Chapter 9
Working with Contract Research Organizations

Why Buy in R&D Services?

A company that exists to provide services to other organizations and whose 'products' are knowledge-based, the fruits of scientific and/or technological research, is generally known as a contract research organization (or CRO). Very often they will serve a niche sector, as the following UK examples illustrate:

• Paint Research Association
• Electrical Research Association
• The Welding Institute
• Motor Industry Research Association
• The Forensic Science Service (law enforcement)
• AEA Technology (nuclear industry)
• Nirex (radioactive waste industry)
• Scott Polar Research Institute
• Building Research Establishment.

Other organizations serve a broader range of customers, but always with the accent on knowledge-based, research-intensive services. Again examples from the UK:

• Roke Manor Research
• QinetiQ
• Marconi Caswell Technology
• The Technology Partnership pic
• Quintiles Research
• Cambridge Drug Discovery Ltd
• AEA Technology
• The Automation Partnership
• The Babraham Institute (biosciences).

There are also company-specific in-house, or otherwise 'captive' research and development units, that will sometimes sell their services to external clients, where this is commercially convenient to them. All these organizations, then, are CROs in the broadest sense. The subject of contracting with them is covered exhaustively in Gower's The Outsourcing R&D Toolkit.¹ The purpose of this chapter is to locate the use of CROs in the context of knowledge buying strategies, to assess where they might add value, and to suggest mutually beneficial ways of working with them.

One key area of knowledge creation, as has been suggested throughout this book, is the area of technological and scientific research and development. This is becoming a major subset of knowledge procurement, and not only for commercial organizations. Across most enterprises, State or private, managers are expected to use the best and most up-to-date knowledge to steer their organizations and maximize value delivered through day-to-day operations. Where knowledge does not yet exist, there is a powerful drive to create the knowledge, if necessary from first principles. At the beginning of the twenty-first century, globalization has forced organizations especially private companies - to become more effective at developing new products, processes and services as increasingly fierce competition threatens virtually all markets. Technology is becoming ever more complex, product life cycles are shortening and substitute technologies follow in rapid succession. This is true of every industry and every activity that has a technology/knowledge basis. Companies find it increasingly difficult to carry the internal resources to sustain R&D capability across all disciplines and so have for the past 20 years focused internal research on core competencies whilst outsourcing (in the broadest sense) non-core research by forming strategic partnerships with other organizations or contracting out the research of non-core activity. The future will undoubtedly see greater contracting-out of core research as well.

It has already been noted in Chapter 5 that purchasing R&D services is a form of temporary integration of the buyer and the seller. Contract research generally implies a higher level of integration, as the research contractor is bound by terms and conditions to deliver certain results/information (knowledge). The research contract may bear some similarity to an employment contract, for example in terms of exclusivity and confidentiality which should outlast the contract itself. There need to be clear boundaries in the minds of both buying and selling organizations, especially where individuals will be working very closely with their opposites, to avoid the danger of unduly cosy relationships being established, possibly to the detriment of forming other useful, competing, relationships. Whilst there is a good measure of truth in the quote below, it also unintentionally illustrates a danger of two organizations becoming too closely aligned:

Typical reasons for using external R&D contractors, as identified in a study by the world's largest CRO (Battelle, Geneva) are, in descending order of precedence:

• Innovation - client seeks competitive advantage through product or process improvement or acquiring technology with which it has limited experience. Environmental legislation is an increasing spur to innovation. In these cases the client does not necessarily define the solution, but may be interested in having a solution 'sold' to them.
• Problem solving- client encounters unexpected problem and needs agile 'off the shelf' expertise. The CRO is then a 'firefighter' valued for its experience, expertise and ability to respect confidentiality.
• Additional capacity-client has expertise but other priorities prevent internal resource allocation. Work is outsourced for a limited time to complement in-house work. This may also reflect an inevitable consequence of downsizing where (perhaps) strategic managers lack the vision, confidence or technical grasp to manage in-house resources and see contract research as a way of hedging risk by transferring some of it outside.
• Multidisciplinary- client finds it difficult to mobilize a team in-house with the necessary range of technical knowledge/expertise. A CRO may be able to integrate the necessary expertise in a flexible way, bringing together a team under one roof.

• Cost sharing - clients, perhaps in the same industry, working temporarily with competitors, or across industries with a common interest, identify work that can usefully be shared. This is often high-cost and/or high-risk. Cost-sharing becomes an attractive strategy and also allows diversity of project management, perhaps enhancing the value of the results.
• Business intelligence - by hiring a CRO a client can gain access more quickly to a wider range of intelligence or focus the resources necessary for effective intelligence acquisition. The CRO, as an 'expert' in its own right, has access to and perspective on available information and is well placed to locate and evaluate any necessary new information. In a commercial setting, an effective confidentiality clause will be necessary to prevent the client's competitors acquiring the same intelligence.

As part of the 'due diligence' process discussed in Chapter 6, the CRO must convince its potential client that it will be the best partner to work with. A considerable amount of problem definition will take place during the negotiation process which will normally cover both business/contractual and technical matters. The client organization's principal negotiator will usually be the engineer/scientist who will have day-to-day contact with the CRO. The negotiator must be convinced by the capabilities of the CRO and supplied with sufficient arguments (knowledge) so that in turn he or she can convince their manager of the value of the proposed contract. These negotiations will be protracted, typically a period of six to nine months from first contact to contract placement.

Strategy Issues

As late as the mid-1980s, the principal buyers of R&D services were larger companies and organizations with in-house R&D departments - typically in sectors such as government, energy, chemicals, pharmaceuticals, electronics, IT and transport. The reasons for this were that these 'buying' organizations needed a good understanding of risk, timescales and technology potential. Many of these organizations work on long-term horizons, with current investments having multi-decade paybacks, often within evolving regulatory environments that also require long-term research (for example the electricity industry's research into the effects of atmospheric pollution). But in the last few years of the twentieth century the need to buy in R&D became an increasingly common fact of life for smaller organizations. High-tech companies interact with mul-tech clients and must themselves be able to cover a broader spectrum of technologies, buying in those that are complex or costly, or which are too far removed from core business activity.

'If we don't sell, someone else will!' The age-old justification for dubious arms sales is also a stimulus for external R&D. Competitive supply of new technologies, especially where buyer and seller are not direct competitors, and where there are often many competing suppliers, increases the pressure to supply R&D services. If we do not sell, a competitor may capitalize on some competing technology which may in turn permanently distort our particular market. A classic example of this was the competitive battle between VHS and Betamax technologies in the video recorder market, which VHS won so comprehensively that Betamax was rendered extinct in the space of a few years.

A corollary is also true: if we don't buy, someone else will! There is a legitimate business case, for firms that can afford to do so, to acquire the services of external suppliers of research and development services to deny their competitors the opportunity to use them. In the UK traditional vacuum cleaner manufacturers have candidly regretted that they turned down the opportunity to acquire and shelve the technology associated with the revolutionary Dyson bagless vaccum cleaners that today have rendered 'bag' vacuum cleaners all but obsolete. There are fewer public cases of research buyers awarding small and ongoing research contracts to inventors and technology firms to prevent them from developing new relationships with competing firms. If the inventor is a one-man band he or she can only work for one customer at a time; the technology firm may be unable to develop new clients due to their ongoing exclusivity arrangement with the research buyer.

The Ove Granstrand report noted a distinction in the commercial sector between 'high-tech' and 'mul-tech' organizations:

Individual products can feature both high-tech and mul-tech characteristics, but the management of the development of these products will differ in emphasis and style. The technology management of high-tech products focuses on:

• scientific creativity
• advanced customer demands
• elitist recruitment
• technological leadership
• technology protection.

The technology management of mul-tech products, by contrast, focuses on:

• technology scanning
• incremental technology improvement
• imitation strategy.

The difference between high-tech and mul-tech is analogous to the difference between 'R' (for research) on the one hand and 'D' (for development) on the other. To manage technology and innovation effectively in the present mul-tech environment demands a broader range of management skills (social, economic, legal, engineering, outsourcing) than traditional in-house R&D management. Mul-tech and high-tech management must play the technological market effectively. External technology acquisition is complementary to, and not a replacement for, in-house R&D. In-house R&D is often needed to absorb/internalize external technology.

Is there an optimum degree of external technology acquisition? This is analogous to the whole question of outsourcing non-core business activity and there is already a great deal of literature to alert senior managers to the broad issues. With regard to technology or knowledge 'outsourcing', the danger of relying on external sources is a real one: what happens if the external source ceases to be available? In the real world however, rising R&D cost and risk is stimulating greater demand for external technology that is being matched by an increased supply of sources, especially niche suppliers of special technologies that may have numerous applications.

The extent of external technology acquisition is a strategic choice for each business whether State or private, industrial, commercial or government. Total external technology acquisition (outsourcing in the purest sense of the term) is an unlikely option, although a few brave commercial firms are beginning to experiment with the idea. But why is total outsourcing unlikely? Having something to offer potential suppliers/partners based on unique in-house R&D capabilities in complementary technologies provides a 'ticket of admission' to patent pools, cross-licensing arrangements, collaborative research and development and so on, whilst also offering the most secure route to internalize bought-in knowledge and technology. Some commentators suggest that businesses will increasingly need to compete to be viewed as prestige/quality customers of their various supply markets. This remains to be proved, but in the technology field, being a desirable client, in the sense of providing good research 'suppliers' with useful, leading-edge work to do, will always be more attractive to them than taking on assignments that involve the research supplier (in effect) carrying an ignorant client, even if, over the short term, it may prove financially more rewarding!

Contract Research as a Strategy to Increase Innovation

Innovations may be defined as products and/ or techniques of a new quality that an innovator introduces to the market for the first time. Innovations may occur at many stages in the development or life-cycle process from discovery through development through diffusion. Innovation processes are primarily information processes in which knowledge is acquired, processed and transformed. Whilst information flows accompany even routine transactions, such as selling, tax raising and regulation, where innovation is the prime goal, the acquisition, transfer and processing of information is managed proactively in such a way as to maximize the usefulness of the information for the innovative task.

Research client organizations need to recognize the information system as a system where there are senders and recipients of information. As a rule, information relationships tend to be asymmetrical in the sense that in the initial phase, the sender has a qualitatively higher level of knowledge than the recipient - the information exchange process is aimed at reducing this asymmetry in a managed way, so that eventually knowledge is equalized. Knowledge equalization is an important objective of most research contracts!

One problem that the innovator must overcome is that, often, information supply is too great. It has been noted in studies on innovation management that information search (as opposed to information supply) is a critical success factor. This has implications for researchers in determining their research strategy and, where that involves buying in research services, implications for the way in which the research specification is drawn up. Information supply can lead to information overload - a noted cause of failure - and one that will continue to accelerate as a cause of failure in today's information explosion. Information search implies discrimination in the use of available information, as Internet search engine suppliers are discovering to their benefit! Jurgen Hauschildt, in his study 'External acquisition of knowledge for innovations',⁴ commented on this subject of information supply:

Hauschildt quotes Gemunden's earlier study, which noted that the level of aspiration of the acquirer of knowledge is an important factor. By aspiration he means the extent to which the buyer aspires to acquire a thorough understanding of the knowledge being transferred. The lesson has obvious application across the field of knowledge-transfer relationships:

Why Buy Knowledge When You Can Buy the Owner of the Knowledge?

This is restricted to the business realm where buying a knowledge-rich firm by merger or acquisition may be a viable proposition. Suverkrup⁶ has studied the factors associated with successful technologically-oriented corporate acquisitions which he found to be dependent mainly on the quality of the post-acquisition integration process, based on efficient decision-making and the support of experts. Conversely, unsuccessful technology acquisitions were those where highly formalized integration/ absorption takes place, treating the target firm as an exploitable knowledge-mine and reducing its autonomy.

The most successful technology-based motives for acquiring another firm are:

• exchange of know-how
• high-productivity R&D
• easy recruitment of researchers
• completion of a particular product programme.

Where these motives are not present, the acquisition of a firm for technological reasons may reflect a short-term tactical move rather than a strategy, unless of course, the strategy is simply to take over a competitor to reduce competition! Merger and acquisitions is a subject outside the narrow scope of this book, being already well served by a considerable body of literature. The main point to be made here is that buying a company as a short-term expedient solely to acquire its R&D capabilities is virtually unknown. A company acquisition must in any case be considered in the context of competition law. The decision is likely to depend on

• the acquirer's overall strategy
• the target firm's overall health portfolio
• the general state of the market
• what competitors are doing.
• technical, financial, managerial, patent

Another method to 'buy' the owners of knowledge is the recruitment of key staff as permanent employees, possibly using head-hunters to target the right individuals. Mighty software company Microsoft has taken this concept about as far as any company ever has. A fascinating insight into Microsoft's approach to R&D was given in a report in the UK Financial Times⁷ at the time this book was being prepared. The management philosophy at Microsoft was to recruit widely and allow their researchers to set their own agenda, their employer merely providing an environment in which they can shine. 'I see myself as a ringmaster' said Andrew Herbert, the director at Microsoft's Cambridge UK laboratory. 'Here are a collection of great performers. My job is to make sure they can put on the best show they possibly can.' For a scientific researcher this sounds like research-paradise. One of Microsoft's top scientists spent the first few years of the twenty-first century linking the world's astronomy databases not a feature that obviously lends itself to be featured in the next release of the Windows operating system, the staple product of the company.

Microsoft's researchers, being amongst the world's best ('brilliant' in the words of the FT) were free to advance the state-of-the-art in software and computer science in areas of their choosing. But Professor Hank Chesborough (executive director of the Center for Technology Strategy and Management at the Haas School of Business in California, was quoted by the FT as a sceptic:

Technology consultant Georges Haour, professor of technology management at IMD, also sees dangers in depending too much on internal knowledge generation: 'Technology firms must break away from internal innovation and redefine their innovation perimeter to include ideas that come from outside', he said. A strong argument for maintaining a diversity of knowledge creation strategies, including judicial use of contract research.

The third method of acquiring the 'owner' of knowledge, or at least privileged access to that knowledge, is via technology licensing. Licensing is a form of technology transfer in which the licensee acquires a right to use a technology from the owner of the technology (the licensor). Technology can, of course, be transferred simply by purchasing a particular machine or piece of equipment, but this can also be done by others - for example, competitors. The need for a licence arises where access to the technology is restricted by a patent or other IPR protection and it becomes necessary to enter into a legally binding agreement with the IPR owner in order to acquire the right to use the technology.

The licensor usually grants a licence in exchange for a fee on signature of the licence agreement and subject to a periodic royalty which represents an agreed percentage of the utilization of the licensed technology - normally in terms of products sold during the life of the agreement. In order to earn a suitable return from the licence the licensor will seek assurances from the licensee as to how the technology will be utilized and will satisfy itself that the licensee is, overall, a reliable partner. This may be underwritten by a minimum royalty clause, to focus the licensee's attention. In granting a licence to a particular licensee, a licensor often has to forgo licensing to other parties, especially in situations where an exclusive licence has been agreed, so it is only common sense to ensure that the licensee is a serious business partner.

Licensing may be an attractive alternative to R&D work: R&D is expensive, carries heavy fixed costs in terms of personnel and infrastructure, and takes time to yield benefits. Some commentators have suggested that R&D is ten times more expensive than licensing as a strategy for acquiring new technology, and a number of organizations have made a conscious choice towards licensing as the basis of their knowledge acquisition strategy. Licensing, therefore, should be considered as a strategy in the overall project selection process. It should be noted, however, that licensing has some disadvantages:

• It ties the licensee to a particular technology for a long period.
• It may damage the licensee's long-term technological competence. As noted elsewhere, the ability of a company to bring 'something to the party' in terms of R&D often serves as a means of gaining privileged access to leading-edge technology with all that this implies in terms of competitiveness.
• The loss of internal R&D capability inevitably leads to a reduction in the organization's ability to comprehend and internalize new technologies as they arise - and some lost skills are impossible to replace, no matter how much money is thrown at the problem!

How to Work Successfully with a CRO

A number of critical success factors need to be present and operating for there to be any real prospect of external R&D project success:

Adequate Project Appraisal

Without an adequate programme/project appraisal process, examining:

• the characteristics of the client organization (strengths and weaknesses),

• its knowledge absorbative capacity
• the market for any resulting technology (or use to which new knowledge will be put)
• operating environment in which the knowledge is required
• the relative advantages of in-house R&D over contract R&D

the client organization will be unsure as to what are its overall objectives. Some of this work, of course, is routinely undertaken as the organization sets out its multi-year strategic plans and builds its annual budget forecasts. If the client organization is unclear about what the ultimate requirement is, it will find it difficult to guide the CRO.

Any organization, commercial, governmental, or non-profit, that has a requirement to invest money to acquire new knowledge or technology, will have a process through which it decides (a) what are its objectives (b) on what it will spend its money and (c) the method of monitoring and final evaluation of such projects. This is called a project appraisal process. The appraisal process will encompass the following steps that ideally should be carried out sequentially, as shown in Table 11.

Table 11 Project appraisal-steps

Adequate Supplier Assessment

We have already looked at supplier assessment in Chapter 8. Inadequate supplier assessment represents a risk that is difficult to quantify. Good quality research supplier assessment represents a considerable opportunity to award work to the most suitable CRO and to develop new 'supply' sources that increase the depth and breadth of the client organization's technology/knowledge portfolio.

Adequate Work Definition

Again, we have already looked at client technical specifications in Chapters 6 and 8. External work must be adequately defined in terms of:

• inputs from the client organization as buyer
• inputs from the contract research organization
• inputs from third parties (and who is responsible therefore among the contracting parties)
• additional help to be provided by the client organization during the work
• outputs required-When? Where? What?

These questions are the practical ones that follow on naturally from the important strategic ones of:

• Why do we fund R&D on this occasion?
• What do we want from the R&D?
• What would be the effect if we did nothing?
• What will we do with the research results/technology?

A ‘Team’ Philosophy

In R&D contracting there tends to be a natural affinity between professionals working in the same field, pushing at the same knowledge frontiers and often sharing similar academic and work-life experiences. To that extent the prevailing ambience tends to be collaborative and cooperative. This does not mean, however, that effort should not be made by both parties to develop and foster a team approach to the project in hand, providing that this approach does not become one that either party exploits to its own narrow advantage.

How can a team philosophy be encouraged? There are a number of strategies based on normal team-building techniques and identifying shared interests. We will concentrate briefly on the contractual document that underpins the relationship - an area normally overlooked by project managers, if not their lawyers. The form of contract should support the project management method adopted by the parties. Ideally it should not engender an adversarial attitude. It is arguable that the best format of commercial contract available in the world today is the New Engineering and Construction Contract (commonly called the NEC) published in the UK by the Institution of Civil Engineers. This observation is made because the NEC actively seeks to be a project management tool and to engender a team approach and philosophy to project management in an industry notorious for its confrontational and litigious style. At the time of writing the NEC, having been developed as a family of contracts with a specific consultancy sub-form (the NEC Professional Services Contract) it appears to be having remarkable success in the engineering sector and is now being applied more widely. Certainly it represents the biggest development in contracting practice for 100 years. On major projects using the NEC, there is normally a project launch meeting where the various parties meet and determine their immediate priorities. Some have used these meetings to team-build in a proactive manner and supplement them with regular briefings with team-building primarily in mind. Whether this is appropriate in an R&D project will depend very much on the particular circumstances and to the overall size of the project.

Conclusion

Among the various strategies for buying in new knowledge, the use of contract research organizations represents a well-proved mechanism. With many major independent research organizations now fifty or more years old, and with a global R&D marketplace opening, it is certain that many managers will turn to these organizations to assist them to meet both short-term tactical needs and long-term strategic goals. The main practical obstacle to using them may be in the area of intellectual property rights. Enlightened CROs and client organizations seek to be realistic about such rights. User rights are often more important than ownership rights.