Monday, July 16, 2012

Guest Post: Partnerships Series: Strategic vs. Tactical Outsourcing for Pharmaceutical Sponsors

Today's guest post is from the ERT Blog.  ERT is a sponsor of the Partnerships in Clinical Trials Event taking place April 22-24, 2012 in Orlando, Florida.


Partnerships Series: Strategic vs. Tactical Outsourcing for Pharmaceutical Sponsors

Outsourcing practices have become an increasing trend as the demand for capacity, speed, an expanded geographic footprint, and cost containment continue to grow in the pharmaceutical industry. Other factors leading to project outsourcing are the increasing complexities of clinical trial activities and the rising number of smaller sponsors conducting their own clinical research. The Tufts Center for the Study of Drug Development revealed that spending on new drug development is growing at a rate of 9.1% annually while global spending on contract clinical services is growing almost twice as fast at 13.4%[1]. Also, according to ERT’s own internal data, just five years ago in 2006, CROs accounted for 1% of total bookings. To date, that number has grown to represent over 17% of ERT’s business. This data exemplifies current trends and can clearly infer what other outsourcing firms are experiencing throughout the pharmaceutical industry.

As the industry moves forward and the current market pressures cause sponsors to change their relationships with vendors, outsourcing practices have begun to evolve and mature. Pharmaceutical companies are challenged now, more than ever, to conduct their clinical research more efficiently in order to reduce costs while enhancing productivity. More than 92% of sponsors and service providers surveyed, felt that the levels of outsourcing relationship efficiencies in 2009 would not adequately meet future needs[2]. Mature sponsors have begun to strategically look for high quality partnerships that will deliver the greatest results and the most satisfactory vendor relationships. Others continue to outsource projects tactically to satisfy a short-term goal for the lowest possible price. A company’s choice to outsource tactically through a transactional relationship, or strategically as business partners is uniquely driven by each company’s internal culture and business philosophies. However, all sponsors, large and small, should be aware that the more mature the outsourcing practices, the higher the potential to yield greater outsourcing quality, value and overall vendor relationship satisfaction.

Key Attributes of Mature Outsourcing Partners
With the benefit of our experience, we have witnessed several customers maturing from the tactical, free-for-all competitive bidding processes, to creating short lists of qualified vendors, and finally to creating a strategic partnership with a trusted vendor. This type of customer tends to see the bigger picture, in terms of a sensible business relationship, due to a more narrow focus on quality results and relationship satisfaction. Often searching for a win-win situation, sponsors who outsource maturely are more concerned with the strategic aspect of their clinical study, not so much the ‘nickel and dime’ philosophy where much time can be wasted on relatively insignificant issues. Since these Pharmaceutical companies recognize that it is in their best interest to understand, they proactively ask questions in an effort to identify their responsibilities and often share pertinent information concerning their company’s business goals, objectives and requirements in an open and transparent forum. There is also an understanding that issues may arise, so with a constructive attitude and emotionless problem solving, they are able to work collaboratively to find a practical and innovative resolution.

The Benefits of Strategic Outsourcing
Strategic outsourcing relationships and alliances often begin to take shape when the sponsor company realizes a particular contractor can provide value-added services and expertise that the company may not have the competency or resources to accomplish otherwise. With true partnerships in place, relationships are based on trust and communication, allowing for greater transparency and service levels. Also, having an established relationship with a short list of preferred providers who offer a broad range of services, global presence, financial stability, and best-in-class quality, can significantly increase the return on outsourced development efforts and dollars. A Jeffries Survey of 60 Pharmaceutical and Biotech executives indicates that nearly 80% of respondents believe outsourcing provides efficiencies that reduce development times and in turn, costs[3]. An additional benefit, when working with a smaller number of best-in-class providers, is continual knowledge management. Processes are able to become more aligned with experience, building long-term value and better integrating the operations of both companies to support business goals. Finally, with the confidence that they are doing business with a trusted provider working in their best interest, Pharmaceutical executives are better able to focus on the strategic aspects of their roles instead of the operational day-to-day tasks.

The Drawbacks of Tactical Outsourcing
Tactical outsourcing is a fragmented approach where short-term goals and initial cost savings take priority and there appears to be less focus on quality. Whether it is due to of a lack of financial resources, to relieve the burden of staffing in an absence of talent, or to eliminate the need for future investment, some pharmaceutical companies choose to outsource on a purely transactional basis. This leads to the idea that every contract is done as a ‘one off’ or in a vacuum, where a high percentage of the deals have to be negotiated from a pricing perspective as individual projects, rather than as a part of a program of studies. While sponsor’s immediate requirements (technology, price, capacity) and individual deals are satisfied, the sponsor’s future needs may be compromised.

In 2010, the Avoca Group conducted a survey in which they found that respondents, whose companies allocated 75% or more of their clinical outsourcing budgets to preferred providers, were less likely to be dissatisfied with the value received from their outsourcing relationships than those who allocated less or those without a preferred-provider relationship in place. Only 5% of respondents whose companies outsource strategically were dissatisfied with the value obtained, as opposed to the 33% whose companies outsource in a more tactical manner[4] . This type of adversarial, transaction based relationship may facilitate lower levels of trust and familiarity, disallowing both sides to fully benefit from the efficiencies that would otherwise be realized. Finally, at an individual study level, much time is spent and wasted in pricing negotiations, and resources are not as well planned without visibility to the bigger client picture, access to key personnel and a well-developed outsourcing strategy where company synergies are formed.

The Future of Outsourcing
It appears change is already underway, in regards to the use of outsourced service providers within the pharmaceutical industry, as the assumptive percentage of total outsourcing market penetration is expected to rise from 40% to 46% in the next five years[5]. Despite growth and maturation of the market, the nature of these relationships continues to have dramatic room for improvement. Due to the pressures of increasing efficiency, lowering costs and the focus on drug safety from regulatory agencies, there has been a growing concern over quality, causing a reevaluation of contracted third-party vendors. Outsourcing relationships have begun to change considerably and will continue to push further in the direction of strategic partnerships. In fact, a survey conducted by William Blair & Company, in conjunction with Life Sciences Strategy Group, indicated that over the past few years, roughly 60% of respondent’s companies have increased their outsourced R&D budget, and 69% of large pharmaceutical respondents expect that strategic partnership agreements will continue to increase the rate of outsourcing in the future[6] .

A recent example of this trend is the June 2011 announcement that Pfizer has selected two CROs, ICON and PAREXEL, as their strategic partners. John Hubbard, Ph.D., senior VP and worldwide head of development operations for Pfizer, expressed that “the goal of this collaboration is to increase R&D productivity.” He also noted numerous other benefits from these relationships, including improved focus – moving from 17 functional service providers to two[7]. Based on the previously mentioned survey conducted by The Avoca Group, it appears that in the future Pharmaceutical companies will become much more selective in choosing their service providers based on their strong capabilities and the quality of their services. When major sponsors were asked what specific changes they planned to make within the next five years regarding their outsourcing vendors, the majority responded by indicating they will be outsourcing work within preferred provider relationships, as well as begin to consolidate the number of vendors where possible. At the time of the survey, 69% of the sponsor companies reported having preferred-provider relationships. Sponsors also plan to modify the way they measure and manage the performance of their service providers and create stringent criteria for vendor selection. Relationship management programs often consist of performance-metric assessments and reviews, lessons-learned meetings, issue handling procedures, and formal governance structures. Plans to change outsourcing models or to incorporate more risk-sharing clauses into their future contracts were also mentioned[8].

It is suggested that the rate of increased development effectiveness through a proper and mature R&D outsourcing strategy is approximately 15-20% in reference to improved time to market, and 10-40% in relation to efficient cost improvements[9]. As it appears, the industry is confident that the changes in outsourcing strategy toward long-term relationships, preferred-providers and relationship management programs will continue to enhance the level of efficiency and alignment between sponsor and vendor in clinical outsourcing.

References
[1] Estimates of Global Demand for Clinical Services Outsourcing. Tufts Center for the Study of Drug Development. Outlook 2010. January 2010.
[2] The Future of Clinical Service Provider-Sponsor Relationships. http://pharmtech.findpharma.com/pharmtech/ article/articleDetail.jsp?id=707026
[3] Windley, Hilgenbrink, and Dodge, “Pharmaceutical Services: Growth Forecast in the High Singles, How Soon Will We Get There?,” Jeffries and Company, Inc., April 19, 2011
[4] The Future of Clinical Service Provider-Sponsor Relationships. http://pharmtech.findpharma.com/pharmtech/ article/articleDetail.jsp?id=707026
[5] Outsourcing Penetration Assumptions, by Phase, 2003-2015E. Jeffries & Company
[6] “CRO Industry Update,” January 11, 2011, William Blair &Company L.L.C.
[7] Strategic Partnering For Innovation: Perspectives From The CRO Side Of The Table. Rob Wright
[8] The Future of Clinical Service Provider-Sponsor Relationships. http://pharmtech.findpharma.com/pharmtech/ article/articleDetail.jsp?id=707026
[9] Strategic review of R&D outsourcing — an essential step towards R&D transformation. http://www.atkearney. com/index.php/Our-expertise/strategic-review-of-rad-outsourcing.html


This blog is co-posted with the ERT Blog. Getting it Done. Right.




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