Managing a Successful Outsourcing TransactionManaging a Successful Outsourcing Transaction

OUTSOURCING

In recent years, numerous writers and speakers—and at least one large consulting firm—have reported disturbing levels of dissatisfaction with outsourcing transactions. The complaints were lodged by the companies that had outsourced some function. Outsourcing service providers and prospective outsourcing customers have sought to identify steps that can be taken to enhance the prospects for the success of these transactions. One factor that has been almost universally identified as a primary contributor to outsourcing success is careful and conscientious management of the outsourcing transaction by the customer.

Medical device companies that have outsourced successfully understand that they cannot delegate management of an outsourcing transaction to the service provider. Just as the services to be outsourced are carefully managed and supervised by the company before being transferred to a service provider, these services must continue to be supervised and managed by the company after the provider assumes responsibility.

An outsourcing transaction can be organized for management as follows:

This article explores how a medical device company can manage an outsourcing transaction effectively by putting together the right team and identifying its key responsibilities. The goals for the device company are to prepare the service provider to perform the outsourced services in a manner that will satisfy the company and to ensure the success of the outsourcing relationship.

Identify an Outsourcing Team

One of the first steps a medical device company should take is to create an outsourcing team. The team is responsible for preparing and coordinating the outsourcing transaction. It also participates in selecting the service provider and negotiating the outsourcing agreement. Team members should be selected carefully based on their abilities to manage the implementation and performance of the outsourcing services.

An effective team should comprise three groups with differing roles and responsibilities. First, core decision makers must manage the process. This group participates in the selection of the service provider and in negotiations with the selected service provider. It also oversees the performance of the selected service provider. The second group contains subject matter experts (SMEs) who advise the decision makers on matters that require their expertise. The third group consists of stakeholders who are responsible for internal performance of the services to be outsourced. These stakeholders eventually will be a critical part of the stay-behind team after the service provider assumes responsibility.

Core Decision Makers. The company should select a manageable number of decision makers to allow for focused discussion and efficient action. They should include, at minimum, a lead business decision maker, internal counsel, and outside counsel.

The lead business decision maker should ideally be the person who will eventually be responsible for implementation and performance of the outsourcing transaction. These future responsibilities provide strong motivation for the lead business decision maker to oversee team activities effectively. This role requires the authority to make day-to-day decisions in the various phases of the outsourcing transaction. The lead business decision maker should be able to prioritize issues and follow up with senior management and others for decisions on these issues.

A medical device company must bear in mind that the person it selects as its lead business decision maker must be prepared to devote significant time and effort to managing the outsourcing process and the negotiation. The outcome can be jeopardized if the designated individual has too many other responsibilities or too little motivation to give sufficient attention to the transaction. Selecting a strong lead business decision maker and giving that person the necessary authority, resources, and time to perform well are perhaps the greatest investments a medical device company can make in the success of its outsourcing transaction.

Internal counsel typically provides guidance about the structure of the transaction. The structure should be as consistent as possible with the company's legal culture and other contractual relationships. Internal counsel also offers the company's institutional perspective on legal issues as they arise. For most device manufacturers, outsourcing transactions are only one item in a long list of the internal counsel's legal responsibilities, and the internal counsel will not ordinarily be available to participate in all meetings of the core decision makers or to review all of their communications. Nevertheless, internal counsel should be available to provide prompt information about the company's legal culture and institutional perspectives on legal issues and to make recommendations for identifying, managing, and resolving issues that may arise.

Outside counsel should be experienced with guiding and coordinating outsourcing transactions and raising issues that the company might not independently recognize, and counsel should be able to provide insight on the customary structure for outsourcing transactions. Outside counsel should advise on how to resolve difficulties that are unique to outsourcing transactions. The outside counsel should also oversee the customer's preparation for the outsourcing transaction, coordinate negotiations with the selected service provider, and facilitate the progress of these activities to meet a reasonable schedule for completion of negotiations.

Subject Matter Experts. SMEs should include the people who manage and perform the services to be outsourced. They should provide the decision makers with a firsthand understanding of the manner in which the company performs the services to be outsourced. Such information includes the aspects of those services that exceed expectations as well as those that do not, and the manner in which the company receives and uses the results of the services. For example, one or more SMEs should be available to provide copies of standard operating procedures (SOPs) that are used to perform specific services to be outsourced. SOPs will give prospective service providers a detailed understanding of the customer's requirements. SMEs should also be given opportunities to assess any changes to SOPs and other aspects of the services that a service provider may propose. Depending on the nature of the services to be outsourced, a medical device company might want to include members of its internal regulatory compliance staff among the SMEs. It may also be appropriate to have a member of the regulatory staff included in the core decision makers.

The core decision makers should recognize that they might not have all the details regarding the services to be outsourced. They should be encouraged to consult closely with SMEs. SMEs are most valuable if they have the ability and the initiative to ferret out information about the medical device company's current performance and how the outsourcer is to be used. Their goal is to provide a balanced perspective on any changes to services that are under consideration.

Stakeholders. Stakeholders are managers and representatives of the business units that require and use the results of the outsourced services. Because they offer insight into how the services are used, their support for the outsourcing transaction is critical to its success. Stakeholders must be given the opportunity to develop confidence that the outsourcing transaction will deliver the benefits that the company is seeking. To achieve such confidence, stakeholders should have insight into the company's analysis of its internal performance of the services to be outsourced, the improvements the company has decided are necessary, and the steps that the company is taking to achieve those improvements.

Because service improvements necessarily entail changes to the services, stakeholders should be given detailed information on anticipated changes and the effect that those changes will have on the receipt and use of the services. Giving stakeholders an active role in the planning and execution of the outsourcing transaction will help gain their cooperation and support. It may also help motivate them to work hard to ensure the success of the transaction after it is implemented.

Effective communication is a critical part of a team-based approach to preparing for and implementing an outsourcing transaction. To avoid unwelcome surprises as the process proceeds, it is essential to have periodic meetings of the core decision makers and frequent communication among the core decision makers and SMEs to gather information. It is also necessary to have regular meetings or conference calls among the core decision makers and the stakeholders to discuss issues that have arisen and to gather input for the decisions that must be made. Such communication helps to maintain a unity of purpose within the company.

Outsourcing Team Responsibilities

Although the outsourcing team's goal of achieving a successful outsourcing transaction remains the same throughout the process, the team's responsibilities evolve from phase to phase. Team members should not be expected to recognize these responsibilities intuitively. To ensure a consistent understanding of the responsibilities by all members and to foster a sense of team affiliation, the outsourcing team should receive initial training and periodic updates as its responsibilities change.

Preparation Phase. The most important preparation for an outsourcing transaction is due diligence, or information gathering. A significant volume of information must be gathered in connection with any outsourcing transaction, and the outsourcing team should equally share responsibility for the effort. Although the gathering effort can be time-consuming and costly, investing resources to collect the information as early as possible strongly enhances a company's chance for success. Information collected should include the following:

Service Provider Selection Phase. A medical device firm may decide to offer an outsourcing opportunity to only a single service provider, or it may invite responses from several outsourcers in the form of a request for proposal (RFP).

The outsourcing team's responsibilities are limited when an outsourcing opportunity is offered to a single service provider. The RFP process, on the other hand, requires the team to take on more responsibility. When using RFP, one team goal is to agree on a recommendation of an outsourcing service provider to company management. The goal is more likely to be achieved if the members of the team have a full opportunity to provide input. It is important that the lead business decision maker or senior company management, as appropriate, considers and addresses any concerns identified by the team members.

An effective RFP must include a description of the company and the services to be outsourced. The SMEs and the stakeholders should have provided input on these matters and they should have an opportunity to review and comment on the information that is included in the RFP. An effective RFP also includes a proposed outsourcing agreement, or at minimum a detailed term sheet, to which respondents are asked to identify any exceptions and objections. The agreement or term sheet is normally prepared by outside counsel, reviewed by internal counsel, and offered to the stakeholders for review. Review of the agreement or term sheet by internal counsel and any resulting feedback should be completed before the RFP is provided to prospective service providers.

The receipt of proposals in response to an RFP creates a flurry of activity for the outsourcing team. Individual respondents inevitably interpret the same RFP differently. They may make different recommendations about how the services might best be performed or use different calculations for pricing the services. The core decision makers are tasked with taking these proposals and making a recommendation to the company's management for selection of a service provider.

Between publication of the RFP and the deadline for receipt of responses, the core decision makers should prepare guidelines that they will use to evaluate responses, so that relevant information presented can be identified, evaluated, and compared as efficiently as possible. Responses will inevitably raise questions that require input from SMEs. And the stakeholders should be asked to provide input on the evaluations and comparisons made by the decision makers so that the recommendation to management has the support of as many members of the team as possible.

Contract Negotiation Phase. Careful consideration should be given to whether one of the core decision makers should act as the primary negotiator with the service provider or whether an additional member should be recruited for that role. Negotiation of an outsourcing agreement inevitably raises some controversy, and the skills and experience that are necessary to manage an outsourcing transaction are different from those required for effective contract negotiation. Therefore, the lead business decision maker, who is likely to need a close and cooperative working relationship with the service provider after the contract is completed, may not wish to be the primary negotiator. Having the internal counsel assume this role is likely to conflict with his or her other legal responsibilities. For these reasons, the role of primary negotiator is often assigned to outside counsel or to another company employee who is selected by company management. However this role is assigned, all company personnel and the service provider should know who has the responsibility and authority to serve as the company's primary negotiator.

Outside counsel, the primary negotiator, and the lead business decision maker (at minimum) should be present for all in-person negotiations with the service provider. Internal counsel should be present to the extent possible and consistent with other responsibilities. So-called back-channel negotiations between anyone other than the company's and the service provider's primary negotiators should not occur without the approval of the company's primary negotiator.

Service performance issues will likely come up during negotiations. Such discussions require input from SMEs. Core decision makers need to recognize that they may not have full details regarding the outsourced services and that close consultation with SMEs is warranted. In some circumstances, it may be appropriate to invite SMEs to participate directly in negotiations. Core decision makers should also conduct regular meetings with the stakeholders on the progress of the negotiations. This includes updates on contentious issues that the parties are working to resolve. The stakeholder meetings should be an opportunity for decision makers to seek input from the stakeholders on possible resolutions or compromises.

Supervision Phase. Based on the size and complexity of an outsourcing transaction, the service provider may need to begin implementing services before the negotiation phase is completed. In this case, some members of the outsourcing team may find themselves with supervisory responsibilities in addition to their negotiation roles.

However, most supervisory responsibilities begin after negotiations are complete. As in any supervisory relationship, all parties must understand the applicable performance criteria. The supervisor must communicate performance assessments to those being supervised coherently, constructively, and promptly. Regardless of the quality of the service provider, an outsourcing transaction can be seriously jeopardized if the service provider receives no feedback or input regarding its performance of the services.

A steering committee that includes staff from both the device company and the service provider should be formed as part of the outsourcing agreement. Its chief purpose is to foster communication. However, such committees serve little purpose if the meetings are poorly attended or are not staffed with members of sufficient stature. Service providers recognize the value of these meetings more frequently than do their customers; however, it is up to the customers to put the effort into these opportunities. As soon as possible after a decision to outsource is made, a device firm should begin to identify management personnel and stay-back team members who are responsible for the success of the transaction. The company should plan how these individuals should establish and maintain communications with both the stakeholders and the company's delegates to the steering committee.

Conclusion

To achieve a successful outsourcing transaction, a medical device company must organize itself to manage the lengthy and frequently cumbersome process. It must gather a significant volume of information and organize it so that prospective service providers can submit reliable proposals. It must select a service provider that can meet the company's needs and diplomatically negotiate a contract. And it must implement a procedure for supervising the service provider's performance. Recognizing these needs and putting a team in place as early as possible to manage the effort is the best way to ensure that the medical device company can outsource services successfully.

Philip Porter is head of the outsourcing practice at Hogan & Hartson LLP (McLean, VA). He can be reached at [email protected].

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