The pharmaceutical industry continues to outsource more clinical trials to contract research organizations (CROs) each year—resulting in CRO growth of over 10% annually in the last five years. This trend is expected to increase to 15%, according to industry reports.
But despite rapid growth, many CROs are seeing dramatic declines in profitability—up to 50% by some estimates. While top line revenue growth is good, growth of profitability is important to attract and retain top talent.
To gain insight into the profitability problem let's look at how CROs and sponsors interact, and how difficult it can be to measure study profitability—and even more difficult to forecast.
The problem is complex because sponsors typically pay CROs for deliverables on what is known as a “unitized” basis. This means that the sponsor pays a fixed amount for each unit, regardless of the effort to deliver the unit. The challenge is to precisely budget the time of professionals working to deliver those units. For example, if the CRO estimates it will take two hours of clinical research associate (CRA) time to deliver a unit, but it ends up taking three hours instead, then profit quickly evaporates.
The CRO must continually fine-tune their profitability model to ensure this does not happen in future studies. This is the crux of the challenge—it requires state-of-the-art tools. Unfortunately, many CROs are working with a combination of paper records, spreadsheets and document management software to estimate profitability and forecast revenue. CROs are not new to technology for running studies—for example, clinical trial management systems and electronic data capture systems. But these tools are specific to the trials themselves, and do nothing to run the business side of the company—such as study proposal management, invoicing, customer relationship management, and other key business processes.
What's needed is an enterprise system that can run the whole company and all its processes on a single software platform. Such an ERP system would arm the executives with the right business intelligence to focus on increasing profitability. These tools are known as enterprise resource planning (ERP) software, and major players like SAP, Oracle, and others offer solutions for many industries. But they are expensive and require lots of customization to fit the complex business processes of CROs. Since each CRO runs its processes differently, the focus on customizability of the software increases even more. Hence the first steps in addressing the profitability problem starts with the top leadership recognizing the need for an ERP solution and selecting one that is highly customizable. However, it doesn’t stop there—it requires a successful implementation project to take the ERP system live.
Let’s take the case of what North-Carolina-based Ockham Oncology was facing after they acquired a Scotland-based CRO and experienced a growth spurt. It was a good acquisition since Ockham focused on Data Management/Biometrics and Nexus focused on Clinical Management.
Within a few months of the acquisition, the financial process of integrating the two companies was complete, but operationally they were still working as two different companies. What Ockham needed to take true advantage of the merger was a single operational system to run the entire company. They required an ERP system that can prepare unitized study proposals, forecast resources and revenue, record billable units and hours, and generate invoices. Such a tool should have enough flexibility to accommodate minor variations across the two organizations while serving as the unifying backbone. From Ockham’s perspective, implementation of such a system required strong commitment from the top leadership to a vision of a unified company. The executive team had to sell this vision to the various departmental managers and get them on board.
When Ockham decided to go with the Mindprint CRO ERP solution because of its flexibility, the executive team vigorously took on the task of communicating the vision and distilling the system implementation goals to the entire company. A core team was set up comprising of leaders from both organizations and clear responsibilities were communicated. While day to day decision making was delegated, a clear escalation path was defined and adhered to, for decisions that required trade-offs between various departments.
This focus on the execution paid off. Six months after the implementation, Ockham is now a strong growing CRO with streamlined operations across various countries. Various departments such as proposal management, operations, finance, and HR are now speaking a single language. The executives’ effort and involvement in the implementation project has rewarded them with timely business intelligence reports that if utilized correctly, can be fundamental to their business and growth demands. In the words of Jim Baker, the CEO of Ockham, “These new tools help us serve our clients more effectively and preserve our essential focus on the clinical challenge in helping our clients in developing new cancer-fighting formulations”. In the ERP implementation world, there has been a strong correlation between executive involvement and success—the Ockham leadership team whole heartedly embraced this philosophy and proved it correct.