Outsourcing Rigor FIVE STEPS FOR IMPLEMENTING OUTSOURCING ENGAGEMENTS IN HIGHLY REGULATED ENVIRONMENTS MICHAEL KOPER AND JUAN LUEVANO

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1 Outsourcing Rigor FIVE STEPS FOR IMPLEMENTING OUTSOURCING ENGAGEMENTS IN HIGHLY REGULATED ENVIRONMENTS MICHAEL KOPER AND JUAN LUEVANO

2 Regulation can present major obstacles for businesses that outsource functions such as manufacturing. As with any challenge, it s possible to manage the risks by doing your homework and making sure your provider applies the right knowledge to your outsourced engagements. /02

3 INTRODUCTION /03 It s no secret that outsourcing has changed the way many organizations work. Over the next two years, 72 percent of companies worldwide plan to increase their reliance on outsourcing to some degree. Already, 96 percent are outsourcing some element of their back-office and other basic operations. 1 However, in rigorously regulated environments the benefits of outsourcing becomes less clear. In highly regulated industries such as pharmaceuticals, medical devices and food production, failure to comply with strict procedural standards can result in substantial penalties. Constantly evolving markets mean outsourcing still holds substantial appeal for businesses that operate in highly regulated industries. Such pressures encourage organizations to maintain careful control over their compliance, building regulatory considerations into business processes, staff training and documentation procedures, so everything is as it should be in case of audit. These measures are often intricate, so it s understandable for these businesses to be reluctant in entrusting them to a third party. Despite compliance risk, growing competition and constantly evolving markets mean outsourcing still holds substantial appeal for businesses that operate in highly regulated industries. 1 David Brown, Phil Fersht, Executive report: The State of Services & Outsourcing in 2014, KPMG, dam/kpmg/sharedservicesoutsourcinginstitute/pdf/2014/state-of-outsourcing-2014-exec-findings-hfs.pdf.

4 INTRODUCTION /04 This presents companies with a difficult decision: keep core processes in-house and risk being outpaced by more resourceful competitors, or trust third party outsourcers to take ownership over regulatory compliance. Regulation adds complexity to the outsourcing process. But businesses can mitigate any uncertainty by ensuring their providers build compliance into the processes and workforces that support outsourced projects. In this paper, we present five factors you can put in place to help you make sure your outsourced business functions meet regulatory expectations in the long term. Businesses can mitigate any uncertainty by ensuring their providers build compliance into the processes and workforces that support outsourced projects.

5 Can you afford to outsource highly regulated processes? /05

6 CAN YOU AFFORD TO OUTSOURCE HIGHLY REGULATED PROCESSES? /06 In highly controlled environments, the cost associated with regulatory audits, fines, lost customers and even temporary closure can negate the benefits of outsourcing in the first place. Most industries must comply with some kind of regulation. In the finance industry, accountability and transparency are increasingly regulated to protect consumers. Construction businesses face requirements relating to building standards, competing land usage and occupational health and safety. According to the CDRH, the U.S. is the world s leader in regulatory science, medical device innovation and manufacturing, and radiation-emitting product safety. Some industries are more rigorously regulated than others. Some industries are more rigorously regulated than others. For example, the US Food and Drug Administration (FDA) and the US Department of Agriculture (USDA), respectively require pharmaceutical and food production companies to follow strict anti cross-contamination protocols when cleaning machinery used to process different products. In addition to similar cleanliness standards, the FDA and DEA require businesses in the pharmaceuticals industry to assign a serial number to every bottle, case and pallet of certain products, to enable tracking of counterfeit or controlled substances. Furthermore, the pharmaceuticals industry is also subject to Free Trade Zone (FTZ) requirements as it relates to logistics and supply chain components.

7 CAN YOU AFFORD TO OUTSOURCE HIGHLY REGULATED PROCESSES? /07 Fear of regulatory fall out Failure to comply with these and other regulations exposes businesses to a range of complicating factors. Regulatory scrutiny can result in fines and restrictions on what a business is legally permitted to produce. Regulators can even force a business to halt non-compliant departments or cease producing certain products until the company can pass an audit. Successfully outsourcing key processes also gives businesses a competitive edge. These interruptions can affect product supply chains, leading to unhappy customers and lasting brand damage. In worst-case scenarios, lack of compliance can cause cash flow problems. Outsourcing becomes less attractive for businesses trying to use their talent budgets in highly regulated environments. Despite the potential dangers, outsourcing does hold inherent value for businesses operating in highly regulated industries. Successfully outsourcing key processes also gives businesses a competitive edge, while still providing appropriate compliance oversight.

8 Ensuring compliance in outsourcing /08

9 ENSURING COMPLIANCE IN OUTSOURCING /09 Applying a strong understanding of regulatory requirements to each part of an outsourced practice including business processes, staff training and performance metrics is essential for companies intent on outsourcing in highly-regulated industries. Outsourcing is more than a tactical exercise in achieving cost reductions by passing operations to third-party providers it s a strategic way for organizations to be more competitive and responsive to future needs. Outsourcing doesn t absolve a business of its responsibility to comply with industry regulations. Companies operating in highly regulated industries need to take the long-term approach to outsourcing, by making sure that service providers can sustain compliance by building each of the following elements into their outsourced functions. 1 A proactive compliance framework Outsourcing doesn t absolve a business of its responsibility to comply with industry regulations. Businesses that want to successfully outsource in highly regulated environments must take a proactive approach to meeting their obligations.

10 ENSURING COMPLIANCE IN OUTSOURCING /10 These new arrangements must be modelled on compliance information published by regulators, minimizing the margin for error and lowering the risk of penalties. Building regulatory requirements into outsourcing frameworks also allows businesses to eliminate inefficiencies and double-handling in business processes, which helps to improve productivity and bring down operating costs. 2 Capable talent Businesses need to ensure their providers employ skilled managers capable of understanding and applying regulatory protocols. Having a comprehensive compliance framework is not enough to ensure outsourced operations meet all regulatory requirements; businesses also need to ensure their providers employ skilled managers and teams capable of understanding and applying regulatory protocols. Proper management reduces operational risk and decreases regulatory scrutiny. Managers of outsourcing engagements need the knowledge and experience to maintain audit-proof levels of compliance and to take action when workers breach protocol. This is why it is essential for managers and their team members to receive comprehensive training that reinforces the regulatory reasoning behind their daily processes. Similarly, it is important for managers to follow rigorous procedures to ensure all tasks and business processes are compliant and clearly documented.

11 ENSURING COMPLIANCE IN OUTSOURCING /11 3 Knowledge retention High levels of turnover have an adverse effect on workers regulatory knowledge and capabilities. For this reason, it s important to make sure workforce providers can retain regulatory knowledge within outsourced business functions, especially over the long term. A few keys to keeping regulatory know-how in the business is to offer a career path with developmental opportunities to keep the workforce engaged and motivated. It is essential for managers to receive comprehensive training that reinforces the regulatory reasoning behind their daily processes. By creating clear paths for career progression and offering benefits packages, outsourcing providers can offer their workers stronger job security and motivation to perform. This reduces workers incentives to leave and helps to keep valuable compliance knowledge within the outsourced business process. 4 Positive workplace culture Workplace culture is another aspect that is important for maintaining the morale and quality of work among the workforce. Engaged employees are easier to retain, but also more likely to take care in their work, which helps the outsourced business process complies with regulation.

12 ENSURING COMPLIANCE IN OUTSOURCING /12 For this reason, it is important to make sure outsourcing providers take an interest in establishing positive environments for employees so they have greater ownership over each outsourced business function s regulatory compliance. 5 Strong accountability Maintaining a high level of accountability in the eyes of regulatory bodies is a good way to reduce unwanted scrutiny. If a regulator s audit reveals that all business processes are comprehensively documented, and that the records show improvements in compliance, the regulator is likely to audit less frequently. For this reason, it is important to make sure that outsourcing providers document their compliance efforts and track improvements over time. It is important to make sure that outsourcing providers document their compliance efforts and track improvements over time. Internal audits are a valuable way to track a company s compliance. By using regulatory requirements to create audit checklists, providers can present managers of outsourced functions and their teams with protocols that allow them to gauge how effectively various processes comply with specific regulations. Giving managers analytic tools also allows them to detect and remediate noncompliance patterns that might develop over the long term. The ability to anticipate potential protocol breaches helps safeguard outsourced business processes against failure in future audits.

13 Five steps for effective outsourcing in highly regulated environments /13

14 FIVE STEPS FOR EFFECTIVE OUTSOURCING IN HIGHLY REGULATED ENVIRONMENTS /14 Proactive regulatory management is essential for sustained compliance when outsourcing in highly regulated environments. The following five steps will help your outsourced projects meet and maintain regulatory compliance over the long term. 1. Establish regulatory frameworks: It s important that providers understand what regulators expect of the business process you are outsourcing. Make sure your provider uses guidelines and citations published by regulators as the basis for audit checklists, and that outsourced business processes account for their compliance with regulatory requirements. Make sure outsourcing providers offer managers rigorous training. 2. Develop a well-trained team: Managers need to understand their regulatory responsibilities. Make sure outsourcing providers offer managers and their teams rigorous training in understanding and complying with regulatory protocols and procedures. 3. Deploy knowledge retention strategies: By offering skilled team members training and similar benefits to those enjoyed by full-time employees, as well as building pathways for career progression, outsourcing providers can reduce turnover, which helps retain valuable regulatory capabilities within outsourced processes.

15 FIVE STEPS FOR EFFECTIVE OUTSOURCING IN HIGHLY REGULATED ENVIRONMENTS /15 4. Create a compliant workplace culture: Managers and employees who are not engaged in their roles are less likely to be committed to meeting requirements for regulatory compliance. For this reason, it s important to make sure your outsourcing provider builds and maintains a positive workplace culture. 5. Maintain accountable processes: Compliance is an ongoing process, not a setand-forget solution. Check that your provider identifies relevant metrics in each outsourced function; monitors these at least quarterly to mitigate the risk of failed audits; and documents processes in preparation for any future audits. It s important to make sure your outsourcing provider builds and maintains a positive workplace culture.

16 /16 CASE STUDY: Eye-care leader reduces turnover of highly skilled staff leading US eye-care A manufacturer was employing college science after training or were forced out due to lack of career progression in the role. Based on our recommendations, the company transferred a fresh approach to help retain employees. The new arrangements gave workers to complete. Our rationalized management approach reduced this to seven days graduates as analysts in its As a result, the company managerial responsibility greater job security, a full within a year, and just four research and development was unable to retain the for its R&D employees benefits package, paid time days within two years. department. The workers were responsible for testing products such as contact lenses to ensure they met regulatory requirements for quality and safety. However, a lengthy training process and dysfunctional workforce model was causing knowledge of its highly skilled staff despite the investment in training. The company asked KellyOCG to review the workforce model and propose a solution that would help retain skilled workers, while improving to KellyOCG. Using our experience with business process outsourcing, we appointed an internal manager to oversee the laboratories and designed a fresh approach to workforce management that minimized company restrictions. off and a degree of certainty about the future of their careers. This helped establish a positive workplace culture and reduced incentives for workers to leave. We also designed new management processes aimed at raising productivity. The company s quality and safety control laboratories now operate more effectively and have higher retention rates. Our involvement has helped the company access the long-term benefits of developing and retaining skilled workers, while a high rate of turnover productivity in its core We evaluated existing Before we were engaged, maintaining the flexibility and many graduates were quality and safety testing contract and employment testing on clinical submissions cost-effectiveness of reduced leaving voluntarily shortly processes. arrangements and designed took teams around 14 days corporate headcount.

17 MICHAEL KOPER is the Manufacturing Solutions Architect for Business Process Outsourcing practice of KellyOCG. Mike has over 20 years working in and consulting to the manufacturing industry and has authored over 15 articles in trade magazines. Mike holds certifications as a Manufacturing Engineer, Professional Engineering Manager and Technologist. Additionally, Mike earned his degree in Engineering from Oakland University and a Masters in Management, Nazareth College. He is a senior member of Society of Manufacturing Engineers as well as the Society of Maintenance and Reliability Professionals. JUAN LUEVANO is Director and Supply Chain Solutions Architect for the for Business Process Outsourcing practice of KellyOCG. He began his career at Kelly working as a Lean implementation manager for customer Delphi Energy. He has been with KellyOCG since 1999 and has held various positions in operations, global account management and implementation. Juan attended the University of Texas where he earned a Bachelor of Science in Economics, a Bachelor in Business Administration in Finance, and minored in Latin American studies. ABOUT KELLYOCG KellyOCG is the Outsourcing and Consulting Group of workforce solutions provider Kelly Services, Inc. KellyOCG is a global leader in innovative talent management solutions in the areas of Recruitment Process Outsourcing (RPO), Business Process Outsourcing (BPO), Contingent Workforce Outsourcing (CWO), including Independent Contractor Solutions, Human Resources Consulting, Career Transition and Executive Coaching, and Executive Search. KellyOCG was named in the International Association of Outsourcing Professionals 2015 Global Outsourcing 100 list, an annual ranking of the world s best outsourcing service providers and advisors. Further information about KellyOCG may be found at kellyocg.com. EXIT