Magazine Article | March 4, 2013

When Outsourcing, Focusing On Low FTE Rates Can Be Costly

Source: Life Science Leader

By Roger Frechette, cofounder and partner, New England PharmAssociates, LLC

At a meeting in December 2012, I spoke with an excited young biologist entrepreneur whose grant application had been funded, formally launching his new company. He had arranged shared lab space and couldn’t wait to land an Indian chemistry CRO to get started. I mentioned that there might be a more cost-effective option and offered to discuss this topic in more detail in the new year. His quizzical expression suggested I not wait by the phone.

While outsourcing at all stages of life sciences R&D has become common, it is remarkable that entrepreneurs so often believe outsourcing to a lab more than 10 time zones away is the only option — or even a good option. At a time when access to capital for life sciences start-ups is increasingly scarce, it certainly is possible for a virtual life sciences operation to succeed with a lean, capital-efficient, asset-centric business model, without ever building and staffing a laboratory. But execution of outsourced research requires careful planning and sound management. The siren call of inexpensive FTE rates can be difficult to resist, but for a researchdriven business to succeed, leadership has to take a holistic view of operational needs, where contract FTE cost is but one component.

Consider The Cost Of Redoing Outsourced Research
Project managers typically use variations of the triple constraint system, which can be depicted as a triangle with sides labeled good, fast, and cheap — interdependent properties of a project, any two of which may be optimized, but necessarily at the expense of the third. Life sciences projects cannot escape this reality. It may seem cliché, but sometimes you get what you pay for — if the cost of labor is low, but deliverables fail to meet expectations, finding a new vendor to repeat the work could negate the cost savings and delay important milestones. But more damaging than the incremental cost of repeated work, for companies funded by grants or impatient investors, an extended delay could be terminal.

Selecting a partner for contracted research requires a clear understanding of timeline and quality expectations for projects/products and honest assessment of internal capabilities and aptitudes, both scientific and managerial. Then comes contractor due diligence to assess quality capabilities, reliability, responsiveness, suitability of facilities, access to resources, and compatibility of corporate interests and of culture/personalities. Lacking a good match between sponsor and contractor, failure is a very real possibility. Price should not enter the discussion until compatibility is assured — then, if there is more than one competitor standing, the lower price probably makes the most sense.

Small Companies Cannot Always Mimic Big Companies
When contemplating contract work with distant labs, consider the costs beyond FTE rates. Since the turn of the century, well-funded companies, including contractors, have fueled a huge expansion of R&D centers in countries associated with low costs. However, these companies also have expended enormous resources on frequent travel and complex project logistics, and many have resorted to constructing offshore research facilities, often staffed with expertise imported from the U.S. or Europe. Great, productive working relationships certainly can be, and have been, created across geographic boundaries, and I have had the pleasure of participating in excellent long-distance collaborations over the years. However, successfully building and maintaining truly productive research teams across multiple time zones and cultural boundaries is challenging and, for low-budget operations, often cost-prohibitive.

Recommended CRO selection priorities:

  1. compatibility — do they have the skills and capacity, and can we work together?
  2. preservation of IP protection and ownership
  3. quality/reliability
  4. proximity — face-to-face meetings (same time zone preferred, same area code even better)
  5. fully loaded cost — FTE rates, extra expenses, shipping, frequent site visits.

The good news for entrepreneurs is that most life sciences hubs have a wealth of high-quality CROs from which to choose.