 fax: ⫹1 215 616 5104 e-mail: Brian Hauser@MicronTechnologies. com
▼ The pharmaceutical industry has experienced,
and continues to undergo, tremendous change. For example, in the USA, increased government scrutiny, the emergence of health maintenance organizations (HMOs) and other buying groups has introduced greater-than-ever cost pressures and, in some cases, restrictions on what is allowed on the formularies. Companies have responded in various ways. One very visible response is the current level of merger activity; for example, the agreement between Ciba and Sandoz to form Novartis and the recent manoeuvring by Monsanto and American Home Products, and Glaxo Wellcome and Smith Kline Beecham. Alliances abound and, in addition, companies are being re-engineered and resources reassessed. Indeed, companies such as Pharmacia & Upjohn have shifted production to low-cost facilities or regional manufacturing centers, while the recent trend towards globalization often means that facilities exist in Asia-Pacific regions. New challenges Laboratory personnel are now asked to undertake very different tasks to those that they performed ten years ago. More decisions are being made at operating levels and there is more data available than ever before. Such decisions and tasks can form part of project management, internally or externally, across numerous functions. Rapid transfer of materials and information between various sites and functions means that analytical methods must be more robust than in the past,
148
and employees are required to participate in audit teams, launch teams, focus groups and the ever-present ‘special projects’. All of these activities must be accomplished with fewer resources in shorter times. Resource alternatives The cost of managing drug development remains high, especially in the later phases. This is where automation can be used to increase productivity in areas where the volume of samples is high, the work is repetitive and the method has the potential to be transferred numerous times. Such is the case in Phase III stability studies, conducted initially at the developmental site and then in Phase IV (post-marketing) at the manufacturing site. The risk is the ‘up-front’ cost of the investment necessary for converting to automation versus the ultimate launch of the product. Developing manual methods that are amenable to automation (with careful planning of solvent use, dispersion techniques etc.) can reduce such risk. However, automation is only one alternative; this article will focus on three investment options that a laboratory can use to address today’s changing market (Box 1):
• • •
Laboratory automation Use of contract resources Hiring of temporary help
The hiring of internal resources will not be addressed here because this type of investment is difficult to justify in the current market, and each company has its own corporate policy. Major drivers in the market Speed-to-market One critical success factor is the speed with which a product can be brought to market. In a recent financial analyst’s report1, reductions in the drug development cycle were highlighted because of the impact that these can have on the bottom line (Fig. 1). Pfizer, for example, has cut
Copyright ©1998 Elsevier Science Ltd. All rights reserved. 1461-5347/98/$19.00. PII: S1461-5347(98)00017-0
perspective
PSTT Vol. 1, No. 4 July 1998
900
Box 1. Factors to consider for different resource options Lost revenue ($k/day)
800
Automation • Training of staff • When to convert to automated method • Initial cost • Hidden costs – more data for review • Lower cost per test • 24 h operation • Standard platform
700 600 500 400 300 200 100 0 IIA
Contract facilities • Technology transfer • Control • Time/cost to approve • Cost per test • Lab–lab and analyst variability • Source for expertise • Rapid capacity addition • Less oversight required Use of ‘temps’ • Time to train/quality issues • Turnover • Reliability • Supervision • Expertise • Control (in-house) • Easily replaced • Readily available
its average time to bring products to Phase I trials from 21.5 months to 16.3 months1. The traditional sequential project timeline, in which one ‘task’ is begun only when another is completed, is no longer acceptable. Any delay in one stage or task would delay the remaining tasks. Running multiple projects concurrently usually leads to reduced project time, but increases the risk. To obtain the desired ‘new’ timeline while balancing risks requires the use of more rigorous processes, one of which could be based on financial modeling. Capacity issues In any process, work is rarely received at a steady rate.The situation is made worse when internal resources that are already limited are redirected to a company’s strategic focal area. This is particularly true in the generation of new chemical entities, an area in which a tremendous amount of effort has been focused recently. Also, analytical support requirements are
reviews
IIB
III
Phase Figure 1. Opportunity cost of development delays [von Steiger, H. (1997) Make vs Buy, A Client Perspective, IBC USA Conferences, Philadelphia, PA, USA].
typically high during this phase of development because of the new methods that are being used. The traditional way to manage this situation is to set capacity at a level at which surges in workload could be handled. Some studies indicate that up to 30% internal capacity is needed to handle the swings in work2.This can be very costly because capacity addition is usually fixed, and this high level of investment impacts on the overall productivity of an organization. Possible causes of capacity constraints that magnify the volatility of work are:
• • • • • •
backlogs of previous work; extended process time (either manufacturing, product development or analysis); unplanned events; shifting project priorities; equipment failures; personnel issues.
Strategic choices Increasingly, companies are recognizing that productivity not only means cost reduction but also more effective utilization of resources. This is where finding the appropriate mix of the three alternatives (temporary help, contract resources or laboratory automation) can play a significant role, particularly when coordinated with, or used as, a key strategy. By focusing on strengths and leveraging other strengths to gain expertise in an area in which they may be relatively weak, companies can improve productivity and gain a competitive advantage. As a consequence, outsourcing is booming; services ranging from traditional contract manufacturing to the writing of chemical, 149
reviews
perspective
PSTT Vol. 1, No. 4 July 1998
manufacturing and control sections for new drug applications (NDAs) are now available and the use of contract employees has tripled in recent years. Sustainable competitive advantage requires innovation and the ability to deliver that innovation as fast as possible to the marketplace.Typically, pharmaceutical companies have operated in a high-quality, slow-innovation business as a consequence of regulation, but the emphasis has now shifted. Technology and innovation have become increasingly important keys to the pharmaceutical industry’s success; key tenets of strategic implementation include:
• • • • • • • •
Leverage of enabling technologies Avoidance of overinvestment in any single area Complete evaluation of processes and the determination of steps on the critical path Establishment of the dollar volume of time reduction Identification of impediments Introduction of scalability Adoption of flexible team structures Obtaining organizational and management ‘buy in’ (important)
Development costs ($k day−1)
Establishing a strategy It is good business practice to establish a strategy for a specific area. This strategy should also support the broad strategy set for the entire organization and complement those other closely interacting functions. It is important that the objectives that are set are realistic; if not, the morale of the group can suffer and this can cause damage to relationships with management or lead to unrealistic expectations. Setting achievable and ‘stretch’ objectives are a very good idea, as long as the meaning of ‘stretch’ is understood.
1200 1000 800 600 400 200 0 0
Phase IIA
Phase IIB
Phase III
Figure 2. Internal vs. external development costs. Internal costs (black); external costs (grey) represent contractor fees; external and coordination costs (white) are the internal costs for overseeing contractor costs such as travel, employees time, data review etc. [Jawadakar, M. (1997) Forming the Outsourcing Manufacturing Decision, IBC USA Conferences, Coral Gables, FL, USA].
150
Understanding what is driving or impacting a decision is paramount.Typically, during the drug development stage, there is a difference in managing the process between external and internal costs (Fig. 2). The aspect of ‘control’ also increases in the later phases of development, which probably contributes to the increased cost in Phase II (studies are also larger). Financial tools and the ways to assign value When using financial models, one of the most difficult tasks is to determine value in processes in which technical issues are involved. When this fact, together with the increasing demand of managing multiple projects, is considered, it becomes apparent that a technique for establishing priorities for projects and evaluating resources is needed. Cash-flow analysis For incremental projects (such as outsourcing), resource requirements change in a stepwise fashion rather than linearly. Most managers are familiar with profit and loss (i.e. standard costs) rather than cash flow, but more education is required. The most commonly used models are break-even analysis and discounted cash flow or just cash flow. Other commonly used financial tools are working capital, return on capital employed, return on sales and inventory turns. Financial statements that should be readily available when performing such analysis include balance sheet, profit-and-loss statement and all cash-flow statements. Breakeven analysis is simple to perform if the number of variables is kept low. As a standalone method, this method is used for a quick payback analysis, such as when a product is on the market and a revenue stream is consistent. A simple example would be whether to purchase a specific piece of equipment (costing $100k) for a specific test or continue to use an outside laboratory (which charges $5k/test). It takes only twenty tests to cover the cost of the equipment and if ten tests per year were forecast, breakeven would be achieved within two years. Discounted cash flow includes the element of risk as well as providing a payback. The outputs are rate-of-return and netpresent-value. Rate-of-return is the payback for an investment and net-present-value represents the cost of money. Both indicate the financial ‘soundness’ of the investment, incorporating time as a major variable. As a project takes longer, the risk increases and the financial aspects become less attractive. Some major inputs are required; one is the appropriate time period for the project. This could be based on the depreciation period used by a company (7–10 years is common). Alternatively, it could be based on technology timeframes, such as a patent file. It is necessary to identify the major variables and guage whether their values change in different situations.This is where value analysis helps because it forces a consistent ranking
perspective
PSTT Vol. 1, No. 4 July 1998
of the ‘desired’ variables.The rate of cost of money again could be determined based on company guidelines, industry standards or by financial markets. Choice and value analysis The use of choice or value analysis techniques is critical because it should help to highlight the technical issues by identifying the ‘know how’ of a department, which a simplistic approach could overlook. Some key points should be considered when undertaking this type of analysis.
• • •
The level of risk should be determined for the project. The development stage of the compound and probability of success should be assessed. All relevant scenarios should be examined to understand sensitivities.
There are many types of value analysis processes available. Value analysis is a process used to prioritize numerous criteria (variables) for a set of alternatives for a specific project or objective. Starting with ‘must haves’ or the criteria that are absolutely necessary for that project, the alternatives are then screened using these criteria. If the alternative doesn’t meet one criterion, it is rejected. If more than one alternative remains, the next step in the process uses desired criteria. These are usually criteria that aren’t essential, but could add some incremental value.This step forces a rank order of each desired criterion starting with one to the actual number. Then, for each alternative, a value is assigned (typically 1–10). That valued is multiplied by the rank order to obtain a ‘weighted value’. Each alternative’s desired criteria can then be totalled, hopefully providing clear delineation between the remaining alternatives. It is during these steps that an attempt can be made to assign financial values to each criterion. This, of course, depends on each company’s approach to costing, depreciation, etc. The sheet shown in Fig. 3 was developed by Decision Processes International (Plymouth, PA, USA)and illustrates the key steps in the process. Another company, Aliah International, markets a computer program and offers training for in-house ‘facilitators’. Alternatively, the company will send their own personnel to facilitate. This program is very time-intensive, but is probably the best in reducing biases that can occur when there are strong personalities in a group. It works on a weighted average, needs at least four participants and is based on participant input to assign a value to each variable. It will even calculate the major variables that will have the most significant impact. The steps for this process follow a ‘logic path’ (Box 2). The decision objective must be clearly defined and understood by all participants.Typically, this is given insufficient consideration,
reviews
Box 2. Value analysis logic path • • • • •
Decision objective Selection criteria Comparison of alternatives Risk evaluation Best balanced choice
because of the perception that the next few steps will be monumental and will involve much work. However, if the objective is not clearly understood, the process may have to be started again, with consequent loss in productivity. Selection criteria should be as generic as possible, but not too broad.They should be specific to an organization, function or even market, depending on how the objective is defined. It is at this point that brainstorming occurs regarding the alternative options. Judging each suggestion as it arises can inhibit the participants, so the main aim should be to develop as long a list as possible, within a set time period. These can be reviewed using the selection criteria developed earlier as a screening procedure.The resulting shortlist should then be reviewed critically using more stringent criteria, using the worksheet in Fig. 3 as a tool, for example. In evaluating alternatives, the team should start by developing ‘must haves’ for a project. The question is then, does each alternative meet these? Those that do not should be eliminated from consideration. If more than one alternative remains, the team must then take into account ‘wants’ or ‘desireds’.These receive a relative weighting for the project, but will be different for each alternative. A common example of assigning value to variables can be drawn from the manufacturing environment and can be readily identified by most cost accountants. The fixed costs for a plant would include equipment, waste treatment, buildings and, in some cases, the plant administration and perhaps support staff. Variable costs are energy, direct labour and raw materials. For a laboratory operation, the fixed costs are similar to those above (buildings, equipment and perhaps support staff, such as administrative support, QA personnel and the analyst performing the work, as well as consumables used being the variable costs). Once the costs have been set they should not be massaged, or manipulated, because the baseline and targets will change and bias can enter the analysis. Investment alternatives The factors or ‘variables’ associated with the resource alternatives (Box 1) will have a different value for each organization and even for different functions within the same organization. These lists will be different for each organization and will be 151
reviews
perspective
Figure 3. Decision analysis worksheet. (Source: Decision Processes International.) Key operating principles to apply when using the worksheet. The objective should be brief and to the point (clarity is important). For 'musts', make sure these are absolutely required. Don't forget to place 'wants' in rank order.
PSTT Vol. 1, No. 4 July 1998
DECISION ANALYSIS WORKSHEET
OBJECTIVE: CRITERIA MUSTS
NON-Negotiable Limits Measurable
ALTERNATIVES How well does each alternative meet each must?
A
B Info
WANTS
Go/ No Go
C Info
Go/ No Go
D Info
Go/ No Go
Info
Go/ No Go
Info
Score
WT SC
Info
Score
How well does each alternative perform against each want?
Include inverted Relative Which one gets best score? Musts weight WT Info Score SC
Info
Score
WT SC
WT SC
Total: index of performance EDA 5
of each decision. With experience, individuals or groups can become efficient in making such comparisons.
Table 1. Estimated costs by option Temps
Automation
$30–75 h⫺1 $45–75 h⫺1 Internal fixed costs Qualified automation Mallocation Mspecialist plus fixed Mcost allocation
Contract laboratory $75–200⫹h⫺1 Usually project Mdependent
refined during piloting of any of the alternatives, which is highly recommended. Each of these factors can have some relative value within the same project or versus other projects. In some cases it is possible to establish templates or minimum levels of acceptance (Table 1). Using previous factors for each project, cost comparison can be used as a guide or baseline to check the validity
Conclusion In general, a mix of the alternatives tends to provide the optimum flexibility, owing especially to differences between the phases of drug development.The use of financial models combined with other tools, particularly value analysis, provides the best way to select appropriate alternatives for any scenario. However, these should be employed taking into account the broader strategies of the organization and the department. References 01
Felz Analyst Report, 1997
02
Zenie, F. (1996) International Symposium on Laboratory Automation Symposium, 20–23 October, Boston, MA, USA
In brief... The biopharmaceutical company Andaris (Nottingham, UK) has announced changes to its Board. The lead founder of the company, David Heath, is to retire as chairman to become a non-executive director and consultant to the company and Stuart Collinson, formerly at Glaxo Wellcome, has been appointed chief executive officer. Gordon Hall becomes nonexecutive chairman. Andaris is a UK-based biopharmaceutical company using a proprietary microcapsule technology to develop a range of in vivo imaging and therapeutic products targeted at major pharmaceutical markets. The company’s core technology is a proprietary spray-drying technique which produces spherical microcapsules, in soluble or insoluble form, from a wide range of pharmaceutical materials, including proteins and conventional drugs. The products are aimed primarily at applications of diagnostic imaging and drug delivery.
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