By Todd Hintze, Principal, Everest Group

What Exactly Is Outsourcing?

Despite all of the industry hoopla regarding the growth of life-sciences outsourcing, only a small set of life-sciences organizations truly engage in outsourcing. By our definition, outsourcing occurs when a sponsor transfers ownership and the associated risk of a process to a service provider. In this environment, the sponsor focuses on what it wants to buy and leaves the how it is accomplished to the service provider. By doing so, the sponsor can leverage the supplier's infrastructure, tools, and SOPs (standard operating processes).

Outsourcing generates its added value through a transfer of risks, access to expertise, and the ability to leverage operational efficiencies of scaled shared processes. In a contracting environment, the supplier must follow the sponsor's approach, leaving the sponsor with all the operational risks and precluding much of the CRO's (clinical research organization) advantages.

When properly outsourced, the sponsor / provider relationship is characterized by both parties fully committing to the following prior to contract signing:

• A set of defined outcomes
• A clear delineation of services, scope, and associated roles and responsibilities
• Jointly approved solutions that leverage the provider's expertise, scale, unique resources, and technologies
• Performance-based metrics with rewards and penalties
• Robust governance structure and processes

Unfortunately, the majority of the sourcing relationships Everest Group reviewed in our 2006 CRO survey lacked several of these critical components.

Jointly Focus on Outcomes

The deals were not grounded in the sponsor's desired objectives. Without clearly defining these end objectives, many sponsors and providers find themselves having, at worst, no expectations and, at best, differing expectations regarding what issues the outsourcing solution should address.

Frankly, this can leave the CRO in "order-taker" mode, which denies the sponsor full access to the CRO's body of expertise in procedures, systems, and unique resources/technologies.

The lack of shared outcomes is not surprising since the relationships were predominantly focused on "contract labor" needs vs. full outsourcing objectives.

Measure What Matters and Make It Matter

A joint understanding of the outsourcing relationship is paramount; having the right set of metrics makes that understanding meaningful. The survey suggests that the sponsor and CROs often fail to clearly define the performance metrics for the solution prior to awarding the project.

Alarmingly, the survey also suggests that when the metrics are defined, they lack any meaningful incentives. There appears to be no economic mechanisms in place to ensure that the provider quickly addresses the performance issue in the most effective manner possible. As a result, the provider can be put in the unfortunate position of making an economic decision whether to address and prevent the issue from reoccurring in the future.

If neither party has enough of the solution's detail to develop the metrics, how can either party be assured what services are sold and bought?

The Importance of Good Governance

Too many outsourcing articles have been written on the subject of governance. The need is clear. The impact of not properly establishing the right structure and procedures is quickly apparent. The survey suggests, however, that not all outsourcing agreements have the proper governance structures in place to oversee the relationship.

This lack of definition is compounded by the earlier observed lack of objective-sharing performance metrics and financial incentives which, together, provide the power and "teeth" for robust governance.

Going Forward

We believe that the overall maturity of the life sciences outsourcing marketplace, coupled with the economics of outsourcing versus contracting, will encourage many sponsor and provider teams to learn from the more robust outsourcing approach and solutions developed in other industries with longer experience in outsourcing.

Here's what we believe the future state of life science CRO practices will begin to include:

• Governance used to be an afterthought. Now it is a critical, top-of-mind component from the start. Its goal: to create sustainable value.
• Metrics will measure what matters and align with the overarching goals of both players.
• Contracts will include performance rewards and penalties.
• Suppliers will begin committing to a specific solution before contract signing. The days of "select us and then we will tell you how we'll do it" are disappearing since the associated cost and time penalties are no longer affordable.
• The CROs are at risk for the operational activities they fully control, relieving the buyers of all financial burdens for delayed or failed activities.

Based on our work in other industries, successful outsourcing partners jointly focus their outsourcing efforts on achieving specific targeted outcomes. They define outsourcing goals from the company's strategic objectives, then link service levels to these objectives.

Service levels must be well defined and measurable in order to avoid reporting confusion. We found the fewer the service levels, the better.The supplier's failure to meet any service level should result in a financial credit with the credits escalating for repeated service failures.

From day one, buyers must work to create a trusting, value-based relationship with its carefully selected service provider. The goal is to capture value through responsive governance and service delivery models. Buyers can only create value if they recognize how and where outsourcing creates it.

How we did the survey: Everest Group invited 5,000 clinicians and providers to participate; 300 completed the paper survey. Everest followed up with phone calls. One-quarter were operational managers with another 24 percent in executive leadership.

Lessons from the Outsourcing Journal:

• In the past, life-sciences companies adopted a contracting model for staff augmentation for their clinical drug testing. To create true value, they will have to adopt a robust outsourcing model.
• It's critical to create service level agreements grounded in explicit and shared objectives.
• Penalties and rewards are critical to outsourcing. Penalties should escalate for repeated failures.
• Governance is critical to outsourcing's success.
• This sea change presents opportunities for suppliers who can successfully adopt an outsourcing structure; they can gain a first-mover advantage and can secure an enviable "partnership position".

Publish Date: December 2006