CIOs in the pharmaceutical industry have an opportunity to become true pioneers. That's the good news—and the bad news. With the business model straining to operate at scale, pharma companies are asking their IT leaders to do two things at once: dramatically improve the efficiency of IT and use it to drive business innovation. Never before have CIOs in any industry had to face these challenges at the same time and to meet them so quickly.

The need to face both challenges at once arises from a convergence of factors. The pharma industry—buffeted by the possibility of price controls, declining drug-development productivity (higher costs, fewer drugs), stricter regulatory scrutiny, and competition from a growing number of "me-too" drugs—is in a state of turbulence. This instability is putting financial pressure on all the industry players, not just the weaker ones; earnings of the sector's top companies have fallen by 25 percent since 2002 (Exhibit 1). Meanwhile, companies must rethink core business processes (such as drug development and commercialization) and seek new ways to increase their yield and productivity.

IT is critical to meeting both challenges. Big pharma companies are streamlining and standardizing their operations, focusing on procurement and manufacturing as well as on back-office functions such as finance, human resources, and facilities. Success in these efforts will require IT solutions. Equally critical is IT support for business innovation. Pharma companies expect IT to improve data collection, speed up regulatory reporting, manage the progress of clinical projects, and improve the targeting of physicians and the use of marketing programs. Faster, better decisions are critical in an industry where each day's delay of a blockbuster drug can mean $5 million in lost revenue.

To meet these twin challenges, pharma CIOs will need to overhaul their IT organizations. Over the past decade, IT spending at most pharma companies has grown much faster than revenues (Exhibit 2), partly to meet the information needs of the business but mainly because the IT environment is diverse and highly decentralized. In a typical pharma company, fiercely autonomous and well-financed divisions and functions make their own IT decisions. There might be dozens of different systems for enterprise resource planning (ERP), finance, lab information management, and document management, along with a jumble of underlying infrastructure assets. Layers and layers of fragmented systems make it impossible for companies to integrate and scale their IT resources to reach speed and efficiency goals or to support their need for innovation. Inefficiency is costly: more than 85 percent of the industry's IT spending goes toward maintaining and supporting these disparate assets. In short, IT has become an impediment to rather than an enabler of better business performance.

The choices pharma CIOs make regarding IT's efficiency and potential for business enablement—that is, the use of IT to promote business objectives—will have an enormous impact on their company's ability to compete over the next decade. The wrong choices will impede progress; the right choices will speed it up. CIOs need to sort out the balance of actions meticulously to improve both the efficiency of IT and its support of business innovation, weighing these decisions by the lights of a deep understanding of corporate strategy and capabilities.

It is all too easy for executives under pressure to decide on tactical improvements that are wrong for the corporation. At one company, a CIO placed more emphasis on improving IT's efficiency than the business units did—a misalignment that has set back the company's overall improvement program by 18 months. At another company, a CIO opportunistically pursued IT efficiency and business-enablement projects, but this à la carte approach quickly led to conflicting decisions, mixed messages, and confusion within the IT organization and in communications with clients.

CIOs can make the right choices if they truly understand the three generic improvement paths available: tackling the twin challenges in a serial fashion, in parallel, or through outsourcing. They must recognize the benefits, challenges, and trade-offs of each path to choose the one that best fits their company's business strategy and the IT organization's ability to deliver.

The IT leadership challenge

Improving efficiency and promoting business innovation demand different sets of roles and skills from the IT leader. To increase efficiency, the CIO must play the role of enforcer, urging the business to conform to more restrictive rules and policies. Supporting business innovation requires a true partnership with business leaders and a willingness to assume the role of business strategist. Moreover, efficiency makes it necessary to cut costs by limiting service-level choices, instilling process discipline, and finding what business units have in common. Promoting business innovation, by contrast, requires an IT leader who understands the differences—not the commonalities—among all business units and helps each of them hone its competitive distinctiveness. What's more, business innovation demands a willingness to go beyond traditional process constraints and service catalogs. These inherently conflicting roles present a major hurdle to success. The CIO may struggle to fill both roles, neither of them well, or may focus on one at the expense of the other, thus creating an imbalance.

Another critical issue is capacity. Launching simultaneous campaigns for IT efficiency and business innovation puts an enormous load on the IT organization. Few pharma companies have enough skilled IT project managers to drive all the efforts these goals imply, and some efforts will inevitably stall. This upheaval also takes a toll on the enterprise as a whole.

To address these challenges, pharma companies face a choice of three paths: tackling IT efficiency first and then focusing on IT-driven business innovation, undertaking both sets of activities in parallel with two different leaders, or gaining efficiency by outsourcing basic IT operations so that the IT leader can focus on innovation. Each approach has advantages and drawbacks. In our experience, all pharma companies are moving forward—but some are taking the wrong path, pursuing advantages that aren't matched to their current business needs, grappling with disadvantages that their IT capabilities can't overcome, or both. Worse, some companies are on more than one path.

These problems stem from a lack of clarity about what each path involves. Let's look more closely at them in turn.

The serial approach

Pharma companies that take a serial approach start by streamlining and globalizing the IT function to increase its scale and efficiency. Once their IT house is in order, they focus on IT-driven business performance and innovation. This approach takes the longest time—18 to 24 months for the efficiency phase alone, on average—but it's the least risky because resources can be managed in a focused, coherent way.

In the first phase, the CIO consolidates IT assets, creates standard and reusable IT "products,"¹ selectively offshores or outsources infrastructure management or application development where feasible, and takes other actions to increase the efficiency and scalability of IT. At one typical pharma company, functions such as sales, manufacturing, and R&D had their own groups for IT support, application maintenance, the help desk, and infrastructure. As a result, processes were inconsistent, efforts duplicated, and systems redundant and fragmented. The company consolidated these dispersed assets under one IT organization, cut back on redundant systems, and reduced the number of servers and other IT assets. Cost-saving actions also included paring back the application portfolio, using fewer vendors for the development and maintenance of applications, and outsourcing help desk and end user support. In this way, the company reduced its total IT costs by 30 percent in 18 months (Exhibit 3).

Another goal of the company's phase-one effort was to globalize IT operations, since IT was fragmented across countries and even within functions. The company created a new, global IT organization with twice the size and budget of the old one—all under a single CIO—so that IT operations could be managed in a more unified way. Consolidation and globalization laid the foundation for the IT-enablement phase, which the company is shifting to now.

After centralizing and globalizing IT, pharma companies following the serial approach can begin creating common, global platforms for key business processes such as finance, human resources, the supply chain, and other areas that benefit from low-cost, standardized approaches. The creation of shared services and the selective use of offshoring are also possible at this stage. With standardized, global processes, business units can more easily share new approaches and technologies across the enterprise and thus accelerate innovation in the core areas of sales and R&D.

The serial approach has practical benefits. Besides reducing the risks involved in managing these initiatives, it can make progress self-supporting, as cash freed up during the efficiency phase is used to finance globalization and innovation. The serial approach also gives the IT organization time to build the necessary change-management capabilities as it moves from internally focused IT efficiency to externally focused business innovation and enablement. Finally, the early wins from reducing costs and complexity help build credibility with the business, thereby smoothing the way for phase two. The business units will be more likely to put their processes at risk when they know that the IT organization has successfully transformed itself.

The parallel approach

When pharma companies want to overhaul the IT organization but cannot put IT-driven business innovation on hold, they can undertake both efforts in parallel. With this approach, companies split the responsibilities between two leaders—one with the experience and capabilities to drive scale and efficiency, the other with the acumen and business relationships needed to support IT-driven innovation. Companies needn't be constrained by traditional views of the proper experience for an IT leader. One pharma company, for example, gave the responsibility for promoting business innovation to an executive with a background in business strategy and planning. His charter was to drive the value of the business in commercial, R&D, and supply chain applications and in information management.

Besides splitting up the leadership roles, companies must design cross-cutting policies and operating procedures—such as ways to manage conflicting demands and to measure unit costs—that let the two groups remain strategically aligned while day-to-day operations are somewhat decoupled. Companies on the parallel path work best when they identify the 10 to 15 application platform "archetypes" that meet the needs of most applications and then standardize support and provisioning around these archetypes. Finally, the parallel path requires release-management discipline for application development. These principles help eliminate the low-value variations and complexity that hinder scale and efficiency, and they allow the leader responsible for IT-driven business innovation to move aggressively by focusing on the specific capabilities that create value.

The parallel approach can be risky, however. Without disciplined adherence to cross-cutting policies and operating procedures, the two separate power centers may make slow and ineffective decisions, which lead to misalignment and waste. The parallel approach also can introduce cash flow problems: when companies invest in efficiency and innovation at the same time, the IT budget often balloons until the efficiency improvements kick in.

The outsourcing approach

A third approach to transforming IT is offloading the efficiency piece to a third party. By outsourcing the IT infrastructure and the maintenance of stable legacy applications, companies can capitalize on the capacity and professional standards of vendors and focus internal resources on IT enablement and innovation. Outsourcing is not, however, a complete shortcut; companies typically spend six to nine months planning before handing off any IT functions to a vendor. These planning activities include identifying opportunities for efficiency and scale, estimating the economic payback from the bottom up, determining which aspects of IT should be contracted out to capture these opportunities, and negotiating contracts that meet efficiency goals.

Outsourcing is becoming more prevalent in the pharma industry. Although the large-scale, multiyear commitment required means that few companies outsource their IT infrastructure wholesale, many have outsourced selected components, such as the help desk or desktop support. In addition, more vendors have shown that they can provide specific infrastructure services (for example, the hosting of applications that run on virtual Windows or Linux platforms) during the course of contracts that are much shorter in duration than the typical seven- to ten-year outsourcing deal.

Outsourcing infrastructure and legacy systems lets IT leaders focus on business change. Moreover, this approach involves less strain than does the dual-focus and dual-organizational model of a parallel transformation. If done correctly, the outsourcing approach is also considerably faster than the serial one. These benefits come at the expense of some flexibility, however. As most CIOs now realize, outsourcing agreements can hinder rapid growth or contraction and usually require prenegotiated technology changeovers. Outsourcing also demands greater management sophistication, including the discipline of planning ahead and the ability to manage the activities of partners.

Choosing the right path

Although most major pharma companies are overhauling their IT operations to meet the challenges of business efficiency and innovation, few have thought about the best way to get there and how their decisions will affect the flexibility of the business and the speed of innovation.

A number of factors should drive the choice. Companies that are averse to change or risk may opt for the more easily managed and slower-paced serial approach. Another factor may be leadership capacity: the parallel approach demands two highly motivated people with wholly different sets of skills. Companies that cannot find such people may have to scale back and adopt the serial or outsourcing approach. In the end, though, the best path depends largely on a company's overall business strategy.

Staying in the game

For financially troubled companies whose business strategy is to stay in the game by engineering a turnaround, the best option is the serial one because it's the fastest path to cost savings—with the least risk. For these companies, improving the efficiency of current operations trumps promoting business innovation in the short term. To succeed with this approach, however, companies must set clear and ambitious efficiency goals that reflect the amount and timing of the savings they expect. Moreover, the business must understand the need to delay innovation while the IT organization cleans house. Only the most critical business-enablement projects can be pursued during this first phase.

Shifting from the IT efficiency to the business-enablement phase may require a change in IT leadership. The former demands a leader with the technical competence and attention to detail needed to push the IT organization to consolidate and standardize technologies, as well as the organizational know-how to restructure the IT organization, change its governance models, and develop internal talent—in other words, an operator. By contrast, the leader of the business-enablement phase must be a person with a deep knowledge of the business units and functions that IT supports, credibility as a business partner, and the sophistication to invest in new approaches and technologies—in other words, a strategist. Only rarely does one individual possess both sets of capabilities.

CIOs at companies that aren't under financial duress should think twice before opting for the serial approach. Managing in a serial fashion puts less stress on the IT organization, but it undermines the competitive advantages to be gained by pursuing business innovation today. At one company, executives rejected the CIO's decision to pursue a serial approach—the company wasn't financially struggling—so he eventually had to adopt a parallel one to get improvements started at the company. In the process, valuable time was lost.

Winning within the rules

The outsourcing approach balances risk and speed. It is the choice for any company whose business strategy is to be a "fast follower"—that is, ready to adopt industry innovations quickly but with no desire to lead. Such a company seeks a more rapid transformation than the serial approach offers, without the complexity and organizational strain of the parallel approach. Moreover, as outsourcing vendors become more flexible and outsourcing buyers become more sophisticated in the way they plan, negotiate, and manage deals, the attractions of this option increase. Companies on the outsourcing path must still, however, analyze the opportunity and develop a strong grasp of vendor economics before negotiating deals. They will also need to strengthen their skills in procurement and in managing third parties. After the six to nine months required to analyze the outsourcing opportunity, these companies can begin to address business innovation in earnest.

From a leadership perspective, companies that choose this route need a CIO who has outsourcing and vendor-management experience and can work effectively with the business to improve its performance. The outsourcing approach combines IT efficiency and business enablement, but not to the same degree as the parallel approach. Since efficiency efforts are conducted at arm's length, the leader can focus on optimizing the business.

Changing the rules

The parallel approach is most attractive to companies intent on developing or maintaining industry leadership by changing the rules of the game. It lets them build on their current strengths and lengthen their lead while seeking new ways to compete. Companies on this path have an overall bias toward business innovation, so they pursue efficiency in parallel to speed the delivery of new capabilities. Two IT leaders, one focused on efficiency and one on IT-driven business innovation, will give these companies the greatest flexibility and the fastest transformation.

With the parallel approach, the complexity of dual leadership and the strain on an IT organization that must manage change in both efficiency and innovation will be more than offset by the rapid achievement of a new, more competitive business model. To get started on this path, companies must clearly define the roles, skills, and responsibilities of the two leaders; create a common operating model to help resolve the inevitable conflicts and trade-offs; and create mechanisms (such as service-level agreements and standard platforms) to promote structured interaction between the two organizations.

Looking across the industry, only 25 percent of the top pharma companies are able or willing to change the rules of the game through the parallel approach. Another 25 percent, driven by the need to streamline and restructure their operations to generate cash, will default to the serial approach. The remaining industry players should use outsourcing to boost the efficiency of IT so that business and IT leaders can focus on business innovation and competitive performance.

As pharma CIOs face the dual challenge of quickly improving the efficiency of IT and supporting IT-driven innovation, they have no precedent to follow. No other industry has had to change so much so quickly to assure the financial viability of its key players. In this turbulent environment, the choice of a path to transformation and the selection of IT leaders are critical decisions with far-reaching implications.