An increasing number of pharmaceutical companies are recognizing the numerous benefits of establishing long-term outsourcing strategies with contract re-search organizations (CROs). A fairly novel approach to a partnership type of relationship between the sponsor and the CRO is the Full-Time Equivalent (FTE) agreement.

According to the FTE contractual agreement, the CRO provides the client with a project team dedicated to the client’s studies for a specified period of time at a fixed rate per FTE unit. The suitability of this program depends on the nature and scope of the work, the timing, timelines and duration of the studies, as well as the level of commitment that both parties are willing to invest in the business relationship.

How Is FTE Different?
One key difference of the FTE agreement from a traditional bid or contract is the contractual obligation of the CRO to have a dedicated and consistent team of scientists for the sponsor?s program. The pricing structure is one in which the client pays a fixed rate per FTE, independent of the workload, analytical method or compound. This is in contrast to the traditional contract, in which the sponsor?s fee is based on a per sample and/or per test basis. A single document for multiple studies is often sufficient for an FTE contract, while a variety of quotes are required for different types of projects in the traditional outsourcing process. Under an FTE agreement, both sponsor and CRO work jointly to manage the resources relevant to the outsourced work. In the traditional contract structure, this is primarily the responsibility of the CRO. Typically, the FTE agreement is more appropriate for a long-term program, while the more conventional bid can be suitable for both short-term and some long-term projects.

Selecting this outsourcing alternative is generally based on a long-term commitment where the risk and rewards are shared by both the sponsor and contract service provider. The significant benefits obtained from having consistency in the project team make this strategy quite attractive. Aside from the flexibility to accommodate changing priorities, shorter lead-times are often required before project start-up. In addition, overall quality of the work, responsiveness and turnaround times are improved, because the dedicated project team becomes more familiar with the client studies. The financial incentive for both parties comes from the predictability of the work load which in turn leads to better control of the project costs, budgets and profitability.

The FTE Trend is Growing
Interestingly, the introduction of the FTE agreement to the pharmaceutical outsourcing industry coincided with the shifting trend in the sponsor-CRO relationship to a ?partnership,? as well as the CRO?s role as an extension of the sponsor?s company. The ongoing expansion of the CRO?s capabilities to various areas of the drug development process has contributed to the increasing trend in FTE programs and similar types of agreement. Furthermore, the enhancement of the overall quality of the contract organization?s staff, work output and client service has been welcomed by the pharmaceutical sponsors, which are seeking a ?mirror image? of their companies.

As the sponsor grows more comfortable with the CRO?s abilities, the volume of the work that is contracted out expands and the studies become more long-term; this situation is more conducive to FTE arrangements. Also, the acceleration of R&D endeavors in the pharmaceutical companies, which results in simultaneous development programs for multiple compounds, has undoubtedly played a role in the rising demand in FTE outsourcing agreements.

Suitability
Not every study that is contracted out is suitable for an FTE agreement. The following criteria may be useful in determining if this type of contract is appropriate for the sponsor?s needs:

? sponsor seeks a long-term relationship with a CRO to advance and/or resolve project goals;
? program includes of various technical activities with an overall large scope and volume of work;
? similar studies for multiple compounds at different stages of the drug development process are required;
? CRO?s capabilities are needed on an ongoing and consistent basis;
? timing and timelines of studies are staggered;
? projects have unclear and constantly changing priorities; and
? studies require different types of capabilities, expertise and instrumentation not available at sponsor site.
Examples of studies that meet some or most of the above criteria include:
? stability programs at preclinical and clinical stages for multiple compounds;
? stability studies for the same compound with multiple dosage strengths/forms and package configurations;
? commercial release and stability testing for a new drug product;
? manufacturing and packaging of clinical supply material for multiple lots of different strengths;
? analytical method development and validation for new chemical entities in the sponsor?s pipeline;
? process and cleaning validation studies for a finished product;
? analytical and regulatory support to address multiple filing deficiencies or compliance issues; and
? studies with complex and challenging synthetic or manufacturing processes.

Pros and Cons
What are the benefits and drawbacks of the FTE agreement from a CRO and client?s perspective? Due to its nature and duration, the FTE agreement provides a steady source of revenues for the CRO. As a result, projections of financial performance become more accurate. This is particularly beneficial to the CRO, since the influx of work is often variable and revenues are difficult to predict. With multiple programs covered by one contract and a fixed rate per FTE, preparation of quotations, bids, purchase orders and invoices is more efficient and straightforward.

However, due to the large financial value of the FTE contracts, cancellation of portions or all of the program can cause a major negative impact on the revenues and profit margins for the CRO. In most cases, the CRO?s initial investment in hiring staff and purchasing equipment is enormous. This type of agreement can generate a huge financial risk if studies are discontinued or delayed significantly. Having a project team dedicated to a particular client also limits the flexibility of the CRO in scheduling and assigning resources to studies from other sponsors. Depending on the size of the FTE program, this restriction may be a significant financial constraint.

In general, the FTE program is more cost effective than a traditional arrangement, from a sponsor?s viewpoint. The cost savings primarily stem from less time spent providing detailed information (stability protocols, analytical methods, etc.) for quote preparation, review of bids and invoices, financial management of project costs and revision of contracts and budgets when the scope of the work changes.

For example, one client who shifted all of the sponsor company?s contracted work to an FTE contract estimated that he previously spent at least 75% of his time on financial management of the non-FTE programs, handling preparation and review of various document issues, varying from the quotations to the invoices. For most pharmaceutical clients, particularly those in which the technical and outsourcing manager is one and the same person or department, this time and effort can be more productively spent on management of technical and compliance issues and building the relationship with the laboratory.

It should be noted that the sponsor may be at a financial disadvantage when FTEs are not fully utilized for long periods of time. To avoid this pitfall, the client must have a detailed knowledge of the scope of the work and the timelines prior to contract negotiation. More often than not, this information may be unclear or not yet finalized at this early stage. In addition, the CRO and sponsor need to work closely together in tracking and accounting of the labor hours on a regular basis to ensure efficient utilization of the FTEs. This effort may prove to be time-consuming particularly if the ?peaks and valleys? in the workload are prominent.

Human Resources
For CROs, resource allocation in an FTE program is more straightforward because of the predictability of the volume and type of workload for the technical staff. Over time, the project team develops more ownership and accountability of the work due to the long-term nature of the relationship. These distinguishing features of the FTE agreement often lead to employee job satisfaction and ultimately staff retention.

Being dedicated to a specific client program may be advantageous from a planning standpoint but may restrict the technical and career advancement of the FTEs. Often it limits the exposure of the FTEs to other projects with different technologies and methodologies. Also, employee turnover (which averages around 25% to 30% in most CROs) is more detrimental in an FTE program and results in a greater negative impact on client service.

Sponsors, on the other hand, can benefit from having a dedicated pool of resources at the CRO instead of keeping such resources internally. Head count and productivity in the sponsor?s company is therefore not impacted especially when unexpected changes in timelines and scope of work occur. Technical staff at the client?s facilities can instead be diverted towards development of innovative ideas, as well as drug discovery and research efforts.

Just as the benefits of having a consistent project staff are numerous, it can also produce various drawbacks. The success of the FTE agreement more strongly depends on the quality, experience and expertise of the project team dedicated to the client studies. Likewise, FTE turnover can lead to a greater loss and a larger void to fill, due to the established partnership between the client program manager and the FTE.

Quality of Work
One expectation of the FTE agreement is that consistency in the project team will lead to familiarity with the procedures and project requirements. This in turn will build technical expertise and produce better trained staff. The impact on work quality may be reflected in the number and type of audit findings as well as in less frequent incidence of laboratory errors and investigations.

The partnership approach that is fostered by this type of agreement improves overall quality of the work and service, since FTEs become an extension of the sponsor?s lab. Gaining access to a dedicated group of technical staff can also result in greater ease in project management and communication efforts for the client.

Although ease of changing priorities, shorter lead times and quicker turnaround times have apparent benefits, they can likewise become drawbacks if quality of the work is compromised. Laboratory errors and retesting may occur more frequently if inadequate time is allotted to prepare for a study or if tremendous pressure is put on the project team at the CRO?s end to meet an aggressive deadline. Replacement of FTE staff due to turnover requires retraining of new analysts and can have a negative impact on the quality of the data. Familiarity with the sponsor studies by the FTE can also be a disadvantage from the standpoint that it can generate complacency and lack of critical evaluation of project specifics.

Responsiveness
Overall, responsiveness to clients? needs is enhanced by having an FTE agreement in place, since changes in priorities, scope of work and timelines are more easily accommodated. In addition, efficiencies are gained and faster turnaround times are achieved due to the consistency in the project team.

However, shorter lead times and greater frequency of priority changes may create difficulty in scheduling and resource allocation, especially when additional staff is needed. At times, when an FTE program consists of a wide variety of projects that all have critical timelines, these studies can compete with one another for the same resources. Client expectations for turnaround times are normally greater when a dedicated team is in place.

For sponsors, an FTE program may be advantageous in terms of responsiveness by accelerating project timelines and maintaining the flexibility for unforeseen changes in scope of work and priorities. Having project staff familiar with and accountable for its studies can equate to less time devoted to managing crises, technical and compliance issues.

However, time spent m anaging the workload and re-sources to ensure full utilization of the FTEs may affect the responsiveness of the sponsor to the lab?s technical needs. Like the traditional type of agreement, geographical distance can be a limiting factor for the sponsor, particularly when close management of the FTE program is required. This can even be more of a challenge when laboratory investigations and method problems occur and the client needs to be intimately involved with the studies.

On a comparative level, an FTE contract delivers a higher value service per dollar spent from a technical, financial and quality perspective, compared to a project-by-project bid process. Realization of the benefits discussed above can be facilitated by clear definition of expectations, open communication between the CRO and sponsor, effective management of the workload and allocated resources by both parties and sharing the challenges, risks and successes of the FTE program.

Sponsor?s Role
Once a decision has been made that an FTE agreement is the proper outsourcing approach and the CRO has been selected, the following steps are necessary to prepare and negotiate the terms and conditions of the contract from a sponsor?s standpoint:

Sell the idea internally. The advantages of the FTE program discussed above are useful tools for the internal ?sale? to management and finance. For more convincing arguments, comparative analysis of cost effectiveness of an FTE contract with a traditional bid can be extremely valuable, especially when approaching the financial or purchasing representative. For top management to support this type of agreement unequivocally, emphasis should be given to significant gains in flexibility, efficiency, quality, responsiveness and turnaround time. The level of commitment, as well as the long-term outsourcing strategy of the sponsor, can ultimately make or break the decision to proceed with an FTE agreement.

Determine the scope of the work to be outsourced. It is critical to be able to identify the type, nature and scope of the work that is to be contracted out at this early stage. This information will help determine the cost, number of FTEs, timelines and other principles of the contract.

Negotiate the principles of the contract. The cost of each FTE is scrutinized at this step and the following typical questions are addressed:

? How many hours are recognized per week or per day (40 hours or 35 hours a week/eight hours or seven hours per day)?
? Is management and supervision included in the cost?
? Are there different costs associated with analyst experience levels?
? Is overtime pay included in the cost?
? Is QA review included or excluded?
? Is stability storage included?
? Are sample management, instrument calibration and report generation included?
? Are the costs of columns, standards, special equipment, sample disposal and shipping incorporated in the costs or are they pass-through costs?

Calculate the number of FTEs required initially and for each month. Based on the work that is to be outsourced, plan start and completion dates of project milestones. For each task, determine the time required to complete the work, using the available information on analytical methods, number of samples, number of storage conditions and other tasks that will be billed to the client (training, laboratory investigations and retests). Using established internal time standards and past experience, calculate the total labor hours per month and the number of FTEs required per month. The terms and conditions for addition or decrease in the original number of FTEs must also be defined. The lead time required for this change in the number of FTEs, any guarantee clauses (X % of the total number of FTEs are guaranteed for Y period of time), penalties or cancellation fees should be taken into consideration.

Estimate the ?peaks and valleys? in the workload. The successful management of the FTE program depends on early recognition of the busy and slow months and proactive scheduling of short-term ?filler? studies during these periods. Examples of projects that can fill the gaps in workload include: release testing, reference standard qualification, method validation, cleaning and process validation testing support. The decision to add and remove FTEs is also based on these ?peaks and valleys.?

Negotiate the contract. Equipped with the full understanding of the contract principles, staffing needs, timelines and costs, negotiation with the CRO is initiated. All essential information necessary to prepare an FTE agreement is shared with the CRO to reflect accurately the client?s needs and project requirements in the contract. Upon receipt of the finalized contract from the CRO, the agreement is routed for legal, financial and management approvals at the sponsor’s end.

CRO’s Role
After all the critical information discussed above has been transferred from the sponsor to the CRO, the contract negotiations continue and the CRO prepares the contract.

The FTE agreement consists of several key sections as outlined below:

Scope of the work: In an FTE agreement, the specific activities and the nature and extent of the work should be well-defined. The more details supplied, the less likely it is that miscommunication and misinterpretation will occur.
Term or duration of contract: This section defines the term and the length of time the contract is in effect. The sponsor guarantee is stated in terms of assurance of FTEs for the stated period of time, while the CRO contractually agrees to the allocation of the dedicated FTEs for the defined workload and time period.

Staffing: In an FTE contract, the number and type of FTE (R & D, stability, QA/QC) based on the expertise should be stated explicitly. In addition, the specific functions, aside from laboratory work covered by the FTE agreement (training, project management, QA review, sample management) are clarified in this portion.

Financial Details: It is important to define the number of hours in a work week (40/35 hours) for accurate tracking of labor hours. The rate per FTE per month is provided and can vary depending on the type of expertise needed and nature of the work performed. In addition, this part of the contract also contains stipulations on monitoring and reporting of FTE labor hours.

Deliverables: The delivered product (validated method, stability report, finished manufactured product) is described and timelines or turnaround times associated with the deliverables are stated.

Changes to Scope of Work: In this section, advance notice to increase or decrease project workload is defined as well as the corresponding adjustments to be made in the number and type of FTEs.

Termination Clause: In cases of project cancellation, a penalty clause is stated which covers how much advance notice is required (30 days or 60) and/or guaranteed payment for a defined number of FTE for a specific period of time.

Managing FTE
Managing the FTE program starts during the preparation of the contract. Without a clear definition of specific terms and conditions, false assumptions made from both ends may prove to be quite detrimental. One common pitfall experienced in an FTE program is the lack of understanding for the premise of adding or decreasing FTEs. The agreement should contain a built-in flexibility for changing the number and type of FTEs. The more variable the workload and less predictable the timelines are, the more critical it is for both sides to agree on how much lead time is needed to cancel or add an FTE and what the penalty and/or guarantee terms are. Another nebulous area that may need to be elucidated are less apparent tasks and functions that are covered by the FTE agreement (QA review, report generation) and materials included or not included in the cost (HPLC columns, reference standards).

Controlling the utilization of the FTEs by both parties requires that the number of labor hours be tracked regularly on a given project or FTE type for a defined period. The systems and processes needed to monitor and evaluate the FTE hours should be as simple and straightforward as possible. Critical decisions for amending the contract is generally based on the information generated by this report. In one case, monitoring the FTE hours proved to be quite useful. The labor hours reported at the end of each month revealed that the FTEs were not fully utilized at all times. The contract was originally for five FTEs based on the initial projected work load but the labor hours report showed that two to five FTEs were utilized per month due to the variability of the workload. Since the timelines were uncertain for the remainder of the studies, the client opted to decrease the FTEs to three and agreed to pay for any additional hours over and above the total for three FTEs at the equivalent hourly labor rate.

The success of the FTE program from a quality-of-the-work and service standpoint can be monitored by performance metrics such as turnaround time, repeat work, number of Out of Specification (OOS) and atypical data investigations and audit findings from QA. With one cGMP contract laboratory, this positive impact on the quality of the data was substantiated by consistently fewer instances for repeat work due to a laboratory or analyst error in FTE programs compared to non-FTE studies. Similarly, the financial performance of the FTE agreement can be measured most effectively on a regular basis by cost analysis of the studies and budget review.
There is no argument that communication is an integral com
ponent in any CRO-sponsor relationship, especially one based on an FTE program. Designating a program manager or project leader from both sides is a good first step. This person becomes the primary contact person, provides regular project updates and maintains open and honest communication lines between both sides. The mode, frequency and content of the communication during the duration of the program should also be explicitly defined prior to project initiation.

Due to the long-term nature of the agreement and large financial investment involved, minimizing the potentially enormous risks inherent in this type of contract is a necessity. Just like in any business partnership, this requires nothing short of a firm commitment from both the sponsor and CRO.

The Future of FTE
Contract organizations should exercise caution in recommending the FTE type of agreement to a potential client. As a general rule, it should be offered to the sponsor only as an alternate means of establishing a long-term commitment with the CRO. This outsourcing strategy should be considered as an option during contract negotiations depending on the suitability of the study for this type of agreement.

With the continuous upward trend in outsourcing and with pharmaceutical companies narrowing their list of CROs to a select few, it is expected that the FTE program will increasingly become the contractual agreement of choice. Numer-ous long-term partnerships are already being solidified in the pharmaceutical outsourcing sector as CROs play increasingly integral roles in drug development process. While the pressure for pharmaceutical companies to in-crease the number of new drugs in their pipeline continues to escalate, the industry can expect a continuous surge in the demand for agreements that are flexible and for CRO?s performance of consistent quality and timeliness.

On initial analysis, it may seem that the FTE program is a sure winner for both the CRO and sponsor. However, just as the benefits are huge and plenty, so are the risks. Our industry is predicated on careful consideration of issues, so each sponsor should examine its outsourcing strategy deeply before entering into a new arrangement.