Find your balance – bridging internal capacity gaps

19 September 2016

Internal capacity gaps need to be solved with the right outsourcing strategy; however, outsourcing itself can be performed in very different ways. In the words of Petra Wicklandt from Merck, it can either be a “boon or a bane” for an organisation. We explore how the firm found equilibrium between functional and strategic approaches, and ask how sponsor companies in general can minimise the downsides.

Outsourcing is on the rise. According to Contract Pharma’s 2016 Annual Outsourcing Survey, pharma companies are tightening up their focus – turning their attention to their core competencies and looking towards third parties to deliver the rest. When asked whether there has been an increasing demand for outsourcing this year, 73% of the 315 respondents answered ‘yes’.

What this means in practice varies considerably from organisation to organisation. Where some sponsor companies are looking to fill a few clearly demarcated needs, others (predominantly virtual pharma companies) will be aiming to outsource almost all their core functions. Even among those with roughly similar outsourcing requirements, there are as many different approaches as there are sponsors.

Tactical versus strategic

At the seventh annual Drug Delivery & Formulation Summit in May 2016, delegates discussed potential solutions to the biggest challenges in pharmaceutical development and drug delivery. Petra Wicklandt, global head of chemical and pharmaceutical development at Merck, delivered a talk called ‘Boon and Bane of Outsourcing’, in which she explored the difference between tactical and strategic outsourcing business models.

Wicklandt explained that, for pharma companies employing a tactical model, outsourcing is a way to bridge short-term capacity gaps and overcome a temporary lack of resources. This is typically a one-off arrangement: multiple suppliers are recruited to cover the relevant areas of need, and the payment model is often fee-for-service.

Strategic models, by contrast, typically involve a multiyear contract with a limited number of suppliers. These are more partnerships than transactions – the third party undertakes a fixed portion of development activities, while the pharma company gains access to expertise they do not have in-house.

According to a 2016 report, 33% of small-molecule projects were outsourced tactically and 30% strategically, while the remainder went to preferred providers.

Wicklandt cited statistics from Contract Pharma showing that the proportion of strategic partnerships grew rapidly between 2007 and 2012. In 2007, 42% of large pharma companies and 47% of small pharma companies employed a strategic outsourcing model. By 2012, these figures had grown to 53% and 54% respectively.

While both models are valid, organisations need to find the right balance between the two. If, at one end of the spectrum, you have a purely tactical model (which has the advantage of flexibility but requires a high degree of micromanagement) and at the other end you have a purely strategic model (inflexible and based on trust), many pharma companies would be best served by opting for something in between. Merck’s own approach – which she described as “a new outsourcing equilibrium” – has proved highly successful to date, reducing bureaucracy and improving communication at all levels. It has allowed the maximisation of the advantages of outsourcing while minimising the downsides.

Fight for number one

Much ink has been spilled over the respective advantages of both approaches. To use very broad brushstrokes, one might say that strategic outsourcing is gradually overtaking tactical – although it appears, for the time being at least, that the numbers on either side are fairly equal.

According to a report published early in 2016 by Industry Standard Research, 33% of small-molecule projects were outsourced tactically and 30% strategically, while the remainder went to preferred providers. For large-molecule projects, the figures were similar: 35% were outsourced tactically and 31% strategically.

Contract Pharma, for its part, found an even split between tactical and strategic business models, along with relatively little desire for change (74% of respondents said they were planning to continue their current approach).

It is clear, however, that the terminology of strategic outsourcing is permeating the whole industry; 80% of sponsor-company respondents said they viewed their contract relationships as partnerships, suggesting that even one-off transactions are now viewed through the lens of collaboration. Another research firm, That’s Nice, found a growing receptivity to the idea of strategic partnerships. Of the pharma companies surveyed, 83% said they felt it was likely for a preferred provider to become a strategic partner, while 81% said their tactical service providers were likely to make the leap to preferred providers.

What factors, then, determine the decision, and what should pharma companies be doing to work out the best-tailored strategy for their organisation? And what are the pitfalls on both sides of the equation that they should be looking to avoid?

Flexible control

During her talk, Wicklandt highlighted the steps that Merck had taken to find its ‘outsourcing equilibrium’. The company decided to outsource one complete new chemical entities (NCE) project to one provider, covering all chemistry, manufacturing and controls (CMC) activities up to phase two. This would enable it to support more internal activities while using the same amount of resources overall.

In doing so, the company moved away from a function-based interaction model in which different work packages were outsourced to different providers. This approach had been characterised by a high degree of complexity and internal effort. Under the new model, the CMO was placed ‘in the driver’s seat’, with a very limited CMC team in house.

Before getting started, the two parties agreed on key partnership principles: a joint Merck/CMO team was established to discuss common objectives and KPIs while a three-level communication plan was put in place. It was therefore clear to both sides whether or not things were going as planned, and prompt adjustments could be made wherever necessary.

After six months working ‘in concert’, Merck had already seen real pay-offs. It had learnt lessons too, however – not least that change in mindset can prove tricky (in-house teams don’t always like surrendering control) and that even more flexibility in the contract was needed.

The company had also found that while one CMO for one project was feasible, project requirements were very different and required different CMOs each time. If this marks a departure from a tactical approach, it isn’t a classically strategic approach either, insofar as it doesn’t presume an ongoing, multiproject relationship with that particular CMO.

Merck may have made the switch to a more long-term, strategic view based on the idea of a partnership, yet the company did so in a way that minimised pain points, taking care to address the associated lack of flexibility and control.

Evidently, sponsor companies should not see strategic partnerships as a silver bullet that will address all their internal capacity needs; rather, they should remain alert to what could go wrong and put mitigating strategies in place. And if, like Merck, they’re moving away from a tactical approach, they should acknowledge the elements that are being lost in the mix.

Communication is key

While tactical outsourcing can prove inefficient and labour-intensive – often requiring a high degree of micromanagement – it does allow the sponsor to exert maximum control over the project. Strategic outsourcing, by contrast, needs to be predicated on trust, which can be daunting for any sponsor company accustomed to managing all of its processes in house.

If this trust is to feel real and unforced, partner selection is critical. Merck had a clear idea of what characteristics it was looking for: the potential partner needed strong project management skills, a highly qualified team, a positive inspection track record and the ability to take ownership of the project. Having found ten potential candidates, it gradually whittled them down to one.

Only commit to what you can deliver with quality and integrity. Do good due diligence, maintain transparency and communicate.

Ultimately, the effectiveness of the relationship will come down to communication and cultural fit. In Contract Pharma’s outsourcing survey, 51% of sponsors cited communication and culture as the top challenge of the sponsor-contract services relationship, up from 46% in 2015. The service providers concurred: 41% said infrequent communication was a challenge when working with pharma companies.

One sponsor advised, “Only commit to what you can deliver with quality and integrity. Do good due diligence of the scope of work, maintain transparency and communicate.” A service-provider respondent from the 2015 survey, meanwhile, remarked that it is important for their partners “to treat us as a part of their team and share their entire strategy so that we can truly add value.”

At Merck, the joint sponsor/CMO team meets every quarter. It has seen high transparency on project progress due to its high strategic relevance for both partners. Within a trust-based relationship of this kind, accountability is high, and the service provider does have a clear incentive to deliver what’s been promised. By contrast, when a company relies on multiple providers, each of those parties is likely to need more hand-holding and will have less of a personal stake in the project’s outcomes.

What has worked for Merck, of course, will not work for all pharma companies. The actual strategy will depend on the nature of the project being outsourced, the resources available in house, the amount of flexibility required and the amount of trust they are willing to place in a third-party organisation.

That said, Petra Wicklandt’s contention – that they need to find the right balance between tactical and strategic outsourcing – rings true. As outsourcing becomes ever more prevalent, sponsor companies are getting smarter with their business models and are seeking their own kind of sweet spot in the middle. 

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