Contracting in any vendor relationship can raise its ugly head when the parties least need or expect it. It is a given in any outsourcing that a contract of some sort needs to be put in place; however, there should be more emphasis on the effort needed to ensure contracting does not become an obstacle. The typical focus of any vendor relationship is on delivery, as this ultimately serves the greater goal of this industry – to bring new treatments to those in need. So, why focus on the contracting piece? When contracting goes wrong, it can lead to delays in delivery, regulatory risks, and erosion in trust – especially when scope changes occur and result in contentious discussions. With this in mind, there is an opportunity for improvement to establish a better working model. The parties involved can work to narrow or eliminate some of the white space between the bid and the contract itself, better understand the pros and cons of the contract type, and lastly, mute some of the noise associated with change orders. With the right investment and focus, contracting can be a strong foundation to a strong relationship.
At the SCOPE Conference in Miami this past January, there was a lot of discussion in the outsourcing work stream about transparency and trust, and that it is time for parties to start acknowledging that this is foundational in eliminating the divide. When one thinks of a typical governance structure in any large relationship, there is typically an executive committee, a joint operations committee and some form of quality committee. What often gets missed is some form of commercial governance. Even in a smaller relationship, the focus tends to be on operational delivery, and the contracting process is assumed. In a larger relationship, a commercial governance committee would be the convergence of the outsourcing, procurement, finance, and contracting staff from the respective parties. This committee should examine the following:
- Contractual and financial performance
- Effective operationalization of the governing terms of the MSA
- New/modified pricing strategies
- Continuous improvement of commercial framework
- Budget forecasting and proactive variance management
- Feedback/assessment of competitive bidding performance
- Contract and financial approvals
- Escalations and issue resolutions
Even in a small relationship, all of the points above remain relevant. While a committee may not be needed, there should be an upfront discussion focused on the contracting process, along with continuous, regular dialogue to ensure there are no surprises. Too often the strain placed on the contract process stems from a reaction to operational delivery changes, which then need to be reflected urgently in the contract. While changes to operational delivery cannot be avoided, connecting the impact of delivery to the contracting process is key. Understanding the state of the delivery can provide pertinent insights as to any downstream impacts on the contract itself. And, with the delivery insights, the impacts on the contract can be managed more proactively – leading to an improved, smoother process.
A key part of commercial governance is to ensure a framework is in place, with a focus on the process itself. Critical to this is understanding from both sides what it takes to get a contract signed or a budget approved. The transactional contract process often focuses on two points of contact sharing the contract. This document, including a budget, will reflect feedback from operations and often becomes a game of ping pong with the document bouncing back and forth. It is best to eliminate this back and forth by bringing the parties together on a call and work collaboratively to finalize the scope to be reflected in the contract. After all, this is the main purpose of the contract – to document in a binding way what the parties have agreed to, relative to the services to be provided and the associated key specifications. Another way to improve the process itself would be to have contracts at the kick-off meeting, so that when scope is discussed it can be documented first-hand.
Another critical point of the process is when the time comes that the operational teams come to agreement and the contract is ready to be signed. At this point, it should not be a surprise that to have something approved, there are still several additional steps required, which can prevent the contract from being signed on time. Fundamental to the contracting part of the relationship is fully understanding the entire endto- end process, and not just stopping at the point of having something that operations agrees to. This will avoid last minute escalations, and more importantly, it will allow the parties to set expectations and agree on a plan with turnaround times to have the contract fully executed by the desired date.
The commercial governance should also look beyond the process itself and focus on the likes of templates, including work order/change order templates and associated budgeting templates. In an ongoing relationship where the outsourcing volume is high, it is critical to have a clearly defined set of tasks and responsibilities relative to the services being delivered. This way, they don’t need to be reinvented each time more work of a similar nature is sourced. In the ideal situation, the only thing that changes from contract to contract is the scope of the work. This idea can be pushed further by then going beyond contracting templates, when one starts to rethink the RFP process. Every RFP ultimately will lead to a contract, so it would make sense to start with the end in mind. For instance, what in a contract is required that should be pulled from the awarded bid? Determining this can allow one to better frame what is required in a bid, making clear which elements will then form the contract. Some other best practices include agreeing a pre-determined start-up budget and payment schedule based on the full service budget itself. This results in award to initial start-up contract being days, rather than weeks.
While working on the relationship and the process will improve contracting, we should also be considerate of the contracting approach, as this can also affect the relationship and process. If there are no changes in scope, many challenges in contracting could be avoided. The contracting vehicle that best supports this approach is a fixed price contract; however, this contracting model has both pros and cons. It requires a relationship to be in place where trust has already been established. It should not be the contracting vehicle used by parties new to each other. Expecting a CRO to commit to a fixed price contract after submitting a proposal with a typical ten working day turnaround based on a protocol synopsis is fairly unrealistic. There is too little time and too much uncertainty for the CRO to be able to make a good estimate of the scope of that trial. But, asking a CRO to commit to a fixed price after it has had a chance to provide input in the protocol and conduct a detailed feasibility assessment is more reasonable. However, there are still environmental factors that even the best feasibility assessments cannot predict. Those factors will become carve-outs in the contract, whereby if triggered will result in a change in scope. A CRO is unlikely to sign up for taking on execution risks without accounting for some risk by building some level of contingencies into their budget. But then if those events do not occur, are the fees then being paid to the CRO fair? Based on the understanding of the parties, the answer should be ‘yes,’ because ultimately, that is what a fixed price contract is about. But this kind of agreement really requires there to be a level of trust in the relationship to accept this. Neither party will want to be caught short, so the actual scope of work required to deliver the trial, inclusive of contingencies, must in fact be deemed reasonable by both parties. Put in more black and white terms, the sponsor does not want to overpay, and the CRO does not want to be underpaid. Difficult situations have occurred when both parties had not established a proper level of trust and transparency to agree on the scope of the activities required to deliver the trial through a fixed price contract. Ultimately, the work order did not get signed until the parties agreed to change the contracting vehicle.
The CRO industry should be striving to meet the objectives of fixed price contracting, including a predictable budget based on a CRO taking ownership for things within its control. Bringing new therapies to patients is an expensive business, so it is understandable that a sponsor is looking to the CRO to assure them of delivery within a reasonably predictable budget. The catch phrase is having the CRO have ‘skin in the game.’ There are ways to achieve that, but perhaps in a more transparent way whereby the delivery contingencies associated with what the CRO sees as the risk are not explicitly built into the budget but can be managed more as a contingency and used on an asneeded basis. This avoids those same contingencies being paid for in a typical milestone driven contract whether those contingencies were used or not. There are also ways to better balance the budget at the study end and create a more equitable approach in risk-sharing some of the budget variance, whether good or bad, at the end of the study if ultimately the study was delivered.
Another way to avoid changes in scope is relative to the transparency of the budget itself. With the backdrop that changes in scope are inevitable, it is important to plan ahead and account for transparency in how the scope and budget are defined in the contract. If all one has is a single line item for data management and then twenty associated specifications, how does one know what will happen to the budget if one of those specifications changes? With that said, organizations must be careful not to swing to the complete opposite end of the spectrum and track things at such a level of detail that more time is spent micromanaging the budget at the expense of moving a contract forward. There is a balance to be struck. To further this concept, a relationship built on trust and transparency involves working through the details of how a CRO prices and then maps to a sponsor bid grid. This exercise will allow both parties get comfortable with the budget, and when inevitable scope changes occur, it will be more obvious how those then connect to the budget changes.
Lastly, to avoid changes in scope, there should be a vehicle to have a more in-depth “lessons learned” discussion at the conclusion of the trial and connect the operational challenges to impacts on the budget. The discussion also can review costs the parties incurred that ultimately were not part of the contract itself. This concept seems a little foreign in today’s environment and requires the parties to convene for a meaningful, open, and transparent discussion. By going through such an exercise, the parties may find that if they had done something differently, some of the change orders or internal costs could have been avoided. Both parties can then account for that in the next contract.
A good sponsor and CRO relationship is built on trust and transparency. Our outsourcing relationships are very focused on delivery aspects. But, underpinning every outsourced piece of work is a contract. The goal of that contract is to adequately reflect what the delivery parties have agreed to. Yet, when contracting goes wrong it can easily become a sticking point in a relationship. Rather than run the risk of a contract process going wrong, it is important to consider making the contracting process an explicit part of the relationship that requires an investment from both parties. The contracting process should be equally built on trust and transparency. And, with the right level of attention and planning, the contracting process can be less reactionary and become less of an administrative burden to all those involved.
As Corporate Vice President of Business Operations, Luke is responsible for proposals, budgets and client contracts for PAREXEL’s Clinical Research Services as well as for PAREXEL Informatics. He leads a team of proposal and contracts managers distributed in all major geographic regions. Luke has 20 years of pharmaceutical industry experience ranging from finance to client account management, to proposals and contracts, strategic account management, and operational resourcing. He led the establishment of the Strategic Account Management program at PAREXEL and has been directly involved in the establishment of the majority of PAREXEL’s strategic accounts. Luke has an MBA and certification in Clinical Pharmacology, Drug Development and Regulation from Tufts University.