The ins and outs of outsourcing

The decision to outsource is increasingly being taken by pharma companies striving to reduce their bottom line.

However, many in-house executives and lawyers who do not specialise in outsourcing often lack familiarity with many of the specific issues involved, particularly because of the infrequency of some of the larger deals.

While the end result may be financially rewarding, an outsourcing negotiation can be a complex endeavor and should not be entered into naively.

Outsourcing is not always the most appropriate or cost-effective option for a company and those considering whether or not to outsource should base their decision on a realistic assessment of long-term internal capabilities and priorities.

Whether it be contract manufacturing, clinical research, logistics, sales or facilities management, making the decision to outsource is only the first in a series of often complex and lengthy processes to follow.

Once a company has decided to outsource a function, the next step involves conducting a competitive selection process - one of the key elements in achieving savings in outsourcing, according to the Bridgehead report.

This involves putting out a request for proposals (RFP), to which service providers can respond, defining the project, setting out the protocol or technical requirements and clearly stating the responsibilities expected of both parties, particularly the service provider.

Reviewing the bidders' responses can be very time consuming and the Bridgehead report advises that companies should sets aside plenty of time and resources to do a thorough job.

In addition, it points out that some companies are guilty of looking for the absolute lowest price among competing bidders and then driving the price down further, regardless of quality.

In outsourcing, this can be high risk, warns the report, and can lead to outsourcing companies operating on unmanageably low profit margins, with the end result being that the client is unhappy with service levels and the contractor is unable or unwilling to perform any better under the circumstances.

Once a suitable outsourcing company has been chosen, the next step is to take the time to get the fundamentals of the new relationship right, which involves allowing adequate time for due diligence, discussions and negotiations.

Before things go any further, it is also very important for both companies to protect themselves by putting a confidentiality agreement in place before the disclosure of any confidential information.

Next come the contract negotiations, which can be complex and require a great deal of discussion among the negotiation team members.

With this in mind, the report warns that companies can get into trouble and end up with poorly defined contracts if they try to compress the contract negotiation period into an unrealistic timeframe.

When it comes to developing the actual contract, companies should ensure that their interests are adequately protected and the obligations of both parties are thoroughly set out, as there is no special legal relationship between a client and a service provider where obligations of trust and implied standards will automatically apply.

The relationship between the two companies is therefore governed entirely by the terms of the contract, warns the report.

As long-term contracts are becoming increasingly common, many companies are now entering into "master agreements " that provide an umbrella under which the client and outsourcer can add new service agreements without having to renegotiate general terms and conditions each time.

A separate "technical agreement" is then also set out as and when needed, detailing the specification of the required services.

This should include a detailed schedule or protocol setting out specifically what the service provider is to do, including the definition of the scope of the services to be provided, the specification of the performance standards that will be used to gauge the service provider's performance, the pricing structure and a description of the process to be used in relation to the transition of existing services from client to service provider.

Successfully managing and negotiating an outsourcing deal often involves coordinating the efforts of a diverse group of internal participants such as purchasing, the technical group, finance and human resources, and outside experts such as technical and financial consultants.

An experienced lawyer is essential and will be most effective when involved in discussions and decisions in each phase of the deal, not just to check the contract at the end of the negotiations.

A copy of the report titled "Legal aspects of outsourcing in the pharmaceutical industry: a practical guide" can be requested >here.​