Expert insights by Rich Polgar, Managing Director, Danforth Advisors
For decades, CRO pricing has largely been built on a simple concept:
Hours × activities = unit price.
A CRO estimates how many hours it will take a functional expert to complete an activity, applies the relevant labor cost and margin, and converts that calculation into a unit price.
It is essentially an activity-based costing (ABC) model.
Sponsors rarely see all of the assumptions underneath that calculation. CROs generally do not provide the hours behind each unit unless specifically asked, and many proposals blend multiple activities into broader units.
However, AI creates a new challenge to the model.
What Happens When Hours are No Longer a Good Proxy for Value?
Consider an activity historically priced assuming 40 hours of work.
If AI can complete the same deliverable with equivalent or better quality in 15 hours, should the price immediately fall by more than 60%?
Probably not.
The sponsor is purchasing the output, expertise, infrastructure, accountability, and risk associated with the deliverable, not simply 15 hours of someone’s time.
That begins to move the CRO industry away from pure activity-based costing and toward something much closer to value-based pricing.
And that transition could have enormous implications for CRO economics.
The Five-Year Pricing Problem
Clinical development makes this transition particularly interesting because sponsors routinely negotiate prices today for work that will not occur for years.
Think about a Phase II or Phase III program being contracted today.
The sponsor may already be locking in unit prices for:
- Biostatistical analyses
- TLF development
- Data review
- Database activities
- Statistical programming
- Clinical Study Report writing
- Submission-support activities
Some of those tasks may not occur for three, four, or even five years. Now consider how much AI-assisted clinical work could change during that period.
We are effectively negotiating 2026 prices for work that might be performed in 2030 or 2031 using an entirely different operating model.
If a CRO prices a CSR today based on its current operating assumptions, but five years from now AI enables the organization to produce that CSR using a fraction of the labor, the CRO could generate substantially greater margin on that unit.
That isn’t necessarily unfair.
CROs are making substantial investments in technology, AI platforms, data architecture, training, validation, process redesign, and change management. The companies taking the investment risk should expect to capture some of the economic benefit.
But it changes the pricing conversation.
AI Doesn’t Automatically Mean Lower CRO Prices
There is an assumption among some sponsors that AI will simply make CRO services cheaper.
Eventually, it probably will. But I don’t expect that to happen immediately.
The first financial impact of AI may actually be margin expansion for the CROs that implement it successfully.
Imagine two CROs charging the same $100,000 for a deliverable. One still requires 500 labor hours to produce it. The other has redesigned its workflow around AI and requires 250 hours.
From the sponsor’s perspective, the output may look identical. From the CRO’s perspective, the economics are dramatically different.
That is why the winners from AI will not necessarily be the CROs with the most AI press releases. They will be the CROs that can systematically reduce the amount of human effort without reducing the value, quality, or accountability of the service.
The Largest CROs May Have an Early Advantage
In the short term, I believe the larger CROs may be particularly well positioned to benefit.
Large CROs have enormous volumes of historical data, repeatable processes, global delivery organizations, and thousands of employees performing similar activities across hundreds of studies.
A 10% productivity improvement across that infrastructure is meaningful.
A 30% improvement is transformative.
And once an AI-enabled process is developed, validated, and deployed, the incremental benefit can be repeated across a very large book of business, creating the potential for substantial operating leverage.
Smaller and mid-sized CROs can absolutely compete (and in some cases may be able to innovate faster), but they will need to be deliberate about where they invest rather than trying to replicate the technology infrastructure of the largest providers.
Sponsors Need to Rethink Procurement Too
This isn’t only a CRO issue. Sponsor procurement and outsourcing teams also need to evolve.
If we continue evaluating CRO proposals primarily by comparing hundreds or thousands of unit prices, we may increasingly be measuring the wrong thing.
The better questions may become:
- What outcome are we buying?
- How much operational risk is the CRO assuming?
- How quickly can the work be completed?
- What technology and AI capabilities are embedded in the delivery model?
- How much of the productivity benefit is being shared with the sponsor?
And perhaps most importantly: Are we paying for effort, or are we paying for value?
I don’t think activity-based pricing disappears tomorrow. Sponsors will still need units, assumptions, and transparency to manage budgets and change orders.
But I do think we are at the beginning of a significant transition.
What This Means for Biotech Sponsors
At Danforth Health, we manage clinical outsourcing across multiple biotech companies, applying best practices in CRO sourcing, negotiation, and governance across a broad portfolio of clinical programs.
That perspective allows us to see how CRO pricing, commercial models, and contracting practices are evolving across the market, not just within a single sponsor or sourcing event.
As AI changes the economics of clinical delivery, sponsors will need greater transparency into how CROs build their pricing, stronger protections around scope changes and change orders, and more sophisticated ways to assess whether they are receiving appropriate value.
If you are looking to improve the outcomes, pricing, and transparency of your CRO relationships, contact us to discuss how Danforth Health can help.