Who's Afraid of Procurement?

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In pharma as in other industries, the procurement function has long helped companies improve cost performance and efficiency, especially in areas where tangible goods can readily be compared by features, price and other objective measures. But when larger pharmaceutical companies began applying procurement methods to the agency selection process in the early 1990s, a flurry of criticism arose that persists to this day.

First, agencies grumbled that pharma procurement managers were little more than glorified purchasing agents, intent on squeezing the lowest possible rates from vendors. How, they asked, can you commoditize the creative, dynamic and thought-driven services provided by marketing and education agencies?

Next came complaints that procurement made the process of pitching new business both more complicated for agencies (more steps, documents, formalities) and more frustrating (standardized briefings and restricted interaction with product teams created unwelcome distance from the perceived decision-makers). The art of schmoozing lost some of its power.

Agencies excluded from pitches had their own complaints. Because agency size, billings and category experience are among the criteria commonly used in determining which agencies are asked to submit proposals, newer and smaller firms claimed that procurement gave an unfair advantage to larger, established agencies. Other firms noted that the procurement system, by favoring the retention of a small number of incumbent agencies, discouraged the hiring of new agencies, making it almost impossible for outsiders to get a shot at gaining “preferred vendor” or “agency of record” (AOR) status.

Underlying all these complaints was the belief that procurement managers and systems, primarily geared to financial goals, are unqualified to judge what makes a good agency.

I may have voiced some of these complaints myself several years ago, but experience with some of the pharmaceutical companies that do agency procurement especially well has shown that there can be many mutual benefits to working with companies that select and manage their agencies using procurement methods (also known as strategic sourcing) and an allied function called agency relationship management. To understand the benefits, it’s helpful to look at the original goals of agency procurement.

Order and standardization—In the 1990s, many large pharma companies found themselves working with dozens of agencies (15 or more in medical advertising alone) hired by different methods, operated by different standards, and with widely different pricing structures and billing systems. To address the proliferation of agencies and set common standards, companies began codifying a process for establishing expectations and for vetting, hiring and managing suppliers.

Cost control—This was the most visible and clearly understood goal of agency procurement. By consolidating their millions of dollars of business with a smaller number of carefully selected agencies, pharma companies gained the leverage to negotiate lower pricing. They also made their agencies active participants in cost-management, requiring them to identify best practices and demonstrate return on investment. Quickly appreciating the advantages of being an AOR for a company with an active procurement system (multiple accounts, deep experience, broad exposure, long-term relationships), suppliers readily complied. The result was that agencies and pharma companies increasingly became stakeholders in one another’s profitability.

Performance—The third goal of agency procurement was to improve work quality and agency relationships. Companies tackled this by setting baseline credentials for each assignment, establishing clear objectives and expectations, and developing systems for regular performance evaluations and two-way feedback. They also demanded a voice in how their accounts were staffed to ensure senior attention, appropriate levels of specialist talent, and good personal chemistry.

Agency procurement today
In companies where it is done well, agency procurement achieves these goals and more. Michael E. Thyen, global sourcing manager at Eli Lilly & Co., describes procurement as a system embodying “the beauty and value of the arranged marriage.” Both are driven by economic and social considerations, seek to benefit the greater group, and select for shared values, goals and expectations. Both involve others in the partner-selection process, rely on these allies for support and counsel during difficult times, and boast low divorce rates. With procurement, as with arranged marriages, group experience and intellectual judgment take precedence over individual, emotion-based decision making.

Thyen, whose pharma background includes 18 years in marketing and sales in addition to experience in research and government affairs, readily acknowledges the impossibility of making agency selection a totally unbiased, data-driven process. Advertising, public relations and other forms of communication are highly creative services whose value and return on investment are far more difficult to quantify than the value and ROI of manufacturing equipment or a fleet of company vehicles.

But Thyen also understands the benefits of applying procurement to agency selection and management. “The value is multi-faceted, covering risk-control, performance, results delivery and company-agency relationships,” he says. “Ultimately, we foster success on all fronts.”

The first thing good procurement systems do is level the playing field in agency selection. In the past, most agencies were selected by brand teams whose members sometimes lacked experience working with advertising, public relations, medical education and other service agencies. Some teams provided good briefings and direction; others didn’t. Some invited several agencies to present proposals and considered each with an open mind; others simply gave assignments to agencies they had worked with in the past. Inconsistency ruled, and companies didn’t always hire the best agencies for their needs.

Procurement brought standardization and greater objectivity to agency selection. In some procurement systems, all candidates for a specific piece of business are vetted by common credentialing criteria. Those selected to submit a proposal are given identical briefings and sufficient time, usually five to seven weeks, to prepare recommendations. Presentations are held back to back before a cross-functional group comprising the product team, sourcing manager and others who will play a role in product communications. All members then evaluate each presentation in group conference and through completion of a comprehensive questionnaire.

Other effective procurement systems level the playing field in a different way. Recognizing the artificiality of the traditional pitch (what you see and who you see is never what you get), they match agencies to assignments by carefully measuring each agency’s real-life performance on other brands they service for the company. Attaching quantifiable metrics to the quality of work each agency produces and the overall value of its relationship enables companies to predict future success with an agency better than the flawed pitching process.

This approach puts current agencies of record on equal footing because it uses metrics rather than personal preference to select an agency for a new assignment. Yes, it blocks outside agencies from entering the AOR inner circle, although new firms are brought in when current agencies have conflicts or when partnered brands require it. The goal of metrics-based procurement is to make decisions that most benefit the brand, making it vital for agencies to demonstrate their value in a quantifiable way.

Regardless of how procurement is used in agency selection, among companies that do it well, the sourcing manager orchestrates each step, serving as the liaison between the pharma company and agencies. “We understand the business needs of our company and know how to translate those needs to agencies,” says Thyen, noting that the company provides “direction, clarity, consistency and completion” to the process of matching agencies to business needs.

Once an agency is hired, procurement plays a second vital role by managing the pharma-agency relationship and measuring its performance against objectives. Some companies, such as Lilly, unite the procurement and relationship-management functions within one group. Others have made them separate but allied operations. Either way, staff members charged with overseeing agency relationships and performance provide strategic as well as tactical direction and support.

On the macro scale, this means defining what Thyen calls the “partnership promises,” or what deliverables, values and behaviors the company expects of its agencies. Working with multiple firms allows procurement and relationship managers to spot best practices and viral problems as soon as they emerge as well as the chance to reflect on how each agency is working with the company and where there may be gaps between perception and performance. This removes pressure from product teams, who previously bore full responsibility for agency performance and relationships. It also allows companies to compile and share information on the most effective ways of working with agencies.

At the micro level, the relationship-management function is especially useful in resolving conflict. “By being a step removed from day-to-day operations and understanding how both the pharma and agency businesses work, we often find creative solutions to problems and help everyone keep their dignity,” Thyen says. He notes that Lilly takes a “fix-vs.-fire” approach that requires internal review and mediation before an agency can be terminated. “Most problems can be fixed,” Thyen says. “When they can’t, it’s usually because we had not been engaged soon enough for the trust needed between both organizations.” It also prevents “capricious beheadings,” or the abrupt account loss that sometimes accompanies the appointment of a new brand manager who wants to start fresh with an agency of his/her own choosing. A competent procurement and relationship-management function amasses performance metrics on the incumbent agency that makes such a change difficult to justify unless the agency is truly underperforming.

The agency perspective
From the agency point of view, good procurement and relationship management systems lead to more rational hirings and firings (enhancing agency business stability), keep programs and performance on track and blunt potential problems. They also foster better communications, stronger relationships and mutual improvement of each company’s business practices.

To optimize relationships with companies that use procurement and relationship-management systems, agencies should understand and respect the roles of these functions. Agencies should also:
Differentiate the services they offer so cost is viewed relative to value provided. Agencies that produce commodity work will get treated like commodities and be paid commodity prices.

Build in systems for demonstrating performance, delivery of results, and return on investment. This includes encouraging clients to apply their own or outside methodologies for measuring the effectiveness of an agency’s work against established industry norms.

Address potential problems immediately, whether related to strategy, execution, timing, cost or personnel. Performance and relationships are supremely important, so take the initiative in keeping them on track.

Leverage the two-way aspect of performance evaluations to recommend ways of better meeting both the client’s and agency’s business objectives. If there’s a smart way of streamlining approval procedures or simplifying reporting processes, say so.

In the end, agencies that work with well-designed procurement systems will reject the notion that procurement decisions are based solely on cost and recognize that, done well, strategic sourcing and relationship management yield substantial benefits for agencies as well as pharma companies. As Thyen observes, “The real value of strategic sourcing isn’t in getting a lower unit price. It’s in building productive partnerships with suppliers, jointly producing the best possible work, and continually making improvements that benefit everyone.”

Dale Taylor is CEO of AbelsonTaylor

SIDEBAR: Addressing the Myths of Agency Procurement

Myth 1 Procurement managers are bean counters with no marketing expertise and are poorly qualified to judge what makes
a good agency.

Fact Among pharma companies that do agency procurement well, most sourcing and relationship managers have significant marketing and/or agency experience and understand both the pharma and agency sides. Moreover, because they work with numerous agencies covering many different disciplines, they are well-positioned to identify and apply best practices among their agencies and to nip potential problems in the bud. Their professional experience qualifies them to “judge” good agencies in three areas of responsibility:
1. Which suppliers have the desired credentials for an assignment
2. How well agencies meet stated objectives and expectations once hired
3. How well they work with the company overall

Myth 2 Procurement tries to commoditize services whose value cannot be quantified

Fact It is difficult to assign a dollar value to the benefits of services such as advertising and public relations, which are highly creative and dynamic by nature. Suppliers must, however, identify what results they aim to deliver to a client and develop systems for tracking, measuring and evaluating the benefits of those results. Agencies that successfully differentiate their services and quantify their value help sourcing and relationship managers make decisions on the basis of total value delivered, not just cost.
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