Sourcing Strategies for Functional Service Providers

Pharmaceutical companies have long been under pressure from regulatory authorities to bring new drugs to market at an affordable cost. In order to meet this demand in a cost-effective and efficient way, biopharma outsources its critical functions as a way to manage the workload. Besides the traditional outsourcing of clinical trials, almost all pharma companies work with service providers for clinical and informatics services including medical writing, pharmacovigilance, biometrics, biostatistics and data management.

Functional services are largely delivered from service centers in India, due to the low costs and availability of skilled labor. These service centers are utilized for data management, statistics, reporting and medical writing, while clinical monitoring work is managed on-shore. Besides India, other economic destinations including the Philippines and China are also emerging.

There are largely two types of suppliers who offer functional services, Clinical Research Organizations (CRO), and Business Process Outsourcing (BPO). CROs offer a lot of clinical expertise, while BPOs provide IT synergies, low costs, and high volumes. With increases in outsourcing, the Functional Service Provider (FSP) model has seen changes in service portfolios, such as shifting to more complex work including regulatory submission writing, but the way FSPs are billed and contracted has also changed. For instance, besides the common models of Full-time Equivalent (FTE) based payments, and the time and material model, FSPs are also moving to outcome based pricing, though the latter’s popularity is still low.

Pharma companies typically follow two types of models in engaging vendors. They either work with one preferred vendor (>90% spend) across functions, and some small vendors, or they have dedicated vendors for each function. For example, GlaxoSmithKline works with Tata Consultancy Services for most of its functions and with a provider for other smaller activities. On the other hand, Biogen Idec has one vendor for Medical writing, one for Biostatistics, two for pharmacovigilance and so on.

Strategies for Procurement to Save Costs

Shifting to outcome based pricing: Besides the popular FTE and transactional models, pharma can push for outcome based pricing, which can be negotiated on the number of cases, and/or timelines. It helps manage risks as the vendor gets paid based on meeting the negotiated outcomes.

Negotiating payment terms to 90 days in long term contracts: Though most of vendors follow a 30-day or a 60-day payment cycle, in cases of long term contracts, they work with longer cycles. Companies can thus work on longer engagements and push the payment days.

And lastly, capping annual percentage change in contracts for long-term engagements helps save several hikes. Generally, the annual percentage hike in contracts are based on inflation rates and wage increases, which in the case of India is more than 10 percent, however, in order to encourage companies from signing long-term contracts, vendors cap it to certain single-digit numbers. So, negotiating the percentage hike in advance will save some additional dollars.