What Are The Best Practices In Managing Outsourced R&D Projects

© 2007 Xoriant Corporation [email protected] 408.743.4400

AAuutthhoorr: Girish Gaitonde, CEO, Xoriant Corporation

CCoonnttaacctt: [email protected]

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2 © 2007 Xoriant Corporation [email protected] 408.743.4400

By the 1930s, companies in the United States offered R&D services to the government on contractual

basis. By 1999, R&D Magazine accurately predicted that, “outsourcing may become the next hot

technological trend as corporate technology managers look for ways to support their strategic goals.”

Then in 2001, it accurately predicted again that the “industry will continue to emphasize various forms

of partnering and collaborations, including relationships with other industries, federal laboratories, and

international facilities.” These predictions have proven to be quite on the mark since according to

Partnering Forum, by the end of 2010 it is projected that over 40% of R&D will be outsourced in

pharmaceutical industries alone. Moreover, it is estimated that at present, the United States medical

industry alone outsources over $300 million in R&D and that an increasing rate is showing by the year.

The Engineering Management Conference of 2004 discussed then that the increase in the demand in

R&D outsourcing and constant changes in trends have lead to many problems in the management of

outsourced R&D projects. Further, these problems had serious implications on both the outsourcer

and the outsourcing firms. At present, most companies and analysts have come up with good solutions

and insights on the best practices in managing outsourced projects, particularly for R&D projects.

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According to Don W. Caudy, vice president of innovators’ support services and medical products

division of Battelle, there are several key principles to adhere for an effective management of

outsourced R&D projects. Companies must first eessttaabblliisshh ccoommmmoonn oobbjjeeccttiivveess. Meaning, as the

company chooses their preferred provider, they must also make themselves the preferred client.

It is also important to bbuuiilldd rreessppeecctt aanndd ttrruusstt. To do this, the company must be fair, open, and honest

throughout the project. By being open and trusting, both parties foster a good relationship. This avoids

any unpleasant surprises, disregard for rules and misinformation, which are common problems in

outsourcing. After which, the ccoommppaannyy mmuusstt aallwwaayyss ccoommmmuunniiccaattee iinn aa pprrooffeessssiioonnaall mmaannnneerr. Not only

should the client give clear and precise instructions throughout the project, it is important to document

all things essential for the business to ensure no miscommunication happens in the future.



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CCoommmmuunniiccaattiioonn MMaannaaggeemmeenntt is the basic element of a successfully managed outsourced R&D

project. It is best that the company have a specific communication structure that will assist the team in

having a good and open relationship. By having good communication, the team shall be able to face

issues and problems faster and more effectively. Thus, the company must create a structure of

communication that is best suited to the project and the team. For instance, daily communication of

project managers as to the results of the day, weekly communication of operational managers as to the

process of the project and its improvements and monthly communication of business management on

how to address the problems.

RReellaattiioonnsshhiipp MMaannaaggeemmeenntt is also important since it enables the smooth progress of the project. The

team should communicate to the provider all expectations of the project, including its format,

drawings, documents and details of the project to avoid any misunderstanding and to foster good

working relationship based on trust. Further, both parties should also have uniform software,

information systems and programs to use.

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Another important part of how to manage outsourced R&D projects successfully is to know when to

outsource. A company must be clear in its objectives for outsourcing. Most of the time, companies

experience problems in-house that may lead management to consider outsourcing. The management

must evaluate if outsourcing is indeed the solution for their problem. For instance, if the problem is to

meet the deadline, the company must evaluate if the solution is as simple as designating additional

supervisors or managers for the research.

Caudy gave typical scenarios for management to consider outsourcing:

• Meeting deadlines

• Lack of experience and technology

• Lack of facilities and equipment



And what the company should first consider:

• If they have the management skills for R&D outsourcing

• If the workers will be supportive

• If they have enough resources for the management of R&D outsourced projects

Moreover, the company must evaluate if it is ready to do the part of managing an outsourced R&D and

share its secrets and confidential technological information, concepts and strategies.

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Caudy enumerated five preparatory components that shall eventually constitute a successful

management of outsourcing R&D projects. After having decided that the company definitely needs to

outsource its R&D and that it has the work force and resources for its management, it must now take

the following steps:

• Formulate a strategy. The company must clarify its organizational goals and then identify the

things needed to be achieved from outsourcing its R&D projects. These may be to reduce

cost, to have new IT or to free capital funds. The company’s goals must match the provider.

• Create a Plan. The company must assign a capable outsourcing manager and have him

formulate a plan to be presented to the stakeholders.

• Define the scope of work. The company should list down all activities that will be

outsourced.

• Properly document and define all requirements. After defining the scope of work, the

company should prepare a list of outsourcing requirements and documents needed. This

list may include the problems that needed solving, the evaluation of possible providers,

how to go about outsourcing, planned relationship with the provider and the risks

in outsourcing.

• Choosing the provider. This is the trickiest part because the company must go through the

process of choosing the right and suitable provider to be its partner. The company should



perform a thorough evaluation of the candidates, including background, financial and

referral checking. A potential outsourcing company must be evaluated as to how it fares

with its competitors.

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Lastly, according to Caudy, one of the best practices in managing outsourced R&D is to use it as a tool

for the company’s competitive edge. At present, product innovation is now the major factor in top-line

growth. This is far from traditional practices when R&D was the last to be outsourced. As such,

companies must develop good relationship with their clients because when properly managed, R&D

can help in maximizing the company’s performance.

To use it as a tool, the company must remember that outsourcing companies can help them focus on

their competencies, organizational change for effectiveness, pursue more product pipeline, access

technological innovations and reduce their capital requirements.

To be able to utilize all the afforded functions of outsourced R&D, the company must have a definite

guideline or practice in managing the outsourced R&D. Primarily, the company must have oonnllyy rreeaalliissttiicc

eexxppeeccttaattiioonnss. The company should consider its expectations and evaluate if they are realistic or not.

They should understand that providers have certain limits and are not miracle workers. Second, the

company must ggoo tthhrroouugghh tthhee pprrooppeerr oouuttssoouurrcciinngg pprroocceessss. Planning to outsource projects and hiring a

provider should both be done under rigorous courses of action. It is not as simple as buying something

from the store or procuring an office supply.

Third, ggoooodd ccoommmmuunniiccaattiioonn mmuusstt bbee eessttaabblliisshheedd, which is usually overlooked and cause R&D

outsourced projects to fail. Both teams must establish good communication, or else the project will

be compromised. Fourth, ccoonnttiinnuuee tthhee rreellaattiioonnsshhiipp eevveenn aafftteerr tthhee ccoonnttrraacctt hhaass bbeeeenn ssiiggnneedd. Most

companies assume that as soon as they have signed the contract, everything is on the hands of the

provider. In fact, the project’s success lies on the partnership of the buyer and the vendor. Thus, should

the buyer fail its part as a partner, then the project is doomed to fail.

Technology

What Are The Best Practices In Managing Outsourced R&D Projects