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An industry survey finds that pharma's outsourcing practices keep the industry from reaping the full benefits of outsourcing.
Outsourcing in the clinical research sector has reached a critical juncture in its evolution. Pharmaceutical companies are poised to gain major benefits from the scale, scope, and expertise of contract research organizations (CROs)—if they are willing to relinquish control and let their CROs do what they do best.
That's the principal conclusion of a survey conducted by consulting firm Everest Partners L.P. (Dallas, TX) and presented at April's Partnerships with CROs conference sponsored by the Institute for International Research (IIR). This was the third year that Everest and IIR conducted the survey. Everest is a consulting firm focused exclusively on outsourcing in a wide array of industries.
According to Todd Hintze, Everest's industry principal for healthcare, the objective of the survey was to gauge whether research and development (R&D) outsourcing in pharma is delivering the same level of market value that outsourcing has delivered in other sectors such as information technology and business processes.
In Everest's view, true outsourcing requires the transfer of ownership of a business process from the client to the service provider. In a true outsourcing relationship, the client's principal concern is for the results of the process rather than its mechanics. The underlying rationale is that the service provider can do the job better, faster, and cheaper because it has superior economies of scale, greater depth of experience, better technology, and access to lower-cost labor markets.
According to Hintze, pharmaceutical companies are missing out on the full advantages of clinical research outsourcing because they are unwilling to relinquish control. Although some of this reluctance reflects the industry's regulatory environment and prominence as a target for lawsuits, Hintze says that pharmaceutical companies primarily need to get their "blocking and tackling" right. In particular, they need to be better at defining their outsourcing objectives, establishing governance mechanisms, and training staff responsible for managing outsourcing relationships.
The understanding and alignment of objectives between clients and CROs was one of the biggest problems highlighted in the Everest survey. Hintze says that companies are often inconsistent in following their stated objectives; for instance, stating initially that innovation is a prime objective, then focusing on price when it comes time to negotiate the contract. He also notes that agreements and relationships developed among operational people are often undone once the negotiations are handed off to legal and procurement staff.
Metrics should measure progress toward objectives, so developing effective metrics can't be achieved unless the objectives are aligned. Too often, metrics are defined after the project has started, rather being defined in the service agreement. Furthermore, notes Hintze, both the client and the contractor should have incentives to work toward the common objectives, and both should feel pain if they don't.
Pharmaceutical companies also fail to pay adequate attention to relationship governance, says Hintze. Too often, governance is not dealt with until a problem arises after the project is launched. Without a proper structure for resolving problems, including escalation to higher management levels, issues can remain unresolved for long periods, jeopardizing project objectives and completion.
The overwhelming majority of pharma company respondents to the Everest survey indicated that they prefer doing work in-house when speed or cost is of paramount importance. Interestingly, though, executives and operational staff see things differently: Executives are more favorably disposed to outsourcing, while the line-operations staff prefers keeping work in-house.
This suggests that there is a missing link between executives' strategic vision and the day-to-day realities of managing outsourcing projects. The Everest research suggests that the disconnect may be in training: More than 60% of respondents indicated that they received either no training or only on-the-job training for their outsourcing management responsibilities.
Although Hintze did not say so outright, the Everest survey suggests to me that pharmaceutical executives aren't providing adequate leadership in moving their organizations toward a more strategic approach to outsourcing. Accepting the notion that CROs are as competent as in-house staff, if not more so, is still a cultural challenge in most major pharmaceutical companies. The reluctance results from a mix of arrogance bred during years of financial success and the fear of compounding already-high risk arising from scientific and market factors with the additional risk posed by the loss of control over key processes. There may also be reluctance on the part of some managers to adopt outsourcing because it means a reduction of their headcount.
Indeed, while the expenditures on contract services by major pharmaceutical companies continue to grow, companies have been slow to develop the infrastructure to support effective external sourcing. I was talking recently with a strategic sourcing director at a major pharmaceutical company. The role of his team is to support the sourcing activities in the company with "big-picture" analysis of issues like supply-and-demand conditions, development of the supplier base, and risk scenarios. He complained that the sourcing teams are very focused on managing transactions with existing suppliers and spend little time thinking about long-term strategic issues that could lead to more effective results from sourcing practices.
Pharmaceutical companies seem to be moving in the right direction, but it will take more time. True outsourcing, the relinquishing of control, as Hintze defines it, is most often embraced only as part of a desperate effort to turn around a company's performance. This was true in the automotive industry, and it is evident in the efforts of some major pharmaceutical companies to respond to major pipeline and market reversals. Executives at Pfizer (New York) and Merck (Whitehouse Station, NJ), for instance, have made public commitments to outsource more of their basic activities, and their efforts to flatten their organizations by culling out layers of management will lessen the resistance to developing effective outsourcing relationships. We also are seeing pharmaceutical companies and CROs experiment with models that incorporate more performance-based incentives, especially as more functional outsourcing relationships are developed (i.e., arrangements whereby companies outsource an entire functional process such as data management to an external service provider).
It's taking some time, but pharmaceutical companies are beginning to appreciate that giving up some control can lead to much better outcomes.
Jim Miller is president of PharmSource Information Services, Inc., and publisher of Bio/Pharmaceutical Outsourcing Report, tel. 703.383.4903, fax 703.383.4905, email@example.com.