Outsourcing

Outsourcing laboratory work is usually done on the assumption that another laboratory is able to perform the work more cheaply and/or more rapidly while maintaining adequate quality of the results. Laboratory managers must study other laboratories to determine if this assumption is correct before outsourcing work to them.

By

Factors to Consider When Deciding Whether to Outsource Laboratory Work

Outsourcing has long been a hot-button issue for lab managers. When deciding whether or not to outsource a project or type of work, laboratory managers have to consider issues such as amount and quality of work required, staffing levels, staff attrition, cost/benefit analyses, and the cost and time required to effectively manage the business relationship with the company to which work has been outsourced. There is also the issue of the effect of outsourcing on lab staff morale to be considered. Outsourcing laboratory work is usually done on the assumption that another laboratory is able to perform the work more cheaply and/or more rapidly while maintaining adequate quality of the results. Laboratory managers must study other laboratories to determine if this assumption is correct before outsourcing work to them.

However, before discussing outsourcing it is worthwhile to review some definitions. Many regard the terms “outsourcing” and “offshoring” to be synonymous. Such is not the case. For the purposes of this discussion, “outsourcing” occurs when the laboratory manager chooses an outside organization to do work rather than performing it in his or her own laboratory. The communication of instructions and deadlines and the receipt of results are processes that must be carefully managed. Offshoring is the transfer of work from one country to another.

To simplify the discussion below, the outsourcing laboratory is the one from which the work will be outsourced. The receiving laboratory is the one to which the work will be outsourced.

Factors to consider

The most critical question for the laboratory manager of the outsourcing laboratory to consider is whether outsourcing a piece of work—a particular procedure or analysis or an entire project—will reduce costs or accelerate progress toward the laboratory’s goals. If neither of these requirements is met, the work should remain in-house.

Another factor to consider is whether the outsourcing will “hollow out” the laboratory’s capabilities to pursue important projects in the future. Initially, outsourcing may involve routine, repetitive work that allows personnel at the outsourcing laboratory to focus on more critical, challenging research. However, it is the tendency at some outsourcing laboratories to increasingly outsource more sophisticated work. The laboratory manager needs to consider both short-term and long-term aspects of outsourcing more sophisticated work. For example, their most accomplished staff members may leave the laboratory for more challenging work with another employer if challenging R&D work is outsourced. Thus, outsourcing can negatively impact a laboratory’s ability to work on sophisticated, challenging projects.

The decision about whether or not to outsource a particular activity may vary from company to company. This decision depends on the following key considerations:

  •  What is the ability of the receiving laboratory staff to do the needed work? This is the most important question for the outsourcing laboratory manager to consider. Ideally the outsourced work should be performed by experienced, capable scientists and technicians with up-to-date skills. In the case of overseas laboratories in rapidly developing countries, sometimes the age of the laboratory provides a clue to that staff ’s experience level. New laboratories may be staffed largely by recent graduates with little professional experience. Complicated assignments with complex requirements should not be performed by inexperienced personnel.
  •  The outsourcing laboratory manager needs to monitor the work to be sure it meets quality requirements and is completed in a timely fashion. When the outsourcing is unsuccessful the work may need to be repeated, with a consequent loss of time.
  •  Another consideration is the extent to which the outsourcing laboratory manager can establish an effective working relationship with the receiving laboratory manager and staff. Effective communications with them are essential (see below).

Outsourcing options

The receiving laboratory performing the outsourced work may be located in the outsourcing laboratory’s country or in another country. Geographic proximity offers several advantages when outsourcing. Travel between the two laboratories is faster, more economical and often less complicated than when traveling to another country, going through customs, etc. Of course the telephone, e-mail, text messaging and videoconferencing can eliminate the need for much business travel.

Time is related to distance. Laboratories in the lower 48 states of the U.S., Canada and Mexico are separated by four time zones at most. So there is a substantial overlap of their workdays and little inconvenience is involved in conducting a videoconference or conference call. However, the workdays of U.S. laboratories and those in India, China and some other Asian countries do not overlap. Arranging a conference call means that one party has to participate during what is to them the middle of the night.

Language barriers are seldom an issue when the laboratories are in the same country. The same is not true when the laboratories exist in two different countries. Even when personnel at both laboratories speak English, accents and colloquialisms can complicate communication.

In the last decade pharmaceutical companies have increasingly used laboratories and organizations in India to conduct process development work, contract manufacturing and clinical trials. Basic drug discovery research is increasingly being performed in India. A growing amount of chemical research and product development is being outsourced to laboratories in China. Companies doing this outsourcing have to deal with the problems outlined in the two previous paragraphs.

Sometimes the same company owns the offshore receiving laboratory and the laboratory doing the outsourcing. In this case the information exchange between the two laboratories can be on a deeper and more complete level than if the two laboratories are owned by different organizations.

Costs of performing offshored work are usually lower when the work is performed in a low-wage country than when the work is performed in a laboratory located in the same country as the laboratory outsourcing the work. However, productivity of the receiving laboratory in the same country may be greater due in part to the greater ease of communication of the two laboratories.

Choosing the laboratory to which you will outsource work requires assessing its ability to perform the specific work involved. The quality of the receiving laboratory staff, equipment and instruments available is critical. Test methodology used by the two laboratories must be the same. Receiving laboratory staff members may have a higher assessment of their own capabilities than is justified. This may lead them to accept assignments beyond their capabilities. Hence, lab managers need to be careful in determining just what these capabilities are. They must continually monitor the quality of the work results they receive to ensure that a receiving laboratory that initially delivered adequate quality work does not allow its standards to decline. One possible cause of a decline in work standards is staff turnover in the receiving laboratory. Hence, laboratory managers should continuously monitor just who is performing the work being outsourced. Should names of report authors change, the laboratory manager should determine why and ensure that work quality has not declined.

This assessment is essential, but alone it is not enough. It is important to conduct an in-depth review of candidate receiving laboratories to determine if their goals and business practices are compatible with those of your laboratory. Differences in corporate culture can make business relationships difficult, and disagreements are more likely to arise when there isn’t a good match between workplace cultures. When work is offshored, language barriers can hinder communication and lead to incorrectly performed work and wasted time and money. It is always important to make sure that receiving laboratory staff thoroughly understand your requirements and deadlines. This must be done with particular care if the native language of the receiving laboratory staff is different than that of your own staff. In an effort to be pleasant, in some countries laboratory staff will indicate they understand your requirements when they actually do not. Laboratory managers will need to use open-ended questions to verify whether this understanding actually exists.

A different rationale for outsourcing

Outsourcing solely to cut costs is an appealing transitional tactic to meet quarterly profit numbers. However, outsourcing based on this rationale is only sustainable if wages remain low in countries where this outsourced work is done.1 Such is not the case for countries that currently are the most popular destinations for offshored R&D work, such as India and China where salaries are increasing more rapidly than in the U.S. and Canada.

increasing more rapidly than in the U.S. and Canada. What can be a sustainable outsourcing model is to outsource to laboratories that have capabilities your own laboratory lacks, such as expensive instruments and highly trained personnel to operate them, or proprietary technology that allows work to be done more cost effectively than in your own laboratory. For instance, according to life scientists Franz Pichler and Susan Turner (University of Auckland), “The rapid development of ever more complex and expensive technology coupled with the increasingly competitive environment in the life sciences is changing both how we access technology and how we conduct research. It is no longer possible to expect every technology to be readily available within a research institution, let alone a laboratory, yet access to such technology is often the difference between success and failure within today’s competitive funding models. To fully embrace emerging technologies, scientists are increasingly reliant on outsourcing to contract technology providers (CTPs). In this context, CTPs are companies or institutes that conduct partial or entire experiments on a commercial basis.”2

One example of this approach is an R&D venture established by Eli Lilly and Versant in 2001, Chorus.3 To reduce the costs of new drug development, Chorus scientists attempt to fail drug candidates early in the drug development process rather than later, after large amounts of money have been spent. Claims have been made that Chorus scientists can reduce the time for certain drugs to reach proof of concept by 12 to 18 months, resulting in major cost as well as time savings.

Cost/benefit analyses

In determining the costs of outsourcing, the cost of the laboratory manager’s time spent determining outsourcing requirements, assessing receiving laboratories’ capabilities, and establishing the business relationship and signing contracts must be included.

Results in the information technology (IT) sector indicate that management and administrative costs of outsourcing have been much higher than initially projected. Studies indicate it can be quite difficult to capture all costs associated with outsourcing. Therefore, laboratory managers should decide to outsource work only after careful thought and study.

References

1. R. Boehner, “Outsourcing R&D Innovation Takes on New Meaning,” http://www.chemeurope.com/ articles/e/99167/.
2. F.B. Pichler and S.J. Turner, Nature Biotechnology, 25, 1093-1096 (2007).
3. P. McAndrews, “Lilly Sings a New Tune: Chorus Unit Brings High Efficiency Note to Early R&D,” The Pink Sheet, Vol. 69, p. 26 (2009), http://www.icosystem. com/releases/ico-2007-02-26.htm.

Categories: Business Management

Published In

Show me the Money Magazine Issue Cover
Show me the Money

Published: October 1, 2009

Cover Story

Show Me the Money

So far, nearly 5,000 grants totalling over $1 billion have been awarded by NIH. Most have been awarded to research labs at large universities and small colleges, while some have been awarded to small, privately owned research and product development companies.