Strategic Versus Tactical Outsourcing

The greatest benefits of outsourcing as a whole are realized when a company takes a strategic rather than a tactical approach. Using a strategic approach, a company can team up with a vendor that provides a full suite of services—including manufacturing, preclinical, or clinical development—to develop integrated knowledge and technology around a product, and to eliminate the need to transfer this knowledge and technology among numerous vendors. By becoming involved early, a comprehensive drug development outsourcing firm can engage its scientists in preclinical safety and efficacy tests, and in formulation and manufacturing of the product, thus saving precious time and effort, and helping the company realize the synergies among each of these stages. Consultants can further streamline the process by identifying an appropriate vendor, solving problems, and managing timelines and budgets.

A strategic outsourcing approach is particularly important for any project that requires substantial product knowledge and access to many chemical, biological, and clinical skills to drive the project through agreed-upon milestones. Small companies typically choose to deal with multiple vendors for development, manufacturing, preclinical, regulatory, logistics, and other services; this often leads to higher costs, mistakes, longer timelines, and higher risks. Companies should seek outsourcing partners that can provide a substantial number of development tasks internally, to reduce risk, time, and expenditure.

One example of the strategic approach involves making outsourcing interaction either a shared-risk relationship or an incentive-based relationship. The outsourcing vendor presented with a lead compound must do the following: identify how best to formulate it, recognize the most stable form, determine how to scale up production, run preclinical and clinical programs, and guide development through to regulatory approval. The sponsoring company will commit this project to the outsourcing vendor as long as the compound remains viable. If the vendor can shepherd the novel compound through the development process to the agreed-upon accelerated milestones, it will be offered a reward. For example, if compressing the development timeline leads to $100 million in savings and recovered opportunity costs, the outsourcing vendor might be offered a bonus equivalent to 10% of that amount. Strategic outsourcing of this kind provides incentive for the vendor to identify efficiencies along the entire product development timeline. In other cases, the outsourcing firm may be responsible for all manufacturing and supply chain management of a sponsoring company's compound, ensuring that preclinical and clinical studies for various indications are adequately supplied, while avoiding oversupply.

Strategic outsourcing exemplifies a "big picture" view of the outsourcing relationship. Rather than focusing on tactical requirements that may change with the ebb and flow of product development, the strategic relationship motivates the outsourcing vendor to realize efficiencies along a much larger segment of the research and development value chain.

Looking from the Inside Out

Perspectives on the value of strategic outsourcing can vary widely within a sponsoring company. Mid-level managers may have different concerns than executives have. For example, mid-level managers tend to outsource tactically; often, they do so because they are experiencing temporary shortfalls in capacity and need to augment their in-house efforts. These individuals may avoid long-term strategic approaches, especially if they perceive these approaches as threats to their roles in the company. A procurement person typically is driven to find the best price for a service and might not have a strategic view of the overall time- and cost-savings of outsourcing. A vice president of development, a CEO, or a CFO, on the other hand, often will have a better understanding of the objective of getting a compound through the approval process and to market as quickly and economically as possible. If an outsourcing vendor demonstrates a way to get the product to market six months faster, but with a 10% higher expense, the time saved probably more than compensates for the added upfront expense.

To ensure a successful outsourcing relationship with various interests within an organization, two or three external consultants might work closely with the company, perhaps joining the internal project team. Having an internal champion within the sponsoring company can be crucial to success. This champion can serve as a liaison among consultants, the vendor, and the company.

The sponsoring company also must understand that although integrated services provided by a single outsourcing partner may be more expensive than services "cherry picked" from multiple vendors, the upfront investment will probably deliver greater returns downstream (for example, by bringing the product to Phase 1 and beyond more quickly and economically). In drug development, time is typically more important than money. Speed, flexibility, expertise, and innovation have their own currencies, and these must be weighed against costs.