I recently read a white paper by ISR Reports entitled CRO Differentiation. It came out and flatly said what many of us have thought for some time: there is minimal differentiation between contract research organizations (CRO) in the middle and large size. Sponsors often choose them based on price alone. Needless to say, CROs don’t enjoy that sort of talk. No one wants to be a commodity, especially in this economy.

With that white paper in mind, I was part of a very unusual informal conversation at a recent industry conference—unusual not so much for its content so much as that the head of a CRO would come out and have such a discussion.

I was talking with Jeff Williams, who runs a small CRO called Clinipace. Williams acknowledged the pricing squeeze on CROs—and proposed an inventive remedy. He believes there may be a way to differentiate his company by fundamentally altering the cost structure of his pricing. I was intrigued because I've long felt the same way, and have never been able to interest any large CROs in similar ideas.d9A2t49mkex

Technology Impact

In essence, Williams and I both know more than a little about electronic data capture (EDC), and had both been puzzled by why more CROs do not capture market share by sharply lowering prices—and making a greater gross profit at the same time.

Doing this will require a few bold steps. First, the traditional hourly billing model would have to be tossed out the window. Next, it would be replaced with a modified cost-plus model. That's all. Good technology is essential to make this work. Without technology, it can't be done.

Suppose your traditional bid price to perform data management (DM) is 100 units. In that 100 units, 50 units are for labor, 30 units for overhead. With a cost basis of 80 units, the gross margin, as bid, is 20 units.

There is a better way, though. Using a strong, well-designed EDC system as an enabling technology is crucial. It doesn't really matter if the CRO is using the EDC system via a technology transfer, knowledge transfer, or application service provider (ASP) model. The concept is the same, the numbers just change to a minor degree.

New Business Model

Let’s say the technology of the EDC system, as needed for DM, has a price of 5 units. Labor burden drops to 15 units. Commonly cited estimates of DM work saved by using EDC range from 40-90 percent; I’ve used a 70 percent reduction (from 50 units to 15) as the approximate middle of that range. So far, our cost basis is EDC 5 units, and 15 units of DM labor, for a total of 20.

Now, all this is in the honeymoon period in which everyone is signing contracts and looking forward to starting the project. When the change orders and the scope changes come, what then? A good EDC system, properly used, should not require massive additional DM work. Amendments and changes in scope may legitimately affect budget areas such as biostatistics, but DM in an electronic age should be a contained, predictable expense.

The financial risk to the CRO is minimal and would not require the resuscitation of the billable hours world view. Indeed, a well-constructed EDC system should be able to reduce the data entry error rate by 95 percent, and make managing the errors that do occur easier by several orders of magnitude. That's the allure of EDC, after all.

Overhead falls, too, because there are fewer people who need insurance, vacation time, office space, IT support, etc., etc. As a result, the overhead is now 20 units, not 30. So the total cost basis to provide DM is now 40 units, not 80. That's an impressive 50 percent reduction.

Suppose, further, that the CRO providing the DM charges 85 units for DM. They’ll now be 15 percent cheaper than the rest of the market, and raise their gross margin from 20 units to 45 units—an increase of 125 percent. It’s likely the CRO will get more market share on top of that.

Persistent Paradigm

You’d think that the major players would be all over this concept. They aren't. Is the billable hour concept permanently enshrined in the CRO business model? Are the processes considered eternally sacrosanct? Are CROs merely bidding the project as if the work were done on paper with ball point pens, then slapping on EDC as an additional cost? I've seen it done. Both Williams and I pondered these things at length.

There is no doubt that a reassessment of pricing models has been almost unthinkable for many CROs. I once had a senior executive at a mid-tier CRO utterly convinced of the merits of this approach; he could not get his organization behind it. But I continue to feel strongly that the first CRO to adopt this idea, and do it well, would be highly differentiated and enjoy tremendous success. Who knows? Maybe Clinipace will be the pioneer.

Editor's note: .(JavaScript must be enabled to view this email address) has been a clinician, run clinical departments for Fortune 500 companies, and was a long time chief marketing officer and principal scientific advisor for an EDC vendor. He is hard at work on a new book, “EDC, eClinical, and You,” from which these concepts are a paraphrased installment.