Strong Link Between CRO Service Quality and Financial Performance

July 30, 2012
Andrew Schafer
Applied Clinical Trials

Under no pretense do we believe there is a single metric that can explain or predict the stock market performance of pharmaceutical service providers. The supply and demand forces exerted on a company’s stock price are an accumulation of current and past performance, future expectations, management strength, competitive forces, and macro economic trends. However, a solid relationship does exist between a CRO’s service quality and their financial performance. If causal inference cannot be claimed, how then do we explain the correlation which does exist? Back to first principles: a service provider improving its service is likely to enjoy improved financial success. Industry Standard Research’s Service Variability Index (SVI) reliably measures service quality and hence is correlated with financial performance.

For this analysis, service quality was measured using ISR’s proprietary SVI and financial performance was measured using share price. The SVI is an index developed by ISR to measure how well service organizations meet customer expectations. ISR analyzed the SVI data from the 2009, 2010, 2011, and 2012 CRO Quality Benchmarking reports alongside each company’s closing stock price on the first day of trading in that year. The share price data coincide with the time ISR’s primary survey data was being collected. This analysis includes the public companies available that had enough responses to ISR’s survey to make the analysis viable, and include Covance, ICON, Kendle (to 2011), PAREXEL, and PPD (to December 2011). Both the SVI and the share price were indexed, using 2009 as the base year. The SVI figures are based on 816 service encounter ratings of these five companies, ensuring high confidence in the analysis. Overall, these service providers have, on average, improved their service delivery over the past four years and the SVI has a very strong relationship to the average company share price.

The goal of this analysis is to stimulate conversation regarding the importance service execution plays in the financial health of an organization and to encourage the pharmaceutical service provider industry to adopt a consistent and continual program that ensures they are measuring their performance against their customers’ expectations.