Spread too thin?

7 March 2013



Hedley Rees, managing director of pharmaceutical supply chain consultancy PharmaFlow, investigates if partnerships in clinical trials are the way forward or stretching the relationship too far.


In recent decades, the pharmaceutical industry has been dealing with drug development uncertainty and costly failures by divesting staff and facilities into what has now become a buoyant cadre of service providers to the industry. The argument seemed persuasive: if studies fail or compounds are trialled in multiple indications at short notice, the flexibility is there to shed cost or engage extra capacity as required. Additionally, removing fixed assets from the balance sheet was a welcome option for CEOs and CFOs seeking to convince investors that return on net assets was going in the right direction.

In consequence, we now see activities such as manufacturing, analytical methods development and testing, storage and distribution, and non-clinical development entrusted to the stewardship of third parties. Clinical development has not escaped the treatment and there is hardly a clinical team at sponsor companies that could perform without the help of contract research organisations (CROs). Operating in the outsourced environment has become a way of life.

Reality less than expectation

The execution of this boardroom strategy was a tactical exercise, however, as Big Pharma cut the umbilical cords and its offspring entered foster care. Relationships became arm's length and based almost solely on cost. Survival was the overriding imperative for these contractors - they had to learn how to make a marginor go to the wall.

Fortunately for them, virtual, semi-virtual and speciality pharma companies began to emerge as it became possible to develop compounds without owning staff and facilities. These 'new' kinds of sponsors became a fruitful source of revenue for the contractors and they started to grow - and the spiral of sponsor/contractor growth has continued to date; so have the issues associated with tactical outsourcing.

It has not been a bed of roses, however, and readers may have their own list of issues that exist in the world of clinical outsourcing, which may include:

  • - frequent change orders
  • - lack of control over project lead times
  • - conflicts in quality system working practices
  • - competition with other clients for CROs' attention
  • - unchallenged pass-through costs
  • - unavailability of key skill sets.

These are all symptoms of a vendor-type relationship, where suppliers of services have no 'skin in the game' and merely act as those doing the heavy lifting, paid an 'honest day's wage' for their efforts, but gaining nothing from their employers' prospective successes.
In response to these issues, a noticeable trend for pharma sponsors to seek closer relationships with a reduced number of service providers has begun Some are even talking of partnerships to gain more ready access to skills that have long since been devolved into the contractor base. So what are the implications for this kind of approach?

It can be an equally problematic manoeuvre if not approached in the correct manner. Many companies dabbled with partnership sourcing in the 1980s and had their fingers burned as they found partnerships were a one-way street - the clever suppliers gained a lot more business without having to deliver any performance improvement. So what can be done to get the right balance on outsourcing?

Building an outsourcing model

The professional world of procurement is rich with advice and guidance on the topic of outsourcing. Starting at the business level, Professor Michael Porter, the renowned Harvard guru of business strategy, classifies procurement as one of the essential 'activity sets' a firm requires to generate competitive advantage. In his book Competitive Advantage he states: "[Procurement is] an activity set that relates to the purchase of inputs to a business... it occurs across the business and does not always receive due attention from those involved."

There are two important points here. Firstly, 'purchase' means it is primarily a commercial transaction involving a buyer and a seller entering into a business relationship together. This means that the outsourced activity set is no longer dictated by the goals of the outsourcing company; it operates according to a contractual agreement. Within the contract, rules of engagement specify what can and can't happen in the course of doing business. This normally means that any work emerging after the contract is signed will need to be paid for as extra; also, the buyer will normally be in a line of other clients being serviced by the contractor, so availability of staff and resources, not specified in the original contract, may be difficult to assure.

These are some of the drawbacks associated with outsourcing, whereby every new finding or innovative idea costs money and lost time to develop. In the vertically integrated alternative, internal management can revise priorities without cash actually leaving the business and at short notice. Professor Andrew Cox, who is probably the world's greatest authority on strategic procurement and outsourcing, examines the pitfalls of outsourcing in his paper 'Strategic outsourcing: avoiding the loss of critical assets and the problems of adverse selection and moral hazard'. In it, he defines the term 'moral hazard' as the situation whereby post-contract, the relative power distribution shifts from buyer to seller. Since the two companies are separate legal entities with very different revenue objectives, if it wasn't in the contract, it doesn't have to be delivered.

The second conclusion from Porter's work is that organisations should have a process of procurement in place, so that a firm's ability to deliver competitive advantage is not damaged through insufficient attention to this vital activity set.

Process of strategic procurement

Every organisation, no matter how big or small, has a portfolio of goods and services to be procured. Often, a company will establish a procurement (or purchasing) function to deal with many of the associated aspects, but always remember: a procurement function may undertake the process, but in some areas, it is not appropriate for the function to take the lead role.

In 1983, ex-McKinsey consultant Peter Kraljic devised a 2×2 matrix that probably did for procurement what the Boston Matrix did for marketing. It informed the profession on where and how to focus valuable resources and, more importantly, where not to. Kraljic's ideas were first published in the Harvard Business Review. His article recognised that purchasing had been pigeonholed too narrowly and was not meeting the needs of strategic supply management. Kraljic defined two dimensions for the matrix:

  • profit impact: the potential for an item or items in the portfolio to affect the profit margin of a business
  • supply risk: the likelihood of failure to secure the requisite supply when required - this can relate to internal (overly tight specification) or external (scarcity) factors.

Armed with this model, it was possible to segment the procurement portfolio such that items or groups of items could be treated according to the respective positioning within the matrix. The four possible segments are explained below.

1. Leverage
This item class represents relatively high expenditures where there is an adequate base of prospective suppliers able to meet requirements: a complete refit of laboratory instrumentation; for example. The buyer is in a strong position to exploit the opportunity by seeking the best deal through competitive bidding.

2. Routine
These are the 80% of purchases that typically account for approximately 5% of the total portfolio value. They are the multitude of small purchases that must be made to keep businesses supplied with routine materials. The user knows what is required and can find it easily at a price that could not possibly damage the business. Emphasis should be on reducing functional effort using efficient processes by automating transactions and engaging users more directly; also, buyers should look for opportunities to move to leverage by consolidating purchases.

3. Strategic
The common theme is that this category of items contributes to profit margins (revenue up or cost down), and there is a limited supply of contractors able to deliver on requirements. It could be a requirement for therapeutic specialism on a study or some kind of difficult-to-source data management expertise. The focus in this segment is on long-term commitment to relationships for mutual benefit. This means building partnerships or alliances that keep driving toward sustained competitive advantage in the marketplace. This is not just a job for a purchasing function; the requirement is for a team working across the relevant functional boundaries, often led by a technology expert.

4. Bottleneck
These are items that have the potential, if not managed properly, to bring proceedings to a halt. Being of relatively low value, they are likely to be off the radar screen if not given proper attention. If, for example, a clinical protocol calls for a specific but relatively cheap component, such as a needle, to be incorporated into a patient kit, it should receive close attention given the impact of non-availability on study initiation.

Figure 1 shows a diagrammatic representation. The model is simple but very powerful. The role of procurement is to facilitate the process and ensure business owners will not, for example, get an inappropriate CRO thrust upon them to save a few pennies here and there. They will, however, be urged to define their requirements very specifically, spread the net wide for potential providers, and produce a professional document to provide to prospective suppliers so that they can bid with confidence by understanding the commercial terms by which they will be bound.

Figure 2 (shows the procurement cycle applied for a strategic category, following the segmentation exercise above. Service providers in this category will have a critical role to play over a significant period; therefore the procurement cycle needs to be inclusive of the key stakeholders impacted; and in the same way a chef will always lead the procurement of key ingredients in his food, the user function should lead the procurement - according to the process.

Clinical research activities often fall into this category, given the levels of spend and the need to apply sophisticated skill sets to bring clinical studies to conclusion. This is a classic area where partnership should be explored.

Caveat emptor

One note of caution on the evidence of today's approach to partnerships, and it draws on the work of Cox again: he defines the notion of 'critical assets' that should never be outsourced, since they are pivotal to the delivery of a company's attempts to differentiate. There is an argument that says the pendulum has swung too far in the direction of outsourcing, as power and control has moved into the hands of those delivering the services. Readers should judge for themselves where they stand on the topic.

The model is simple but very powerful.
The procurement cycle applied for a strategic category.


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