Preferred Providers Face Outsourcing Challenges

To read more about how sponsor and vendor relationships are changing in a world where outsourcing is the norm, check out the following articles:Laying with the Lions by Brian O'NeillVendor Quality Assurance Audits: A Formula for Success by Carl Anderson, Cathy Tashiro, and Laurie TaddonioSuccessful Outsourcing: Tracking the Evolving Use of Full-Service andNiche-Service CROs by John R. Vogel and Kenneth A. GetzA Clinical Development Solution Tailored for Biopharmaceutical Companies by Vincent Charlon

Master Service Agreements (MSAs) and Preferred Vendor Agreements have been used for years to provide pricing predictability and consistency in contracting to outsourcing departments. While generally successful, the extent to which they ensure companies are extracting maximum value from them is difficult to measure.

Increasingly, these Agreements include provisions that extend well beyond volume-based discounts and rate cards with negotiated fees. Most organizations have created standard MSA templates that include performance requirements, metrics to track performance of their providers, and penalties for noncompliance. In addition, provisions are frequently included that require both parties to meet regularly to discuss the status of the relationship and address specific issues or concerns. This is one of the most common methods of measuring the quality and consistency of service being provided by the preferred provider.

These Agreements also serve to streamline the contracting process associated with specific projects by eliminating the need to renegotiate key terms for each study. In most cases, this provision is effective for both parties and expedites the execution of contracts.

While some companies formerly allowed exceptions when a business case seemingly warranted the use of a nonpreferred provider, these requests are rejected more frequently in the context of these Agreements. The ad hoc selection of a provider has become the exception to most standard processes, and compliance with these Agreements is generally very good, ensuring business is going to the preferred providers as intended.

Figure 1. Consolidation Creeps In: Subject Recruitment

As a result, the process by which vendors are selected has become more rigorous, and in many cases has the cache of a formal audit.

Rigorous and challenging process

In the current environment, there are no assumptions made regarding a provider's competence or capabilities in any area, even if the sponsor has availed itself of these services in the past. While classic audits are conducted by the QA function of both organizations, more and more purchasing decisions are preceded by site visits and live demonstrations of core processes.

PowerPoint presentations and marketing materials are still helpful in supporting these on-site evaluations; however, they do not generally provide sufficient details regarding Standard Operating Procedures (SOPs) and other information required by the sponsor. Final presentations are common during the process of identifying preferred vendors, and the costs associated with bringing all the appropriate support personnel together for these meetings can be tens of thousands of dollars for companies operating on a global scale. It is a significant investment for a provider to participate in this process; therefore, the expenses associated with doing so should be contemplated in any Business Development or Sales and Marketing budget. The ultimate cost of not winning is exclusion from the preferred vendor list for the term of the Agreements, which can extend for two to three years and include automatic renewal provisions for the incumbent providers.

Another significant challenge for outsourcing professionals is the cost of switching providers for a particular service. If the benefits of changing vendors are deemed to be only incremental, the time and cost associated with the transition may not be justifiable in the current climate. It is critical for newer providers or those that have expanded or enhanced their services to clearly differentiate themselves from incumbents to secure these key relationships. The current pace of mergers, acquisitions, and licensing agreements poses a particular challenge in this area. As companies combine their pipelines and try to realize other synergies expected from these transactions, the outsourcing function is often charged with selecting the best of breed suppliers on behalf of all the merged entities.

While the value of existing contracts are contemplated during the due diligence process surrounding an integration, long-term contract commitments of one party may prohibit near-term transitions to alternate, preferred providers of the other. Incumbent providers should not take their preferred status for granted even in these circumstances, since most contracts allow for termination for nonperformance or include changes in control provisions that provide the customer the option to terminate the Agreement prior to its expiration. The most effective way to avoid difficult and protracted negotiations in these circumstances is for all parties to communicate early and frequently during the transition process and to pursue legal remedies when disputes arise only as a last resort.

An additional external factor effecting outsourcing groups is currency exchange rates. Choosing the currency in which payments are made to suppliers has become increasingly complex for companies conducting studies on a global basis. In cases where both the sponsor and provider incur costs to support their infrastructure in various countries, establishing fair and equitable payment terms is challenging. Further, given the significant fluctuation in the value of the U.S. dollar vs. the euro and pound, it is difficult to establish precise payment terms that do not impose unnecessary risk associated with currency exchange rates for either party. Many companies establish exchange rate corridors on the effective date of the Agreement that can be adjusted prospectively based on a mutually agreeable formula.

However, despite the inclusion of such provisions in contracts, the risk associated with currency fluctuations is an ongoing concern for both sponsors and providers. As both sponsors and providers expand into emerging markets such as Asia and India, this issue will become increasingly complex. Beyond the currency challenge, companies must learn the unique business cultures of the markets they serve. In some organizations, subsidiaries are allowed to contract with providers outside the Agreements that govern the relationship with the provider in other parts of the world. It is important for providers to fully understand and track the various Agreements they have with all the entities related to a particular customer. It is equally important for the sponsor to share this information with all affected providers to avoid confusion and lack of alignment.

Newer entrants

The scope of MSAs has also been broadened in many companies to include service providers that have historically not been subjected to this heightened level of scrutiny. Most CROs, central labs, and central ECG providers have been party to these agreements for many years. One of the most noteworthy is the long-standing Agreement between GlaxoSmithKline and Quest Diagnostics for central laboratory services. While this relatively exclusive agreement is somewhat exceptional for the industry, it has been watched closely and served as a benchmark for outsourcing executives for the past nine years.

One service area that is facing increased visibility is central imaging. Historically, imaging necessary for a clinical trial was provided by the investigator physicians in clinics and hospitals—particularly in the university setting. The need for better coordination of this service across multiple sites has prompted many companies to engage a core imaging lab to manage this aspect of a study.

Over the last 10 years, several commercial organizations have developed the scale to support global trials with consistent methods of analyzing imaging endpoints. The increased focus on diseases such as cancer, osteoporosis, and Alzheimer's, where imaging is an important marker of efficacy, is driving growth in this industry. This subjects imaging providers to the same selection and contracting processes that have traditionally applied to others.

One of the potential risks in the current environment is that new entrants into the market will use price as their primary differentiator, thereby creating a quality vs. cost dilemma for existing providers with a proven track record of strong performance. While no one in the industry would knowingly compromise quality for low prices, the potential does exist for the decision-making process to become overly focused on the latter. It is important that these and other vital services remain available and that the companies that perform them remain viable by not succumbing to the pressure to commoditize their services by offering unsustainable pricing.

Navigating RFPs and RFIs

Similar to MSAs, Requests for Proposal (RFPs) and Requests for Information (RFIs) are more comprehensive and address a broader array of issues. A recent RFI issued by a large global pharmaceutical company included a series of questions about potential providers' policies regarding the use of minority owned subcontractors, employment nondiscrimination, and environmental responsibility.

Increasingly, companies require their suppliers to provide detailed, nonconfidential information regarding their experience with other sponsors. This attempt to establish a providers' credibility extends beyond traditional reference checks that invariably provide little objective information. While responses to these requests do not typically constitute a formal, binding offer, the sponsor's expectation is that any final agreement for the services described will be consistent with the proposal and not require material changes, amendments or change orders once the contract is executed.

In an effort to avoid as many unexpected issues as possible, some sponsors' RFPs can span several hundred pages and include inquiries about issues as diverse as whether or not a provider intends to initiate an acquisition or use off-shore resources to provide any of its services. There is no tolerance for ambiguity in providers' responses, as evidenced by the use of scoring systems to compare multiple bids.

These systems are used to rate each proposal on a standard set of measures to ensure an objective analysis is performed. In this context, if a response is not provided or an answer is deemed to be inadequate or unclear, the overall assessment is negatively impacted. Providers should ensure that they have adequate oversight of their bids and contracts function and that a final quality check is performed on all proposals before they are presented to the customer.

Business tactics

One method that is being used to address the financial pressures faced by some manufacturers is a bidder's auction. In some situations, each provider that has issued a proposal for a specific project or trial must participate in an online auction to win the business. During these auctions, representatives from each party that has provided a proposal are able to see the anonymous bids of the other parties and must decide whether or not to alter their bid during the time allotted. Based on the fact that the lowest bidder wins, these are frequently referred to as reverse auctions. While the outcome of this process could be considered a success for the sponsor, it represents a virtualization of the negotiation process and the potential of rendering face-to-face value discussions obsolete.

In another effort to ensure key purchasing decisions are made in an unbiased manner, many companies have implemented a team approach that includes representatives from many different functions in the organization. The intended outcome of this approach is alignment across the company and a seamless implementation of the decisions reached by this group. This internal collaboration can be supported by aligned incentives for the participants on a team.

Another important dynamic is the involvement of members of senior management in purchasing decisions, up to and including the CEOs of multibillion-dollar drug development companies. In some cases this is prompted by corporate governance policies that require executive oversight of key financial decisions. The Sarbanes Oxley regulations are invoked with increased frequency to justify the position that start-up payments or deposits to suppliers are unacceptable because they allegedly represent payments for services that have not yet been rendered. This position places the burden on the supplier to provide evidence of the effort expended on behalf of the company at a very granular level.

The seemingly straightforward process of obtaining approval from key decision makers in both organizations and physically executing contracts has become more complex. As a result, both parties should agree on specific timelines and milestones and monitor them carefully to ensure they are achieved.

Cutting back

In the current environment of doing more with less, many companies have consolidated their purchasing organizations. They have done this primarily in three ways. First, some companies have aligned their outsourcing group with specific therapeutic areas. As cost pressures mount, several companies have eliminated this redundant structure and consolidated the outsourcing function into one organization that is responsible for all therapeutic areas.

Second, several companies are assessing the disparate processes employed between the United States and Europe. Given the mergers and integrations of many U.S.- and EU-based companies, a fair amount of redundancy still exists across the purchasing function. In some cases, contract templates from one side of the Atlantic can be completely different from the other. The need for translations and compliance with applicable country specific laws aside, a provider cannot only become confused, but miss an opportunity to provide services for a particular project altogether.

Finally, cost constraints in some companies have prompted a consolidation of purchasing for a broad range of services. While one department may have focused on ancillary providers and another on strategic CRO relationships, the staffs have had to expand their knowledge base to include many more services with which they may not be familiar. In some cases, the outsourcing groups have been faced with workforce reductions at the same time, making it very difficult to take on the extra burden of these increased responsibilities.

Greg Richard is senior vice president, sales & marketing, Synarc Inc., 575 Market Street, 17th Floor, San Francisco, CA 94105, email: greg.richard@synarc.com