Leveraging differentiation to optimize tendering and contracting

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At first glance, tendering and contracting may appear as two completely different procurement methodologies within the life sciences industry. The general understanding is that contracting predominates in the United States and Japan, whereas tendering (with some contracting opportunities) predominates in the rest of the world. While this presents a fairly accurate overview, on closer inspection, the reality is rarely so black and white.

The contracting continuum

Contracting is a broad term. At root, it means a legally-binding arrangement between two or more parties. Historically, we can refer back to the Romans, who set this type of legal relationship in stone with the Roman Rights, which ultimately led to most of our own legal systems.

In today’s business world, contracts can encompass a variety of procedures – from direct, business-to-business relationships to public and formal tenders. In the life sciences industry, there is further differentiation across this spectrum, with numerous types of tenders and contracts. An optimally organized life sciences company must acknowledge these differences to address them and create value.

At HighPoint, we see contracting as a continuum that evolves from a purely free, business-to-business agreement (e.g., in the U.S., contracts between manufacturer and pharmacy benefit managers) to a pure price-only tender that encompasses a strict blackout period. Between these, there are a variety of mixed procurement methodologies (or procedures) of both tender and contract types. Given the numerous procedure types in use, it typically is not feasible to have a dedicated organization for each type of contract.

Optimization of your Tendering And contracting process

To address this complexity, HighPoint uses an analytical approach to support an organization’s effort to optimize their overall tendering and contracting process. HighPoint begins with a discovery phase, which leads to classification of all contracting procedures in use, and finally, optimization based on potential efficiencies that can be achieved across these.

Step 1: Compiling a list of your company’s procurement procedures

The first step is to list all of your various tender and contract types and their respective processes. While this may sound like an easy first step, in actuality, this initial discovery stage can be quite challenging. Industry-wide, the number of procedures is growing exponentially.

Some background on procedures complexity

Europe is fortunate enough to have a common framework for public procurement. But even within this alignment, there are still country-level variations. A good example is the framework agreement implementation. In Spain, a framework agreement has a volume commitment. In the UK, the framework agreement does not have any volume commitment. In Germany, such an agreement is called an open-house contract, with no binding volume commitment.

The world of contracts also opens a door to analyzing the various types of risk sharing agreements, which could already be a herculean task. Leveraging a patient/population and outcome-/financial-based matrix terminology may support this analysis.

Step 2: Classifying your list of contracts

Once your complete list of contract procedure types has been captured, the various methodologies should be classified to create a common understanding and to enable an organizational optimization process. The following two dimensions can be used to classify the contracts:

  • Level of (artificial) competition
  • Formality of the process

Level of (artificial) competition

The level of (artificial) competition captures the way the procedure itself is increasing the willingness of the different bidders to compete on price. Typically, if price is the only criteria, there is a natural response to decrease price, compared to a procedure where the quality aspect would be acknowledged.

The number of participants is another dimension of competition. If only a few selected manufacturers can participate, the competition dynamics would be decreased. In one example, managed entry agreements, which often apply to novel drugs, there is typically no competition at all. Depending on the therapeutic class, there may be some exceptions. Any analysis should take into account the company-specific portfolio.

Formality of the process

The formality dimension focuses on the level of interaction and negotiation that can take place between stakeholders (mainly the contracting authority and the supplier/bidders). Typically, a classic tender represents a highly formal process, consisting of a “one-shot price bid”. In the request for proposal (RFP) process, the parties have strict timelines but can negotiate price and scope towards the end of the selection process.

On the other hand, in most open, one-to-one negotiations, the process is relatively informal, and stakeholders are free to contact each other at any point in time to align on scope, timelines and price.

Because of this significant variation, differentiating procedures along this "formality" axis allows better shaping of the response process to meet the needs of all parties and improve overall performance.

Ultimately, given the variety of tenders and contracts, some processes can and should be clustered together to avoid overwhelming procurement managers in companies faced with many different processes. Without this clustering, there are missed opportunities for simplification and optimization, limiting the impact of a differentiated approach.

 

By plotting all of your procurement processes on a chart along the two dimensions of formality vs. competition level, you can quickly visualize where your processes may cluster.

While data would need to be tailored to each specific area, the example chart above shows how clusters typically emerge. In this example, the same process could be implemented for dynamic purchasing systems and framework agreements. Aligning the response process for these two types of procedures would be logical and beneficial.

To learn more about HighPoint’s approach to the challenges of contracting and pricing complexity, please contact Ruven Eul

Read the third installment of our  Tender Bechmarking Survey Report

 

Tags: tendering, procurement, pricing and contracting, Life Sciences, optimization

   

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