Any company aiming at growing their business is faced with many important decisions. In the context of developing their commercialization and growth strategy, product portfolio, channel, partnering and support strategy, etc. need to be addressed. In most cases, decisions need to be balanced between the amount of capital that is available for these activities with the prioritization and speed of implementation.
This article describes how small to medium sized life science companies can use outsourcing to influence this balance between speed of implementation and amount of capital required. One of the main reasons to look at outsourcing would come into place when there is a lack of in-house competence in some key critical areas.
In many cases, founding teams are technology experts such as scientists or academic researchers, who have a great idea about a novel product but have little in-depth knowledge in the areas of strategic and business planning, commercialization strategy, product definition and development, regulatory requirements, reimbursement and other commercially relevant topics. Trying to develop these competencies in-house can negatively affect the time to market and can be very costly. Outsourcing the tasks to industry experts can address both of these limitations.
On the other hand, it is clear that outsourcing is not always desirable and developing in-house capabilities can be mission critical. Given limited resources, one should ask which tasks to own, which competence and capacity to develop, and which tasks to outsource. In the following, we are providing a short framework aiming at answering these questions.
We like to visualize our framework in the following manner:
Critical to build core competence
This is a measure of how important an activity or function is for the long-term success of the company. In other words, how much will the business be compromised if the capability, activity or function is not developed in-house? As an example, the answer to the question of whether to own an in-house laboratory could be different for an R&D service company compared to a company selling a research instrument. The answer also depends on many other factors like stage of development, strategic decisions, and resources available among many other factors.
Critical for commercial success
This is a measure of how an activity or function contributes to achieving of the commercial goals. Here one would be asking the question, how an activity or function contributes to the short-, mid-, and long-term commercial success of the company.
As a general rule, activities deemed to be critical both to build core competence and to achieve commercial success should take priority and if possible should be owned by the company. Activities less critical in both these areas should be outsourced.
Activities, capabilities and functions that are not building core competence, but are critical for commercial success should be outsourced but managed and monitored closely in cases where resources don’t allow ownership. Similarly, activities that are important to building core competency but are not critical to commercial success should be developed through collaborations and partnerships in cases where resources don’t allow ownership.
Factors that should be taken into consideration, when making outsourcing decisions are:
Internal Factors
1. Availability of resources (including time, talent and money). How soon do you need to get to get the task done? Do you have a talent in-house to get the tasks done on-time? Do you have the financial resources to execute the activity or develop the capacity?
2. Strategic plan for the future: What is the strategic importance of the task at hand? How much would developing the competence today help future activities? Will the competence come with a future competitive advantage?
3. Efficiency and effectiveness: How efficient is it to carry out the task within the company? Can you find a partner or a company who does it faster and better?
External Factors
1. Disease area, method or target: Often, when working in a cutting-edge field, there may be limited external resources and you may be better off building our own in-house expertise. There may be the possibility for cooperative competition, especially for rare diseases (topic for a future article).
2. Accessing external innovation: Some projects may require cutting-edge experts in other areas than your core competence. In those cases, outsourcing is a viable alternative to in-house expertise.
3. Rapid change: In some situations, technology and methods change very fast and while smaller companies tend to be more agile an adaptable, there may be major tooling and other costs involved for constant technology changes, which would be an indication for outsourcing.
There is never a one-size-fits-all answer. We tried to explore some fundamental considerations regarding outsourcing. In many cases an explorative conversation with an industry expert in areas where internal gaps exist is a good starting point to developing a comprehensive outsourcing strategy.
Ayodeji Arowosegbe Junior Partner, CYTO Consulting. Lexington, MA.