Let’s face it. Contract research organizations (CROs) are in business to make money. Is that really any different than the companies that use CROs? Or any business for that matter? Everyone should be able to benefit from their efforts, but reducing costs by watching the bottom line is only one way to increase profit.
As with any purchase, the consumer should evaluate their needs and determine the best avenue for achieving their goals. While a customer is trying to control costs, the provider is also trying to reduce the costs involved in providing their products and services. Customers can save not only by reducing their own spending, but by optimizing how their resources are spent. Providers of goods and services can have various strategies for maximizing their profit depending on their business model concepts and the type of relationship they desire with their customers. Understanding the true overall costs behind contracted services and using the right CRO for the task can help both the CRO and the client better utilize their resources for mutual benefit.
Reasons for Outsourcing
Companies outsource work for a variety of reasons. Some companies are virtual in terms of their own research capabilities and outsource nearly everything. Others maintain their own research capabilities, but may outsource to meet changes in priorities, the need for specialized services that are unavailable in-house, or simply to handle a larger pipeline than they can support themselves. Each of these reasons is accompanied by a different basis underlying the true overall costs of outsourcing—both from the client’s side as well as the CRO’s. Approaching outsourcing needs in a manner that is appropriate for the type of project or projects can lead to significant increases in the value received on both sides of the equation.
Companies that outsource a large amount of work should be able to take advantage of the economies of scale and find ways to leverage their work load for favorable pricing from the CRO. Companies that use CROs to augment their pipeline capacity can benefit by picking and choosing the types of projects that are outsourced and preferentially outsource the work for which they get the best value. Conversely, outsourcing projects with specialized services and accelerated timelines typically comes at a premium, but may also relieve the customer of some of the burdens associated with these kinds of projects.
The true overall costs of contracted work do not only consist of the CROs fee, but also include the costs that the client incurs in overseeing the contracted work. Cost of goods in this sense is not the CRO’s cost of goods in providing their work, but instead the direct expense the client pays to obtain that work. The client’s costs in monitoring the contracted project, travel to the contract facility, etc, must also be considered when evaluating the true overall cost of the contracted work.
Product vs. Service
An important decision for both parties is to understand whether you are purchasing/providing a product or a service. Some contracted services are relatively routine and the selection of contractors to choose from is large. Economics 101 tells us that high supply should result in lower cost. Also, this type of work should require less oversight on the part of the client, thereby further keeping costs low. On the other hand, specialized work requiring a high level of expertise reduces the options available for outsourcing, thereby demanding premium pricing. The more complicated an outsourced projects is, the more oversight is also required on the part of the client.
Deciding whether contracted work can or should be considered as a product or a service is both a philosophy behind the CRO and the concept that the client has for the type of work. As they feel appropriate, clients can take advantage of CROs on both sides of the spectrum, while company culture at the CRO pretty much determines if they view themselves as providing a product or a service. This is not a difference between small and large CROs, but instead a fundamental difference in how a business operates. Some companies focus on their product: provide a good product at a good price. Other companies focus on service: keep the customer happy. Understanding this difference is fundamental to the client selecting the right CRO for the project and thereby best utilizing their resources. This difference is also important from the CRO’s perspective. Are they trying to optimize through-put and reduce costs or are they making sure they keep a customer?
CROs vs. Other Businesses
I’ve heard it many times. There is no business that compares to a CRO. But is that really the case? Are CROs really any different from other types of businesses? Some of the basic concepts already covered are core to all businesses. Let’s look at some other business models for comparison.
The Hotel Analogy
A hotel is essentially a 3-dimensional geometric shape divided into spaces of various sizes for a variety of purposes: sleeping quarters, suites, conference rooms, ballrooms, etc. The only rooms that make money for the hotel are rooms that are being used. Customers looking to use a hotel have to make a decision about the level of quality they are willing to accept and the level of service they want. Generally speaking, the nicer the room and amenities, the higher the price. I think we can all agree that there is a vast range here and—as evidenced by the number of websites and apps that have sprung up—hotel pricing is not set in stone. Two of the major factors that affect their pricing are how full are they and how soon is the room needed. As the hotel fills up and operating costs are covered, the hotel can actually begin to charge more for a vacant room—rooms have become a limiting resource. That is, until there is a risk of not renting the room at all. At that point, something is better than nothing. An unused room does not generate revenue for the hotel owner.
A CRO can be viewed in essentially the same manner. There are a variety of resources the CRO has to offer, and only those resources being utilized make money for the CRO. Assuming the client has already decided on the level of service they require for a given project, the next question is really one of timing. If a CRO is busy, they may be able to command premium pricing—after all, if they’re going to push their staff extra hard, there should be some additional reward. But at some point, any unused resources are just that, and any opportunity to profit from them disappears.
Other aspects of the hotel industry can be relevant to outsourced work also. For a large group, such as a conference or out-of-town wedding guests, customers can arrange with a hotel to reserve a block of rooms at a reduced rate (note that there’s usually a time component related to this). A CRO should be willing to negotiate reduced fees in exchange for an increased scope or amount of work, but can’t be expected to hold resources beyond a point where those resources may go unused.
But this is just the real estate side of the hotel model. Understanding the overall work demands of a business is essential not only in terms of pricing, but also from a quality standpoint. Even the most accommodating of hotels is stretched thin when they are very busy. The same is true for a CRO. Salaries are one of a CRO’s biggest expenses, so staffing for full capacity is inefficient. That means that as a CRO gets closer to operating at capacity, the staff is stretched thin, and even the Hilton of CROs can start to behave like a Motel 6.
Another aspect of the hotel business that may be considered applicable to CROs is the concept of preferred customers. How many loyalty/ reward program cards are in your wallet? Even low-end hotel chains offer them. Why? Because it’s generally cheaper to retain a customer than to find a new one, so a hotel is willing to give an incentive for loyalty. The hotel also benefits from having a customer that is now familiar with their product and service and therefore has an understanding of what to expect. No Ritz-Carlton concierge service at the Budget Inn, but that’s the expectation. The customer has a certain level of comfort because they have previously used the facility (or chain) and they know what to expect. From a CRO’s vantage point, a repeat customer should be even more golden because of the substantial time and energy spent in developing the working relationship with a new client. Unlike a hotel, a CRO has additional benefits from their past experience with the customer. A hotel doesn’t necessarily know if a guest is going to be one of those ultra-demanding types that chews up resources, even if they are a repeat customer. For a CRO, a repeat client is a well-known entity and, based on previous experience, the CRO can make adjustments for a different level of interaction on subsequent projects. CROs can use their intimate knowledge of their current clients and extend the extra effort necessary to keep them extremely satisfied. The resources needed to maintain a happy customer are much lower than those needed by the CRO to obtain new clients, so again both parties benefit. But does your CRO give you a customer loyalty card?
Attention Walmart Shoppers
As mentioned earlier, some outsourced work can be relatively routine. In these instances, best price and fastest service may be the best option and provide the best value. Discount stores command a large share of the market for a reason. Customers can be in and out fast (especially with the addition of self-checkout lanes). Please pay careful attention to the lack of the words quality and service.
The needs of a program evolve with time, and different CROs may be more appropriate for certain stages of the program than for others. For example, throughout the phases of a pharmaceutical development program, there is the need for drug analysis in biological specimens, but the needs for the bioanalyical portion of the program change as the program progresses. Early in the program, there is the need for rapid method development to provide a suitable assay. Later comes ensuring that the method is robust and can withstand rigorous validation. Still later is the multitude of samples with the need for high-throughput analysis. While some CROs may be able to support all these phases, development and analysis needs are quite different. One CRO could be used for method development issues and another to handle capacity. Directing these different types of needs to CROs that also focus on these needs may be of some benefit. Every aspect of a program should be analyzed to ensure the most efficient use of resources.
Lamborghini
Some projects are really specialized. Every step needs to be in exacting detail. Can we compare the CRO industry to the world of elite luxury sports cars? Let’s take, for example, Lamborghini. OK, before they were bought by VW. There’s only one place to get a Lambo and they’re assembled with TLC. The waiting list is long. They cost a lot. When choices in a CRO are limited due to the highly specialized nature of the work, clients can expect to pay more. But they should also expect to get more. Still, understanding the cost basis for each of the important components of a project can help ensure that resources are maximized.
Are certain features adding unnecessary cost? Are certain components more cost efficient than others? A high level of interaction with the CRO will be essential to understanding the best ways to optimize the program. For elite CRO projects, this high level of interaction needs to continue throughout the life-cycle of the project. Unlike CROs, Lamborghini is more or less selling to the end consumer, the highest order predator. Having an experienced shop steward or ombudsman that oversees every single detail to exacting specifications is sufficient. The person with enough money to blow on a Lambo isn’t going to hang around Sant’Agata Bolognese watching the careful assembly of their new car.
A CRO’s clients, however, are rarely the end consumer. Frankly, they’re usually pretty low on the food chain (no insult intended here, just that it’s a long way up to the boardroom). This means that the client has a lot more than just cash at risk. The success of the project is paramount to the client’s own success and probably to the success of their superiors, therefore, frequent oversight is essential right up until that baby rolls out of the factory. So don’t skimp on the Parmigiano Reggiano while conducting all of those site visits and pretend that you’re waiting for that dream machine.
Cash-Back Bonus
One of the most direct ways for a business to reward a customer is to provide direct incentives based on the volume of spending. Spend more with us and it will be cheaper in the long run. CROs are no different. Even if a CRO specializes in a highly technical area, there are always economies of scale. As mentioned earlier, just having familiarity between a CRO and a client can be a big cost savings for both parties. But unlike loyaltyor reward-type programs, which typically offer upgrades or additional amenities, cash-back programs offer a direct incentive. And unlike the typical credit card cash-back programs, a CRO can expect some minimum annual level of spending before providing the incentive. So, what’s in your wallet?
Retail Stores — The Oreo Dilemma
I once heard someone exclaim that they weren’t “getting the same data bang for the buck” on a small preliminary project as they were on a large follow-up project. They thought the two projects should be priced equivalently even though they were not willing to commit to both projects. After all, the program could be a bust after the preliminary work. The flaw in their thinking is clearly apparent if we compare this to buying cookies at a grocery store. If a 10-oz. package of Oreos costs $1.99 and a 20-oz. package costs $2.99, would anyone really expect to negotiate the smaller package down to $1.50 on the grounds that they may come back later and buy the bigger package? It’s never worked for this author. But there are ways to ensure that the initial purchase and any subsequent purchases are optimized within their own right. What good was the 10-oz. package of regular Oreos, if what you really needed was the 20-oz. package? Or maybe you really needed Double Stuf to begin with? CROs do have certain limits, but having the appropriate dialogue so that the client and CRO can both gauge the appropriateness of the partnership is essential. Does your CRO got milk?
The Bottom Line
By understanding the various reasons behind outsourcing and thoroughly evaluating the distinct needs of each component of a project or program, the best utilization of resources can be achieved. Each component can have a different basis that underlies the true costs of outsourcing and different approaches to outsourcing can be used to optimize resources. Recognizing these differences and using appropriate strategies will surely help everyone’s bottom line.
Dr. Sved has over 30 years of research experience in diverse scientific disciplines and settings. He spent almost 20 years working in a contract research environment both as a principal scientist and in management in the areas of drug metabolism and bioanalytical chemistry.