The evolution of procurement in pharma

Martin Brass | 10th March 2016

It has become almost trendy to moan about procurement in the agency world. As the wider industry becomes increasingly competitive, clients have started to become more procurement-led, looking for ways to improve margins and efficiencies in their business. The impact on agencies is fewer suppliers on rosters, requests for rate card reductions, and more aggressive payment terms.

I wonder whether the tide is turning and whether there is a new breed of procurement professional emerging in pharma. A more strategically-minded, value-generation focussed professional whose needs are markedly different in 2016 than they may have been 10 years ago. It is becoming more important than ever to build sustainable relationships between agencies and procurement.

From risk-averse to value-generative: how agencies contribute

There is a vicious cycle that occurs when companies stick to a risk-averse, cost-cutting strategy in procurement. It’s something seen time and time again – client tells procurement they must cut costs by 10% this quarter, so procurement relays to their suppliers to cut their rate cards by 10% or risk being replaced. Cutting costs leads to either lower quality work or slower work (remember ‘speed, quality, cost – pick any two’), as agencies in turn try to maintain their own margins. A reduction in quality or speed reduces the value delivered by the agency and everyone loses out. This risks the overall relationship with the client, whose expectations are not met. 

Moving forward, we’re seeing more companies take a balanced approach to improving their efficiencies. Rather than pushing out a cost-cutting strategy alone, they’re looking for agencies to show transparency and to find efficiencies (such as reuse across brands) that won’t affect their high quality, value-generating deliverables. When agencies deliver good work that push revenues up, efficiencies improve.

In a high-churn industry, agencies represent consistency

At Blue Latitude Health, we are currently working with a number of different brands whose brand teams have entirely turned over at least once during the time we’ve been working with them. This is not uncommon in pharma, who like their staff to have a broad range of experience. This means that often, we represent consistency in the brand teams. If every time there is a change of client, there is also a change of agency, there would be a massive impact on the efficiency of the brand.

Consider this: A recent study from the Bedford Group revealed that the average relationship between a client and their agency has declined from 7.2 years (in 1984) to 5.3 years (in 2005). Today the average client agency relationship is thought to be less than 3 years.  

If it takes (say) about 3-4 months for a new brand manager to get fully up to speed, and another 6 months to run a pitch process for a new agency, what’s happening to the brand in the meanwhile? Given the time involved in on-boarding a new supplier and the loss of quality and brand share resulting from the churn process, is this actually better value long term?

More and more, procurement is recognising these trends and (in my experience) saying no.

The key is building long-term, sustainable relationships

I wonder whether part of the reason for the animosity between agencies and procurement is down to this shift toward shorter, more fragile relationships. Rather than acting as a trusted advisers to the brand team, agencies are treading carefully, worried that their contracts may be cut short for any small perceived misstep. Removing any room for error is incredibly damaging to the relationship, and it leads to lack of innovation and more mediocre work.

On the wall in my office, there is an open letter from Bill Bernbach (one of the original Mad Men and founder of DDB) to his colleagues at Grey Advertising, where in 1947 he wrote,

“The danger lies in the natural tendency to go after tried-and-true talent that will not make us stand out in competition but rather make us look like all the others”.

I believe the same words are truer today than they ever were.

Moving into 2016, are we seeing a shift back toward the type of relationships between agencies and brands that will imbue excellence and help our clients’ brands to stand out and blaze new trails? 

 

Read more about how we work with brand teams in our special Perspective magazine supplement.

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