Outsourcing Risks Worry the Wary

By contrast, Jeffrey Black, chief financial officer at Endo Pharmaceuticals, says that outsourcing a portion of internal audit has made it easier to comply with Sarbanes-Oxley by giving the company access to experts. "We were able to address some of the concerns of Sarbanes-Oxley and draw on expertise from outside groups with experience in implementation and monitoring the rules," he says.

Security of proprietary knowledge. No firm wants to risk losing a key formula or manufacturing edge because it outsourced. This is especially true in offshore destinations where legal systems may not offer the same intellectual property protection. "Clearly if you go offshore, the ability to protect your proprietary information — such as your patents — is subject to much higher risk," says Maurice Greaver, president of Greaver & Associates. "In low-cost countries, if you're not careful, you could go to the market and they'll be selling medicines that are identical to yours."

The management challenge. The potential difficulty of managing a collaborative partnership throughout its life also dampens enthusiasm for outsourcing, especially with the complications of distance, language, and time differences that accompany offshoring. Christopher-Paul Milne, assistant director of the Tufts Center for the Study of Drug Development, believes that outsourcing may be more trouble than it is worth because as many as 20 or 30 people per project often must be retained in-house to supervise the transition and manage the relationship.

Despite these risks, forward-looking companies can still capture much of the value of outsourcing by contracting with third parties for services that are highly routine and don't have a direct impact on security, regulatory compliance, or product delivery.

This article is excerpted and adapted from Outsourcing among Pharmaceutical and Biotech Firms, a report that summarizes the findings of interviews with executives and professors at 13 companies and institutions. CFO Research Services and A.T. Kearney, a global management consulting firm, developed the hypotheses for the research jointly. A.T. Kearney funded the research and the publication of the findings; CFO Research Services produced the final report. You may download a copy of the full report by filling out a brief form.

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