Outsourcing: Managing Your Contractor Relationship—A Smart Investment

Outsourcing operations can help preserve capital, focus resources, and manage business risk.
Aug 01, 2007
By BioPharm International Editors
Volume 20, Issue 8

Todd Applebaum
Life sciences companies outsource manufacturing for many reasons: to gain access to capacity and skills, while limiting their own capital requirements; to focus their resources; and to mitigate risk and uncertainty in their business. However, some companies are unrealistic about the degree to which they can outsource the management of their supply operations. A company must adequately prepare and staff to ensure that business objectives are met.


Some companies outsource the production of their active pharmaceutical ingredient (API) and keep later stages of the supply chain, such as packaging and distribution, in house. Others retain API or drug substance manufacturing, but partner for subsequent activities. Still others partner for multiple steps in the supply chain, or the entire supply chain. While the outsourcing configuration is specific to the characteristics and business objectives of each company, its operating model and technology, several common themes tend to underlie the "business case" for outsourcing.

Nate Ryan
For emerging companies, the primary motivation to outsource is limited capital to invest in facilities and equipment. Even for more mature companies, the magnitude of the required investment in biologics production and GMP processing is daunting, and many opt to invest in higher return activities.

Many smaller development-stage companies, which lack expertise in manufacturing and supply, prefer to focus their capital and resources on areas they view as true differentiators, such as discovery or marketing. By maintaining a strategic focus on these core activities, they can narrow their capital requirements.

When launching a new therapeutic, both small and large companies face technical uncertainties surrounding clinical results, process scale-up risks, regulations in the timing of potential approvals, and supply and demand trends. The outsourcing decision becomes a means of managing the risks. For larger companies looking to minimize the risk of high variable portions of their business, i.e., forecasts, partnering for additional capacity can smooth out production plans and help them gain efficiencies in their internal operations.


Deciding whether to outsource requires consideration of many variables and should follow a structured approach that evaluates a company's:

  • existing skills and capabilities
  • strategic objectives
  • maturity of the technology or capability in question
  • competitive environment

Figure 1
As Figure 1 illustrates, the assessment can be depicted in two major steps. First, management must consider whether the capability in question is strategic to the organization. This means developing an accurate understanding of the company's priorities and objectives, starting with a strategic assessment and evaluation of product and customer requirements. The outcome of the assessment helps to determine the goals and strategic direction of a potential outsourcing arrangement.

The second step is to analyze the near-term operational, financial, and competitive realities to justify the preferred direction or select another. Outcomes of the overall assessment include both near and long-term strategies that establish principles and priorities of that particular operational capability.

A company may decide to outsource an existing capability because it will no longer be strategic in the future, or to temporarily outsource to reduce internal risk during launch, but bringing those capabilities in-house later.

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