Is "Satisfactory" Contractor Performance Good Enough?

In the 2006 edition of the PharmSource–Pharmaceutical Technology outsourcing survey (the results of which are discussed in the Outsourcing Resources supplement to this month's issue), we asked buyers of contract services about their level of satisfaction with the performance of their service providers. For technical and operational performance, 80% of respondents reported their contractors' performance as "satisfactory" and 18% rated it as "excellent." For customer service performance, the numbers are nearly the same: 75% rated contractor performance as "satisfactory" and 19% said it is "excellent" (see sidebar, "How would you rate the performance of your contract service providers?").

Jim Miller

Should contractors be pleased with this performance? I don't think so. Although very few clients appear to be having a really bad experience with their service providers, it can also be said that relatively few are having an exceptional experience, one that will encourage the client to remain loyal over multiple projects and years.

The gap between a company's view of its own performance and its customers' perception of its performance can be huge, and the consequences of that gap can be substantial. According to a recent article in Fortune magazine ("The New Rules," July 24, 2006), a study by consulting company Bain & Co. (Boston, MA, www.bain.com) found that though 80% of corporate executives think they are doing an excellent job for their customers, only 8% of those executives' customers view their performance as excellent. According to that same Bain study, the average company loses more than half of its customers every four years.

How would you rate the performance of your contract service providers?

A focus on customer retention has never been more important for the bio/pharmaceutical contract services industry. Major and mid-sized bio/pharmaceutical companies are pursuing new sourcing strategies designed to achieve cost savings by reducing the number of vendors they work with. Although consolidation is meant to give the pharmaceutical companies opportunities to negotiate better pricing, it is also aimed at reducing vendor management costs and creating improved opportunities to work cooperatively. As clients go through the process of winnowing their supply bases down to a few preferred providers, CROs and CMOs that have established good performance track records will top the list.

Contract service providers often count on the fact that the costs of changing vendors—including the search and qualification process and the possible need to go through site transfer and revalidation—will keep a client captive. Nonetheless, service providers can't afford to be overconfident that their clients are locked in, especially clients for clinical trial services.

The fact is that clients are always looking for new vendors, whether it is to find special capabilities, replace underperformers, or just add to the roster of possibilities. The 2006 PharmSource–Pharmaceutical Technology outsourcing survey found that 87% are actively looking for new vendors for one of these reasons. There is a very high risk that the very act of searching for a vendor—for whatever reason—will turn up a new service provider that the client will try simply because the client is merely "satisfied" with its current vendors.

It's also important for CROs and CMOs to remember that companies that are not currently competitors can quickly become competitors by expanding their service offerings. For instance, we currently are seeing several contract formulators and manufacturers that specialize in standard dose manufacturing (e.g., solids, liquids, semisolids) adding sterile injectable capabilities. Bio/pharmaceutical companies that have enjoyed successful relationships with those companies may be tempted to try their new services, even though they don't yet have the depth of technical expertise and manufacturing experience in the new service area.

Service providers must also look over their shoulders at the looming challenge of low-cost providers of services in India and China. The 2006 PharmSource–Pharmaceutical Technology outsourcing survey indicates that companies are moving slowly in this area, but they are moving nonetheless. The potential cost advantages of offshore sourcing could more than offset the switching costs involved in establishing those sourcing relationships.

Finally, CRO and CMO executives must remember that every pharmaceutical business runs a risk of experiencing a serious problem that will strain the loyalty of its clients. Will clients that rate your performance as "satisfactory" be willing to stick with you or bring you more business while you fix your problem?

For example, think of the number of major contract manufacturers and laboratories that have run into serious regulatory compliance issues during the last five years. Those crises were often the result of unforeseen legacy problems left over by the previous owners of a facility, not the current management, but they raised the risk that the affected operations could be seriously impaired. Clients that remained with or brought new business to those CMOs while they corrected those problems did so despite facing a considerable risk to their business.

The bottom line here is clear: there is no room for merely "satisfactory" performance by contract service providers expecting long-term success. Striving for excellence in all aspects of operations, expertise, and customer service is the only way to make sure your CMO or CRO will stay in the game long-term.

Jim Miller is the president of PharmSource Information Services, Inc., and publisher of Bio/Pharmaceutical Outsourcing Report, Tel. 703.383.4903, fax 703.383.4905, info@pharmsource.comwww.pharmsource.com.