Root of the Problem: One-Off Outsourcing

To understand the root causes of operational risk, Quintiles Consulting conducted interviews with cross-functional development teams at several companies. The survey found that respondents were outsourcing clinical development tasks in piecemeal fashion. The companies awarded tactical responsibilities in the clinical development value chain (such as data management or monitoring) to a range of vendors through a procurement process designed to minimize the cost of each step. After that, sponsors tended to recognize and pay for value based on completed "inputs" to the development process, such as the number of monitor visits or number of sites initiated.

In several companies, the outsourcing process has evolved to cope with the disparate needs of different functions, geographies, therapeutic areas, and external service providers. In these cases, there is no longer a single way of doing business. Case studies show that many pharma organizations are structured to actively encourage up to 100 percent management overhead on outsourced trials, with functions and roles being duplicated depending on the composition of the various internal and external teams.

The Solution: Better Focus on Outcomes

Industry is exploring new approaches that reengineer the risk–reward imbalance through better alignment of incentives, that encourage a focus on outcomes-based metrics. These are more effective vehicles for delivery due to three factors: First, they increase the accountability of the service provider for solving operational problems, rather than simply taking direction from the sponsor; second, they encourage a deeper exploration of design and operational feasibility between the service provider and the sponsor prior to starting the trial; and third, they rebalance the risk inequity by imposing real penalties for late delivery of agreed outcomes.

Under outcomes-based pricing and management models, service providers promise discrete outcomes in the form of agreed-upon units of measurement (such as a randomized patient), with minimal sponsor oversight. This "risk trade" transaction model radically changes pricing, moving away from costs based on a unit activity (such as a visit) and associated change orders, and toward a price to adopt the risk of guaranteeing an outcome (such as providing an FDA-auditable data set by a specific date).

Partnerships to Control Risk Exposures

As part of the "risk trade" transaction, service providers must agree on a more equitable level of control over the design and execution of a trial, sufficient to keep the risk to an acceptable level for both parties. This usually involves a greater degree of integration in planning and design activities such as feasibility and site selection.

As yet, no Big Pharma company has solved the problem of owning the entire risk in the value chain by working in alliance with service providers in that chain. Recently, however, several companies have launched transformation initiatives, some involving relatively radical departures like outcomes guarantees. While most of these initiatives are still in the pilot stage or apply only to a small part of the business, their rationale is already clear:

» To transform the rules of the game for drug development in order to unlock the latent value in the portfolio within fixed or shrinking budgets and development organizations

» To determine the optimal unit of outsourced work, who is responsible and accountable for delivering it, and what degree of autonomy/oversight is required to balance efficiency, control and risk. If the ultimate deliverable is an agreed outcome at a specific time, the new operating principles shift variable price inputs to the trial to fixed price outcomes, thereby redefining the answers to these questions.

» To mitigate the inherent risks in outcomes-based models. In order to do this, the traditional role of the sponsor and service provider will need to be explored. Changes will likely cover variables such as site selection, start-up/close-out timeliness, monitoring efficiency, and execution flexibility. Contracts will likely be based on the time value of outcomes.

Insights from the successes and failures of these pilot projects will lead to refinement of new operating models and usher in a new paradigm for drug development. In an era of constant change, those organizations that can nimbly manage the three dimensions of development risk (portfolio, operational and resource) will emerge as winners. The key question facing development leadership teams is how to rebalance risk to meet this challenge and ensure a project's viability and competitiveness.

Adrian McKemey is a Managing Director with Quintiles Consulting and leads the Product Development and Commercialization Practice. Badhri Srinivasan leads the Enterprise Transformation Unit, an organization dedicated to mining the experiences accumulated over 10,000 clinical trials. Peter Payne leads efforts on assessing, mitigating and pricing asset and clinical development risk to support risk sharing initiatives at the portfolio, operational and resource level.