In close contract – the risks and rewards of outsourcing

A pharmaceutical company's reputation for consistently providing products of the required safety, quality and compliance is its most valuable, intangible asset. It has a critical influence on a physician's willingness to prescribe a company's products, a patient's willingness to use them, and a regulator's attitudes to granting and maintaining a licence.

Consistent, effective monitoring of the potential risks in supply chain activities is vital to maintaining patient safety and consequently brand reputation. This chain is complex, even when most activities are conducted within a single company, such is tradition. But modern supply chain models allow for some or all of these processes to be undertaken by third parties, which makes maintaining the effective scrutiny, on which product safety and the sponsor company's reputation is critically dependent, increasingly challenging.

Outsourcing is therefore best conducted as part of a planned strategy, by staff familiar with third-party management issues. It should not be viewed as a quick fix, put in place to solve a specific issue, without consideration of how it will be effectively managed in the long term.

Safe property

As pharmaceutical manufacturers increasingly consider contractors, the need for specialised capabilities, ownership of IP, market access and the ever present importance of cost-effectiveness are just some of the factors affecting the balance in the 'make-or-buy' decision.

As your company's reputation and IP become partially dependent on any third parties introduced into a supply chain, careful evaluation is needed to ensure you only accept those you believe will treat your reputation and IP with the same care as your own company does. Clear understanding of the precise package of services to be provided is also critical to consistent delivery.

Introducing third parties inevitably increases risk. But good business practice and regulatory requirements require these risks to be identified and effectively managed.

With the correct set-up, use of third parties in a manufacturing chain can provide a product with the required safety, quality and compliance in a way which mutually benefits the contracted party and the employer of services.

Consistent and effective observation is critical to ensuring delivery of a satisfactory product and the desired manufacturing benefits during a contract's life. Periodic review is vital. The world is not static and an agreement that is favourable to you presently may well need to be readjusted in future to maintain its advantage.

Strategy development

The greatest benefits - and most effective risk management - of outsourcing are likely to be achieved when third parties are used as part of an overall manufacturing strategy. Strategy development starts with an identification of the manufacturing capabilities required to support your current and future product portfolios over a certain period. Some key factors affecting this decision are listed here.

• Specialist capability: a third party may have a capability that is either prohibitively expensive to duplicate or that uses technology over which it has exclusive IP rights. It may also have much more expertise within the activity than the potential sponsor.
• Market access: the approach 'if it is not made within our country, we will either prohibit sale or impose significant financial and/or regulatory obstacles' is taken by some countries that wish to develop domestic pharmaceutical manufacture. Working with a third party in such countries may facilitate market access.
• IP ownership: are there elements of your own IP that you wish to operate only under your direct control? Do you wish to access a third party's IP and can you accept that access to the IP may be conditional on accepting that the product for which you are the marketing authorisation holder in some territories will be made by a third party?
• Supply security: for critical products, do you wish to avoid being single-sourced?
• Capacity of your own facilities: do your own facilities lack the capacity to supply the volumes needed or is your facility required for newer products?
• Cost optimisation: expense is always a consideration and if someone can do a specific manufacturing stage to the required standard at a favourable total acquisition cost (TAC), why not use them?

Third-party selection

One key output of the strategy review will be identification of product specific packages of services you wish to outsource, together with the timescale for delivery of the service and the length of time for which you wish to outsource. Precise definition of these factors is critical to an effective process of matching the capability and willingness of third parties to meet the identified need. The services package also critically affects the cost.

Each new third party has a one-off relationship-set-up charge and an ongoing management price that add to the headline cost per unit of product. Selection requires input from multiple disciplines including (but not limited to) procurement, logistics, manufacturing, quality, regulatory and legal. Ideally, the individuals involved have third-party management as a significant part of their role and have been selected for their demonstrated abilities in:

• expert technical knowledge of their own discipline and an understanding of how their priorities interact with the priorities of other disciplines
• ability to focus on required satisfactory outcomes, with the flexibility to recognise that there may be alternative means of achieving a satisfactory outcome
• understanding of the difference between 'must have' and 'nice to have, but not critical' - as you will rarely get absolutely everything you would ideally wish to have
• soft skills associated with teamwork, communication and negotiation.

Use of existing satisfactory third parties that have the capability, capacity and inclination to accept additional work should be seriously considered. Even where they do not have the lowest headline cost per unit, you avoid the significant relationship-set-up costs and the possible additional unit cost is, in effect, the insurance premium you pay for securing a package of services in whose quality and consistency you have a high degree of confidence. Adding new services to an existing contract is also often much easier and quicker than negotiating a new contract from scratch with a new third party.

Where a new third party is required, time needs to be invested in identifying potential contractors that can meet your needs for service and quality of output. If a third party can be identified, it is critical to invest time in agreeing precisely what the contracted package of services will be, what it will cost and the timescale for its delivery. Time invested here will avoid future debates, such as 'we never agreed to that' or 'I thought you were doing that,' which are the inevitable fallout from failure to fully clarify who is doing what and when.

What is finally agreed must be specified in a contract that covers not only supply but also the quality-related matters. A good contract would enable someone not party to the original discussions to understand what was agreed, and a significant part of its value is that it forces thought and discussion on the detail of what is being agreed, before the relationship commences.

Winston Churchill's famous quote 'This is not the end. This is not the beginning of the end. But it is the end of the beginning.' accurately reflects the position when you have secured a contractual agreement with a third party. To reach the desired long-term, stable service supply from the third party, there is typically a requirement for technical transfer, validation and registration of the new service to be undertaken in order to obtain the necessary approval to move into the long-term supply. Once supply is established, there will, of course, be a need for monitoring.

Mitigate the risks

How to organise a third party's activities is an outsourcing risk that often comes to mind. But, typically, you cannot exercise control due to a lack of executive authority and presence when the process is undertaken. However, a sponsor usually retains legal responsibility for the material produced by the contractor. Patient interests and your company's reputation need to be protected by careful selection of third parties that can be trusted to work in the manner you would expect for activities under your direct control.

A chief risk of outsourcing is the added complexity. Complexity has a significant risk of adversely affecting accurate and timely communication. Such failures, which have the potential to affect patient safety or supply continuity, are one of the biggest potential contracting risk areas needing effective management. The differences in location, working week, personal priorities and language are common, very real communication barriers which can significantly complicate the process.

Effective communication management is critical to success in all phases of a third-party relationship, from engagement with the right contractor, through to the successful management of the day-to-day issues inherent in any manufacturing operation.