The Preferred-Provider Model

The designation of preferred partners has become integral to the outsourcing process. Read this and other preferred organization articles in this special issue.
Feb 01, 2011

This article is part of a special issue on Preferred Providers.

The simplest definition of a "preferred provider" is a vendor that has achieved priority status in the award of contracts by a bio/pharmaceutical company. Beyond the simple definition, however, the designation as a preferred provider can confer a broad range of roles and opportunities, depending on how the practice is implemented by the designating company. The practice extends well beyond contract services to many of the items that bio/pharmaceutical companies purchase, such as laboratory consumables and office supplies. Further, how preferred-provider status is achieved varies from company to company. Global bio/pharmaceutical companies usually have a formal and rigorous process for conferring preferred status on a vendor. At small and mid-size bio/pharmaceutical companies, preferred providers are not usually designated in a formal process, but earn that status in the minds of decision-makers based on their performance in a series of increasingly complex assignments.


The preferred-provider model has evolved in response to the growing complexity of outsourced drug-development programs, especially in clinical research. In the early days of contract research, when outsourcing was primarily a tactic to supplement in-house resources, it was typical for the bio/pharmaceutical companies to contract separately for each and every clinical study that was outsourced. In fact, it was quite common to contract the separate elements of a trial (e.g., data management, site monitoring, medical writing) to different contract research organizations (CROs). This practice resulted in outsourcing programs that were complex and costly to administer, and gave CROs the upper hand in pricing.

The first efforts at establishing preferred-provider relationships were aimed at reducing that complexity and giving bio/pharmaceutical companies more pricing leverage. Sourcing managers realized that by prequalifying a small number of vendors and negotiating price schedules with them, they could reduce the administrative burden in setting up and managing CRO relationships, while at the same time establishing more favorable pricing. In return for their participation, the CROs were led to believe they would gain a greater share of the available business.

Unfortunately, these early efforts at preferred-provider relationships delivered fewer benefits than expected for both bio/pharmaceutical companies and CROs. The problem was that these early arrangements lacked "teeth" (i.e., study directors were often not required to use a designated preferred provider when sourcing a study). As a result, the bio/pharmaceutical company didn't get the savings it expected and the CROs didn't get the incremental business they thought they would receive in exchange for better pricing. Not surprisingly, CROs became skeptical that efforts to gain preferred-provider status were worthwhile.

In recent years, the crusade launched by bio/pharmaceutical companies to rein in costs has finally made the preferred-provider designation meaningful. In most global bio/pharmaceutical companies today, just two or three preferred providers are getting as much as 80% of the available contract clinical-research work, with most of the remaining opportunities going to CROs with specialty capabilities.

Table I: Lilly's strategic sourcing relationships.
The nature of the opportunities being offered to preferred providers is changing as well. Rather than contracting work on a project-by-project basis, more global bio/pharmaceutical companies are following the "functional service provider" model, in which CROs are being handed responsibilities for a specific activity across a broad range of trials. For instance, Lilly, which has wholeheartedly endorsed the functional service provider model, has given responsibility for specific services in specific geographic areas to its preferred providers (see Table I).