This document discusses five steps for ensuring regulatory compliance when outsourcing business functions in highly regulated industries. It begins by explaining how strict regulations in industries like pharmaceuticals and food production present challenges for outsourcing. It then provides five steps companies can take to help outsourcing providers maintain compliance: 1) establish regulatory frameworks, 2) develop well-trained teams, 3) deploy knowledge retention strategies, 4) create a compliant workplace culture, and 5) maintain accountable processes. The document concludes with a case study of how one company improved regulatory compliance and reduced staff turnover by outsourcing certain functions.

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

2. /02
Regulationcanpresentmajorobstaclesfor
businessesthatoutsourcefunctionssuch
asmanufacturing.Aswithanychallenge,
it’spossibletomanagetherisksbydoing
yourhomeworkandmakingsureyour
providerappliestherightknowledgetoyour
outsourcedengagements.

3. 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.
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.
INTRODUCTION /03
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, www.kpmg-institutes.com/content/
dam/kpmg/sharedservicesoutsourcinginstitute/pdf/2014/state-of-outsourcing-2014-exec-findings-hfs.pdf.

4. 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.
/04INTRODUCTION
Businesses can mitigate
any uncertainty by
ensuring their providers
build compliance into
the processes and
workforces that support
outsourced projects.

5. /05
Canyouaffordto
outsourcehighly
regulatedprocesses?

6. 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. 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.
/06CAN YOU AFFORD TO OUTSOURCE HIGHLY REGULATED PROCESSES?
Some industries
are more rigorously
regulated than
others.

7. 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.
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.
/07CAN YOU AFFORD TO OUTSOURCE HIGHLY REGULATED PROCESSES?
Successfully
outsourcing key
processes also
gives businesses a
competitive edge.

8. /08
Ensuringcompliance
inoutsourcing

9. 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.
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.
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.
/09ENSURING COMPLIANCE IN OUTSOURCING
Outsourcing doesn’t
absolve a business
of its responsibility
to comply with
industry regulations.
1

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.
Capable talent
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.
/10ENSURING COMPLIANCE IN OUTSOURCING
Businesses need to
ensure their providers
employ skilled
managers capable of
understanding and
applying regulatory
protocols.2

11. 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.
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.
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.
/11ENSURING COMPLIANCE IN OUTSOURCING
It is essential for
managers to receive
comprehensive
training that reinforces
the regulatory
reasoning behind their
daily processes.
3
4

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.
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.
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.
/12ENSURING COMPLIANCE IN OUTSOURCING
It is important to make
sure that outsourcing
providers document
their compliance efforts
and track improvements
over time.
5

13. /13
Fivestepsforeffective
outsourcingin
highlyregulated
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.
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.
/14FIVE STEPS FOR EFFECTIVE OUTSOURCING IN HIGHLY REGULATED ENVIRONMENTS
Make sure
outsourcing
providers offer
managers rigorous
training.

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 set-
and-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.
/15
It’s important to make
sure your outsourcing
provider builds and
maintains a positive
workplace culture.
FIVE STEPS FOR EFFECTIVE OUTSOURCING IN HIGHLY REGULATED ENVIRONMENTS

16. Eye-care leader reduces turnover
of highly skilled staff
CASE STUDY:
/16
Aleading US eye-care
manufacturer was
employing college science
graduates as analysts in its
research and development
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
a high rate of turnover
– many graduates were
leaving voluntarily shortly
after training or were forced
out due to lack of career
progression in the role.
As a result, the company
was unable to retain the
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
productivity in its core
quality and safety testing
processes.
Based on our
recommendations, the
company transferred
managerial responsibility
for its R&D employees
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.
We evaluated existing
contract and employment
arrangements and designed
a fresh approach to help
retain employees. The new
arrangements gave workers
greater job security, a full
benefits package, paid time
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.
Before we were engaged,
testing on clinical submissions
took teams around 14 days
to complete. Our rationalized
management approach
reduced this to seven days
within a year, and just four
days within two years.
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
maintaining the flexibility and
cost-effectiveness of reduced
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.
EXIT
ABOUT KELLYOCG
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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
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