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Henning

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3

Structure R&D outsourcing Case

How would you structure this one:

Your client is a biotech company who is considering outsourcing its R&D function. They want you to help in determining whether or not this is a good idea.

Their target is to reduce costs and increase the flexibility of their cost base.

How would you structure this one:

Your client is a biotech company who is considering outsourcing its R&D function. They want you to help in determining whether or not this is a good idea.

Their target is to reduce costs and increase the flexibility of their cost base.

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Hi Anonymous!

if the question is wheather or not it's a good idea (vs. where to outsource to, which is also an often asked question), you can approach the case as follows:

  • Benefits:
    • Cost reduction: Assume a factor <1 to calculate savings on salaries and other costs (real estates, tax incentives, etc.). If you have to make an assumption, be careful to explain it clearly and not overstate the cost savings potential. Biotech R&D is a pretty advanced field and talent often mobile enough to have high opportunity costs in other regions
    • Flexibility of cost base: You should ask what exactly they have in mind, but if this is about being more flexible in laying people off in less protected jurisdictions, you should at least mention that the flexibility might be an illusion if talent is highly sought after - i.e. if you can't ramp up quickly in a very specialized field, there is no real flexibility, even if legally possible.
  • Costs:
    • Costs for prepation: Reduced effectiveness as R&D engineers need to document their expertise
    • Costs of physically moving an R&D team: Additional costs for real estate, moving expensive equipment, etc.
    • Cost of talent: Need to have 2 R&D teams work side by side for some time (need to make assumptions here) to hand over R&D projects, preserve know-how, etc.
    • Cost of missed opportunities: Will you lose tenders, product launches, etc. as your team is focused on making the move happen
    • Severence packages, legal costs, etc.
  • Risks to consider:
    • Is talent available? This restricts you to only a few locations world wide
    • How expensive is the talent? Is the talent maybe so constraint that you're not saving a lot?
    • Salary adjustments: Is salary inflation expected to void any cost advantage that you might have now before the time this can pay off?
    • Organizational challenges of having R&D and product teams not co-located?

Based on the above, you can calculate an annual saving, put that together with the cost of moving to calculate a pay-back period and then do a deep dive on some of the risks if the interviewer encourages it.

Hope this helps!

Hi Anonymous!

if the question is wheather or not it's a good idea (vs. where to outsource to, which is also an often asked question), you can approach the case as follows:

  • Benefits:
    • Cost reduction: Assume a factor <1 to calculate savings on salaries and other costs (real estates, tax incentives, etc.). If you have to make an assumption, be careful to explain it clearly and not overstate the cost savings potential. Biotech R&D is a pretty advanced field and talent often mobile enough to have high opportunity costs in other regions
    • Flexibility of cost base: You should ask what exactly they have in mind, but if this is about being more flexible in laying people off in less protected jurisdictions, you should at least mention that the flexibility might be an illusion if talent is highly sought after - i.e. if you can't ramp up quickly in a very specialized field, there is no real flexibility, even if legally possible.
  • Costs:
    • Costs for prepation: Reduced effectiveness as R&D engineers need to document their expertise
    • Costs of physically moving an R&D team: Additional costs for real estate, moving expensive equipment, etc.
    • Cost of talent: Need to have 2 R&D teams work side by side for some time (need to make assumptions here) to hand over R&D projects, preserve know-how, etc.
    • Cost of missed opportunities: Will you lose tenders, product launches, etc. as your team is focused on making the move happen
    • Severence packages, legal costs, etc.
  • Risks to consider:
    • Is talent available? This restricts you to only a few locations world wide
    • How expensive is the talent? Is the talent maybe so constraint that you're not saving a lot?
    • Salary adjustments: Is salary inflation expected to void any cost advantage that you might have now before the time this can pay off?
    • Organizational challenges of having R&D and product teams not co-located?

Based on the above, you can calculate an annual saving, put that together with the cost of moving to calculate a pay-back period and then do a deep dive on some of the risks if the interviewer encourages it.

Hope this helps!

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Glad you included the target. Most people miss this. Without the clear objective/reasoning, we can't create a good framework :)

This is a perfect example of why you can't memorize frameworks! You have to come up with your own though process here. Here is one example. It is not the only approach.

Baseline - Current State

Objective: Evaualte our current state to determine baseline costs (both absolute and a measurement of "flexibility")

  • Need current costs
    • Staff, equipment, rent, legal, patent acquisition, etc
  • Need other constraints
    • Lack of flexibility in cost base
    • Difficulty in getting talent / developing R&D?
    • Siphoning of funds away from other important activities
    • Etc.
  • What is our cost of switching? I.e. what are our benefits with the current state?
    • Yes, we want to reduce C, BUT to determine if it's a good idea we have to make sure the business doesn't fall apart/suffer as a result
    • How do we currently make money?
      • What are our profit puppies? Is it R&D (if so, high risk to outsource. If not, ok). What has the highest ROI in our companies?
      • How big/small is R&A in the grand scheme of things from a Revenue/Cost side?
      • What benefits do we get from having it in-house?(learnings, handover, shared skills, etc.)

Outsourcing - Future State

Objective: Evauluate our outsourcing option to determine expected costs (both absolute and a measurement of "flexibility")

  • Need expected costs
    • Annual fees/payments/contracts
  • Need other benefits
    • Flexibility in cost base
    • No need to worry about it in-house
    • Freeing of focus towards areas where we're really good at
  • What is our cost of switching? I.e. what do we lose?
    • Will outsourcing reduce the profitability of our other departments (i.e. do they rely on us doing this in-house)
    • Are there other negative externalities to this decision?
    • Fundamentally, we can't just assume that, because it's cheaper, it's better
    • Do we still get the same product?

Cost-Benefit & Alternatives Analysis

Objective: Do the benefits of the future state outweight the costs? AND, are there better alternatives? We have to make sure that we get true cost savings AND do not hurt our ability to generate revenues/profits.

  • Cost reduction in switch > loss of benefits in switch (if any)
  • Can we do anything else? Could we do a Joint Venture, could we reduce costs another way? Can we make our R&D better as-is through different learnings.

Glad you included the target. Most people miss this. Without the clear objective/reasoning, we can't create a good framework :)

This is a perfect example of why you can't memorize frameworks! You have to come up with your own though process here. Here is one example. It is not the only approach.

Baseline - Current State

Objective: Evaualte our current state to determine baseline costs (both absolute and a measurement of "flexibility")

  • Need current costs
    • Staff, equipment, rent, legal, patent acquisition, etc
  • Need other constraints
    • Lack of flexibility in cost base
    • Difficulty in getting talent / developing R&D?
    • Siphoning of funds away from other important activities
    • Etc.
  • What is our cost of switching? I.e. what are our benefits with the current state?
    • Yes, we want to reduce C, BUT to determine if it's a good idea we have to make sure the business doesn't fall apart/suffer as a result
    • How do we currently make money?
      • What are our profit puppies? Is it R&D (if so, high risk to outsource. If not, ok). What has the highest ROI in our companies?
      • How big/small is R&A in the grand scheme of things from a Revenue/Cost side?
      • What benefits do we get from having it in-house?(learnings, handover, shared skills, etc.)

Outsourcing - Future State

Objective: Evauluate our outsourcing option to determine expected costs (both absolute and a measurement of "flexibility")

  • Need expected costs
    • Annual fees/payments/contracts
  • Need other benefits
    • Flexibility in cost base
    • No need to worry about it in-house
    • Freeing of focus towards areas where we're really good at
  • What is our cost of switching? I.e. what do we lose?
    • Will outsourcing reduce the profitability of our other departments (i.e. do they rely on us doing this in-house)
    • Are there other negative externalities to this decision?
    • Fundamentally, we can't just assume that, because it's cheaper, it's better
    • Do we still get the same product?

Cost-Benefit & Alternatives Analysis

Objective: Do the benefits of the future state outweight the costs? AND, are there better alternatives? We have to make sure that we get true cost savings AND do not hurt our ability to generate revenues/profits.

  • Cost reduction in switch > loss of benefits in switch (if any)
  • Can we do anything else? Could we do a Joint Venture, could we reduce costs another way? Can we make our R&D better as-is through different learnings.
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The most important here is to understand your client and his main objective of outsourcing (cost reduction, Capability, etc). Find a clear metric to support the case. Then moving forward should be easier for you.

The most important here is to understand your client and his main objective of outsourcing (cost reduction, Capability, etc). Find a clear metric to support the case. Then moving forward should be easier for you.

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