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Productive relationships with CROs require a well thought out strategy on the part of sponsors.
Many clinical development executives sense they are not getting the best value out of contract research organizations (CROs). Areas of concern include lack of clarity on pricing, poor communication, and an inconsistent commitment to projects.1 Managers feel that contracting to a CRO is less cost effective than performing activities in-house.2 Nonetheless, about two thirds of clinical trials involve CROs.3 Consequently, contract research is a multibillion dollar industry growing at 14% to 16% per year.4 Given this reliance, difficulties with CRO management represents a significant concern to the research and development of new medicines.
PHOTOGRAPHY: GETTY IMAGES
This article establishes that drug developers are, in fact, ineffective at CRO management compared to other industries. There are identifiable causes of this inefficiency that this article describes. It also provides a sample of tools that drug developers can implement to improve how they manage CROs.
Clinical developers estimate the cost to manage a CRO is 20% that of performing the task in-house2 (in other words, if it cost $100 to do something in-house, it costs $20 to manage the vendor it was outsourced to). How does this compare to other industries? To assess this, a metric called Transaction Management Cost (TMC) is useful. TMC is the internal cost a company pays to manage vendors. These include costs to identify contractors, develop requests for proposals (RFPs), review proposals, and select a CRO. It also comprises the cost to negotiate and execute a contract. Finally, it contains ongoing expenses to oversee the CRO's activities throughout the project.
Looking at the information technology industry, for example, Figure 1 shows that the average TMC is four cents on the dollar. That is, for every dollar paid to a vendor, the company spends four cents to manage the project. Looking at the biotech industry, the TMC is 15 cents on the dollar. Pharmaceutical companies have a TMC of 40 cents on the dollar.5 The difference in TMC between biotech and pharmaceutical companies likely arises from different operating styles. Most biotech companies are not yet profitable and are therefore compelled to run much leaner operations.
Figure 1. The amount in cents spent on internal costs varies by industry.
This statistic is not likely to improve soon for several reasons. Currently, the complexity of CRO selection is increasing. Companies are adopting team-based approaches to CRO selection involving many departments and executive management. RFPs are becoming longer and more complex,7 which adds cost and time to CRO selection.
Moreover, two thirds of companies do not use preferred vendors or negotiate master service agreements (MSAs) with CROs.2 Thus, rather than gaining efficiency in CRO selection, most companies repeat the same process for every new project. Furthermore, when other industries outsource functions, there is a corresponding decrease in internal resources. This does not happen in the pharmaceutical industry.8 So companies pay twice: once for the CRO's team and again for their own "shadow" team. Together, this has a significant impact on budgets. Consider a $1 million outsourcing project. Using a TMC of four cents on the dollar, the cost to manage this project is $40,000.
However, given the TMC in biotech and pharma of 15 cents and 40 cents on the dollar, the management cost is $150,000 and $400,000, respectively. If biotech and pharma companies could bring their TMC in line with the IT industry, this would reduce the total project budget by 10% and 26%, respectively.6
There is a spectrum of outsourcing models ranging from tactical to strategic. The drug development industry typically limits itself to tactical outsourcing models9 (see Figure 2). Tactical models include fee-for-service arrangements and preferred vendor models. Contracts are project focused and companies choose vendors on a case-by-case basis. Strategic models include the formation of partnerships and alliances. A true strategic relationship must meet three criteria.
Figure 2. Drug developers typically limit themselves to the tactical model.
How does entering into strategic relations lower the overall cost of outsourcing? Strategic models align incentives by sharing risks and rewards. Both drug developer and CRO share quality and performance incentives, which create value and efficiencies. Moreover, firms can implement long-term programs to improve performance. Additionally, managers reduce the costs of CRO selection because partnerships span many projects. Some pharmaceutical companies have shifted toward strategic outsourcing. As Table 1 shows, Wyeth Research and Solvay Healthcare have each entered into strategic partnerships with CROs, and each has achieved significant benefits.
Table 1. Strategic partnerships proved fruitful for both Wyeth and Solvay.
In tactical relations, however, incentives are misaligned. The drug developer wants more value for the dollar, and the CRO needs to protect its profit margins. The final contract is a negotiated compromise between these opposing incentives. Moreover, because relations between the companies end upon completion of a project, there is no incentive to improve long-term performance.
The limitations of tactical models and benefits of strategic outsourcing beg the question why strategic relationships are so rare. Typical answers include:
We are too small. Many managers believe only large firms can enter strategic relations. This is untrue. Size does not restrict the ability to outsource strategically.
Economic benefits disputed.8 Due to lack of data, it is difficult to quantify the benefits of strategic outsourcing in clinical development.
Fear of losing control. Managers believe they might lose control of outsourced activities.1 If the company uses only tactical models, this fear may be justified. Strategic outsourcing, however, can lessen this risk.
Limited vision.8 Many managers are unaware of the range of outsourcing options.
Disagreement over what to outsource. Rationally determining which functions to develop in-house and which functions to outsource can be difficult.8 Therefore, companies perform outsourcing ad hoc when internal capacity is lacking.
Ease of entering tactical relationships. Strategic outsourcing requires a significant commitment at the executive level. Thus, managers turn to tactical outsourcing because it is easier.
The goal of an effective outsourcing program is not to enter a strategic relation with every CRO.13 Strategic relations need significant energy to implement, and are therefore not appropriate for every function. Instead, the goal is to form the right relationship with the right CRO for the right activity. To do this, the firm must first decide what functions to outsource. Then it must determine the best relationship to form with its CRO.
In the early 1990s, the concept of "core competency" drove outsourcing decisions. This school of thought suggested companies could achieve a long-term competitive advantage by identifying core competencies. Managers then outsourced remaining functions. Identifying core competencies, however, is difficult, contentious, and subjective. A more practical method of making outsourcing decisions uses the concept of relative efficiency.13 That is, if you perform a function better and cheaper than other firms, perform it in-house. Otherwise, outsource the function to a CRO who can.
Easy to say, but this involves choices many managers struggle to accept. There may be functions managers consider strategic that the relative efficiency model suggests should be outsourced. However, it is not a company's ownership of capabilities that matters but rather its ability to control them. If strategically designed, an outsourcing program will allow managers to retain control of critical functions.
The following presents a three step framework to help managers choose what to outsource.6,13
Identify outsourcing candidates. Managers assess each function in their development program. Does the company perform the activity in a manner unique to the industry? Does the way in which the company performs the function deliver a competitive advantage? If the answers to the above questions is no, then the function is an outsourcing candidate. Otherwise, consider retaining ownership of the activity.
Define outsourcing goals. Managers evaluate the company's cost effectiveness and ability in each activity. Regarding costs, managers compare their costs of performing an activity against industry standards. Concerning ability, managers determine whether they perform the activity better or worse than required. If the company's costs are higher than industry standard, consider outsourcing the function to CROs who can do it cheaper. If the company's ability is less than required, consider outsourcing to get performance to adequate levels. If the company performs the activity cheaper than industry standard and performs the function adequately or better, consider keeping it in-house.
Based on the findings from the above two steps, managers make a decision about which functions to outsource and which to develop internally. But before implementing this decision, managers need to perform the third step.
Perform a double take. Managers evaluate whether there are extenuating circumstances affecting their decision. What are the potential unintended consequences of the decision? Will the firm need to develop processes to mitigate these effects? Will the decision affect current relationships with key opinion leaders? Will the decision result in layoffs, and if so, what are the associated costs to the company?
Based on these three steps, managers identify activities for outsourcing. The next step is to determine the appropriate relationship to enter in with the CRO.
Another three-step process can be used to help managers choose the right relationship with the right CRO.6,14
Business strategy. Before a company can develop an outsourcing strategy, the business strategy must be in place. The company should have answers to questions like:
Relationship drivers. Drivers are elements that justify a strategic relationship. The company's business strategy influences these drivers. There must be significant benefits for the company and CRO if a strategic relationship is to succeed. The benefits should be long-term and difficult for competitors to match. The following list summarizes benefits from the drug developer's perspective. The CRO should also assess drivers from its own perspective.
Relationship facilitators. Whereas drivers provide motivation for forming a strategic relationship, facilitators support and strengthen the liaison. The following list summarizes important facilitators.
These facilitators should exist in any strategic relationship. Other facilitators may also exist, including:
If the drivers and facilitators are very strong, a deep long-term partnership or possibly an alliance such as a joint venture may be justified. Moderate drivers and facilitators justify a weaker partnership of finite duration. Weak drivers and facilitators warrant a tactical relationship.
To control R&D budgets and obtain the full benefit from working with CROs, drug companies must start to view outsourcing strategically.
Brad Anderson is president of Integrative Consulting Services, Suite 849, 104-1015 Columbia Street, New Westminster, British Columbia, Canada, V3M 6V3, email: info@IntegrativeConsultingServices.com.
1. V. Charlon, "A Clinical Development Solution Tailored for Biopharmaceutical Companies," Applied Clinical Trials, November 2003, 36-39.
2. J.R. Vogel and K. Getz, "Successful Outsourcing: Tracking the Evolving Use of Full-Service and Niche-Service CROs," Applied Clinical Trials, June 2005, 54-60.
3. P. Dewberry, S. DeSantis, J. Kalt, S. Gambrill, S. Zisson, Clinical Trials State of the Industry Report 2006: Market Players, Data, Drug Development, and the Future, M.J. Lamberti, ed. (CenterWatch, Boston, 2006).
4. K. Brooks, "Growth, Expansion, and New Opportunities," Contract Pharma, May 2006, 36-45.
5. N. Turner, "Strategic Relationship Management," in Outsourcing Clinical Development: Strategies for Working with CROs and Other Partners, J. Winter and J. Baguley, eds. (Grower Publishing Limited, Burlington, 2006), pp. 123-138.
6. B. Anderson, Shifting from Tactics to Strategy: The New Age of Clinical-Development Outsourcing (Integrative Consulting Services, Vancouver, Canada, 2007).
7. G. Richard, "Preferred Providers Face Outsourcing Challenges," Applied Clinical Trials, November 2007, 46-50.
8. J.C. Easton, "Forward," in Outsourcing Clinical Development: Strategies for Working with CROs and Other Partners, J. Winter and J. Baguley, eds. (Grower Publishing Limited, Burlington, 2006), pp. xv-xix.
9. J. Thomis and S. Desai, "Outsourcing Strategies," in Outsourcing Clinical Development: Strategies for Working with CROs and Other Partners, J. Winter and J. Baguley, eds. (Grower Publishing Limited, Burlington, 2006), pp. 1-27.
10. Accenture, "Working with Wyeth to Establish a High-Performance Drug Discovery Capability," http://www.accenture.com/Global/Services/Client_Successes/By_Industry/Health_and_Life_Sciences/Pharmaceuticals_and_Medical_Products/WyethTransaction.htm (2005).
11. Touch Briefings, Case Study, "Business Process Outsourcing in Global Research and Development," Drug Development (2006) http://www.touchbriefings.com/cdps/cditem.cfm?NID=1842.
12. Solvay Healthcare, Novel Agreement with Quintiles/Pharmabio Development Accelerates Throughput of Solvay Pharmaceuticals R&D Pipeline, Press Release, October 14, 2004, http://www.solvayhealthcare.co.uk/news/newsitems/0,,23889-2-0,00.htm.
13. M. Gottfredson, R. Puryear, and S. Phillips, "Strategic Sourcing from Periphery to the Core," Harvard Business Review, February 2005, 1-9.
14. D.M. Lambert, M.A. Emmelhainz, J.T. Gardner, "Developing and Implementing Supply Chain Partnerships," The International Journal of Logistics Management, 7 (2) 7-17 (1996).