Best Practices: Governance Models in Outsourcing

Having the right governance model for external partnerships is critical for a successful outsourcing relationship. So what are key elements of a sound governance model and where are the challenges. DCAT Value Chain Insights (VCI) looks at best practices..

Successful external development and manufacturing partnerships are not only the product of identifying the right supplier and effective supplier relationship management. It is also a product of having strong governance models internally to manage those relationships in line with corporate and business goals to gain value, efficiency, and cost-effectiveness. A recent industry survey suggests that an open innovation model is a better approach than traditional models in optimizing pharmaceutical research and development.

Evaluating what works
A recent study be Deloitte Consulting, “Executing an Open Innovation Model: Cooperation is Key to Competition for Biopharmaceutical Companies,” shows that drugs sourced via open innovation are three times more likely to achieve late-phase clinical success versus those cultivated under an in-house, closed-model approach. Produced by Deloitte’s Center for Health Solutions, the study also asserts that open innovation may emerge as a quicker and less expensive avenue for bringing therapies to market and that current trends may accelerate its adoption, including waning public funding and the need to cast a wider net for ideas and talent in overcoming a lack of understanding around the molecular pathways and triggers of complex diseases.

“Companies have entered an intense period of self-examination to determine what their core strengths are and what their strategy should be as the health system moves to a value-based model,” said Matthew Hudes, principal, Deloitte Consulting LLP, and national practice leader for the biopharmaceutical industry “Part of this soul searching should include questions about how R&D gets done in a world more dependent on data analysis and population health.”

The report presents a construct of four levels of open innovation, starting at the low end with “pure outsourcing” and moving up the scale with “licensing and variants,” “collaboration and variants” and “open source,” which involves companies sharing data, governance, operating procedures and risk in a highly-collaborative environment. The study analyzed 281 biopharmaceutical companies from 1988 to 2012 in determining that drugs sourced via open innovation have a higher chance of late-stage success. More specifically, of 355 products developed under an open innovation mode, 119 were filed (34%), whereas out of the 463 pursued under a closed mode, only 51 were filed (11%).

In this spectrum of “openness,” pure outsourcing” is the traditional approach where alliances exist with single and multifunctional service providers. In this model, companies share and implement proprietary governance, methodology, and operating procedures with the collaborator, which in turn assumes the operating risk for the program. In the construct of R&D, partners involved in “pure outsourcing” are contract research organizations, biopharmaceutical start-ups, or universities. The next level, “licensing and variants,” allows for majority control of assets and potentially less ability to fully shape development. Risks and rewards are generally in proportion to the amount invested and rights of operating control. In the “collaboration and variants” approach, there is collaboration (even with competitors) to leverage complementary resources, knowledge, experience, capabilities and to spread development risk through collaborations, co-development deals, and joint ventures.

In the last level, “open source,” refers to a highly collaborative networked environment, where technology, data sharing, goverance, operating procedures, and risk management, are respectively leveraged to encourage this collaborative environment. This type of arrangement is more common in other industries, according to the Deloitte study, such as information technology, consumer products, and industrial products. The study points out that the highly regulated nature of the pharmaceutical industry has thus far limited the adaption of “open source” environments, but that out-of-industry examples may serve as a model for the pharmaceutical industry.  

Although the study focused on the application of open-source models to R&D, it is relevant to see if more collaborative models would be relevant in other areas of drug development and manufacturing and how those models could be potentially managed and governed. The study pointed out that biopharmaceutical companies are traditionally and currently more reliant on the more closed approaches. The report examined development alliances across the sector and found that fewer than 20% of products are being developed under the two higher forms of open innovation–”collaboration and variants” and “open source,” a situation that may be limiting opportunities. “Overuse of traditional R&D could cause a company to fall behind a creative competitor while adopting a more open approach “provides the opportunity to access a large, diverse pool of ideas and experts which could spur product innovation, speed to market, reduce costs, and increase competitiveness,” stated the report.

An open innovation framework
The Deloitte study provides five elements that make for a successful transition to open innovation: (1) network characteristics (number and types of partners); (2) talent; (3) intellectual property management and contracting; (4) participant contributions and impacts; and (5) governance. With respect to each of these elements, the study points to an spectrum of openness with the closed/traditional model at one end and the open/emerging model at the other end.

With respect to network characteristics, referring to the number and type of partners, a closed/traditional approach would have fewer participants and be more localized in terms of the location of those partners.An open/emerging approach would involve multiple partners (20 or more) in multiple countries.

With respect to talent, a closed/traditional approach would have a high degree of specialization and use only innovative capabilities with a narrow acceptance criteria for potential partners. The open/emerging model would have mixed skill sets with a blend of innovative, experimental, and commoditized capabilities with a broad acceptance criteria for participants.

With respect to intellectual property management and contracting, the closed/traditional model has understood and defined outcomes and contracts. The participants design their roles around an explicit agreement, and contractual language is explicit in protecting intellectual property. In the open/emerging model, mutual interest is a guiding element. Contract language enables use, study, distribution, and derivation to the parties.

In terms of participant contributions and impacts, under the closed/traditional model, the network’s agenda is set by a core group or institution. With a model of increased openness, participants can influence some of the innovation activities, reaching a level in the open/emerging model where participants can influence most of the innovation activities.

With respect to governance, in the closed/traditional model, there are predefined and restrictive rules for network participants with reviews and approvals during solution development. As the approach becomes more open, there are some rules governing network participants with reviews and approvals during solution development. With a open/emerging model, reviews and approvals are elicited only when absolutely necessary.

Barriers to an open innovation framework
The Deloitte study found mixed results as to the adoption of open source model among pharmaceutical companies for R&D. Among the 12 largest biopharmaceutical companies’ R&D pipelines in 2014, 54% of all active drugs were sourced through an open innovation model versus 46% that came from a closed/traditional model. A broader analysis of the pharmaceutical industry showed, however, that most drugs (83%) were sourced through more closed types of models, either pure outsourcing and/or by licensing. Only one in five drugs were sourced through “collaboration and its variants,” and none were sourced through an “open source” arrangement. “Collaboration and variants” were pursued three times less often than “licensing and variants,” and nearly two-thirds less often than “pure outsourcing.”

The Deloitte study pointed out that in general, pharmaceutical companies are less reluctant to adopt open-source models. Barriers to acceptance include a reluctance to change existing workflows and processes to adopt open innovation. Also, open innovation models involve working closely with different partners and aligning the companies’ innovation strategies and cultures, which can be difficult. The study also points to cultural barriers or skepticism that innovation has to be initiated at the core institution and cannot be initiated from external partners. Another concern, which the study points out, is that intellectual property may be adversely affected, which the study says is not the case as the value of intellectual property is enhanced in an open innovation model. A final barrier relates to management style, where traditionall, pharmaceutical companies are managed centrally through a top-down approach as opposed to a more collaborative approach found in open innovation models.

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