"Hi, Jay, this is Julie Smith, VP of business development for Acme Pharma Services. You may remember that we met at the recent pharmaceuticals conference and trade show in New York. Jay, we’d like to talk with you about becoming one of your preferred suppliers for…”
These calls are not uncommon, and their implied message seems to be that there are certain criteria that can be “checked off” to elevate a contractor to some mystical status or list intended to assure future business. In reality, the “list” may or may not exist. Getting placed on such a list, even if it does exist, is not usually the result of meeting some easily defined objective criteria. More likely, it is the consequence of long-standing, demonstrated performance, as well as the desire on the part of both the contractor and the sponsor to invest in the relationship. This article examines those key factors that can influence a buyer to consider a contractor as “preferred,” and the implications of such status for both the customer and the supplier.
What is a “Preferred” Supplier?
Among the definitions given for “preference” is “the act, fact or principle of giving advantages to some over others” and “priority in the right to demand and receive satisfaction of an obligation.”(1) If I, as a buyer, have a preferred supplier, it implies that I give that contractor advantages over other suppliers – most likely in the form of business.
The concept of being a preferred contractor may have different connotations, depending on one’s responsibilities. To a salesperson, it probably increases the likelihood of receiving more of a certain customer’s business than the salesperson’s competitors—that is, the customer is giving this contractor advantages versus other suppliers. To the buyer’s internal customers, the end users of the product or service being sourced, a preferred contractor may simply be a firm with which the buyer would like to do business, as opposed to a firm with which it has had bad experiences, or perhaps no experience at all. Such situations reflect a certain comfort level with incumbency, whether or not such incumbency is in the customer’s best interests. The buyer-seller relationship may, without any negative experiences to influence it, gain its own momentum. Changing this momentum (that is, changing to new suppliers) requires organizational energy that may not be readily available. Thus many incumbents over time become de facto preferred suppliers.
As a purchasing professional, I take a different view of the preferred contractor classification. Such status should be conferred intentionally and thoughtfully. If such a relationship offers the contractor the advantage of more business, then it is fair to ask, “What are the advantages offered to the customer?” The real benefit to the buyer is not in having preferred suppliers. It is in having suppliers for whom the buyer is a preferred customer—that is, a customer whom the contractor will favor over other customers. In other words, the contractor will not treat all customers the same; the contractor will take care of a preferred customer before taking care of another customer. This type of preference is proven only over time and thus most preferred customer-contractor relationships evolve through incumbency.
For either party to consider the other “preferred,” each has to be willing to invest time and energy into developing the relationship. Over the long run it is the quality of the relationship that is really going to result in better value for both parties. Because it will require an investment, the decision to have a preferred contractor (or customer) in the first place—regardless of which company it is—should be driven by business requirements. If the supply base and market conditions can provide the buyer with the quality and value that is needed at the place and time it is needed, there may be no incentive to have “preferred” suppliers for a particular product or service. However, if such an analysis leads to the conclusion that having one or more preferred suppliers is appropriate, then which firms get selected?
The major reason for choosing to develop and have preferred suppliers is the extent to which they can provide the customer with a competitive advantage in the customer’s marketplace. In this context, “competitive advantage” means the ability to provide the customer with a unique product or service, or a degree of quality or value that is otherwise not available to the customer’s competitors, or is not available from other suppliers. Michael Porter discussed this at length more than 15 years ago: “Competitive advantage grows fundamentally out of value a firm is able to create for its buyers that exceeds the firm’s cost of creating it. Value is what buyers are willing to pay, and superior value stems from offering lower prices than competitors for equivalent benefits or providing unique benefits that more than offset a higher price. There are two basic types of competitive advantage: cost leadership and differentiation.”(2)
Many suppliers still do not understand this concept. A frequent question I ask while evaluating pharmaceutical contract research organizations (CROs) is “What competitive advantage will you offer me as a customer?” Very often the question is met with blank stares, or a response is offered that addresses how the contractor will maintain the confidentiality of my work. In these cases I respond that I consider safeguarding confidentiality to be a prerequisite of doing business, and that what I’m asking about is what the contractor can offer me that is not readily available to my competition. The ensuing facial expressions often reflect utter disbelief!
Methods of offering competitive advantage can take many forms. While most favorable commercial terms may come to mind first, note that Mr. Porter alludes to customer willingness to pay higher prices for unique benefits. Examples might include access to the supplier’s most talented staff, first right of refusal on plant capacity, favorable intellectual property licensing or ownership rights, prototyping new technology, in-country presence or expertise or a supplier’s willingness to forego working on another customer’s projects for the same pharmaceutical indication.
Does this mean that all suppliers have to offer competitive advantages or preferences to certain customers? Not at all—the decision to do so or not is a strategic choice. A business plan to treat all customers the same is honorable and can especially benefit smaller customers. However, unless such a contractor truly stands out from its own competition in terms of uniqueness or value, its status of incumbency is always at risk of another contractor coming along who is willing to offer certain customers preferential treatment.
What is a Buyer Looking for In a Preferred Supplier?
Developing a preferred contractor may be as simple as a joint decision to further the relationship with an incumbent supplier, or it can be one step in a lengthy and complex contractor selection process. In either case, the buyer desires an excellent contractor in a collaborative relationship. We should try to address what this “excellence” looks like.
Within the pharmaceutical industry, internal customer requirements are generally quality, timeliness and value (where “value” is a cost-factored analysis of the previous two factors), usually in that order. A preferred contractor would address all three of these aspects (quality, timeliness and value) continually. The attributes discussed below intentionally constitute a very high standard. A preferred contractor will have systems in place to achieve and then exceed this bar (i.e., continually setting new standards of excellence). Throughout this discussion, note the emphasis on systemic approaches to the work, as opposed to intermittent, or person-based, approaches.
What “Excellence” Looks Like
The critical outcomes of quality, timeliness and value can be measured in three areas that cover the full range of customer-contractor activities:
Project (or Work) Execution: This is the underlying reason for the existence of the working relationship in the first place—what was outsourced and who was hired to deliver the work. In addition to all technical aspects related to the scope of work (e.g., patient recruitment, scale-up of a custom synthesis, GMP packaging and labeling), it includes all required deliverables such as product, analyses, reports and so on.
Work Administration/Management: This area deals with the non-scope-related activities associated with executing the work. Generally this includes activities such as communications, budget management and order/ shipping/billing activities. These are the types of activities that, if not well-managed, can get in the way of the work and distract customer/scientist time away from the customer’s important core work processes.
Commercial Arrangements: This area deals with the commercial terms and conditions associated with agreeing to do the work. From a work process perspective, the usual intent is to negotiate and gain agreement to these early in the relationship, and then let the work proceed without having to address these concerns much if at all, during the course of the agreement.
Let’s examine the most significant attributes for each critical outcome in each of these areas:
Project (or Work) Execution
Flawless work (rarely, if ever, requires correction, follow-up or rework due to errors on the supplier’s part)
Continual improvement programs exist to improve the quality of work over time. (For example, the contractor is aware of FDA, ICH or other regulatory trends and is investing in the equipment and know-how to be on the leading edge of changes.)
Ongoing, regularly-used, performance feedback systems regarding contractor performance (as opposed to occasional checks, or “no news is good news”). Positive performance is acknowledged and commended; poor performance is recognized and confronted before it becomes a problem.
Performance metrics for the contractor’s work on the sponsor’s projects are identified, used regularly by the contractor to monitor performance and regularly discussed with the sponsor (e.g., meeting patient recruitment targets, development reports delivered on time or process effective yield).
No rework is ever required for administrative interactions between sponsor and contractor (e.g., report formats, invoicing, shipping).
The contractor has continual improvement systems to make its administrative systems more robust and/or easier to interface with from a sponsor perspective (solicits customer input).
Attention to detail: the contractor understands that poor performance in this area can raise questions in the sponsor’s mind about attention to quality in the overall scope of work. (For example, if billings are routinely incorrect, might this inattention extend to batch records or lab notebooks?)
Confidentiality is never an issue. The contractor protects sponsor information and vice versa.
Contractor will do whatever it takes to make things right (within reasonable bounds of fairness to both parties). No one ever has cause to ask, “What does the contract say?”
Commercial terms and conditions are written in a manner aimed at ensuring accountability to do the right thing, but do not get in the way of doing the work.
Project (or Work) Execution
Timelines exist and are shared proactively with the customer.
The contractor always meets or beats timelines, looking for ways to improve the speed with which services can be performed over time (without compromising any other aspects of the work).
All administrative issues are handled promptly.
Invoicing cycles are responsive enough to forecast current spent-to-date amounts and to ensure that bills are paid within a reasonable timeframe of the work performed.
The contractor exploits the use of reasonably available technology to accelerate information flow, including voice mail, e-mail, web portals and videoconferencing.
Requests for proposal (RFP), proposals, contracts, confidential disclosure agreements and other documents move quickly through supplier’s administration.
Contractor understands the amount it has been budgeted for the work and manages the budget as if it were its own.
Contractor tracks work completed, spending and billings to date, and forecasts work and costs to completion. Overspending by the contractor doesn’t happen. If additional funds are required this is discussed proactively with the customer.
Contractor benchmarks its offerings and performance with the industry, and demonstrates a knowledge of its competition in terms of capability, quality and cost, then uses this to offer best value to its customers.
Shared risk: Is the contractor willing to put its profit at risk if the project doesn’t move forward? This is not intended to put the supplier’s existence at risk any more than the customer’s. However, it does challenge the notion that the contractor will profit whether or not the client’s project moves forward from development to commercialization. Rework or extra work on the supplier’s part due to contractor inefficiency or mistakes (including overspending due to poor cost management) shouldn’t cost the customer. Examples of shared risk include no requirement for upfront monies, supplier-owned inventories, cost-savings/ sharing programs, “at-cost” development work, etc. (All of this is with an understanding that the customer will treat its suppliers fairly and has a vested interest in mutual, long-term success.)
Financial terms that favor awarding work to the supplier. This could be due to the contractor being the benchmark “best value,” providing tiered pricing or rebate arrangements based on volume of work, etc.
Customer is not ‘nickel-and-dime-ed to death’ for every cost issue along the way.
Achieving the critical outcomes of quality, timeliness and value is not dependent upon having preferred suppliers. Business requirements in these areas can often be met by one-time suppliers, particularly in the case of “one-off” purchases. Buyers need to recognize that no contractor may be able to deliver it all. Suppliers need to decide in which areas and with which customers, if any, they will focus their efforts. It may take years to develop the relationship (and the inherent benefits to both the contractor and customer) characterized by the attributes discussed above. For those customers and suppliers willing to invest in such a relationship, three key factors must be managed aggressively: alignment, Resources and communications. The attributes associated with each of these factors can be analyzed along the same dimensions as the critical outcomes.
- Project (or Work) Execution
Systems are in place to ensure that the customer and contractor clearly understand and are aligned on the scope of work and the manner in which it will be completed before work begins. This is particularly critical in those cases where the customer may not have the in-house expertise to fully comprehend the scope of what is being requested and what it will take to accomplish the work. For example, “virtual” pharmaceutical companies that have never developed a process in-house may not understand the complexity of route scouting or methods development.
In a preferred customer-contractor relationship, the axiom “the customer is always right” does not hold true. The customer depends upon the expertise that the contractor brings to the table. Thus, if the contractor does not understand why the customer wants the work done in a certain manner, or the contractor thinks it has a better approach, this should be discussed. If the customer’s desires prevail, there should be mutual agreement as to why this is appropriate, as well as a clear delineation of the responsibilities and liabilities of each party. Examples include situations where a customer is outsourcing scale-up of chemical process and can’t afford the time in its clinical development program to pursue an alternate synthetic route.
- Work Administration/Management
Because this is a “preferred” relationship, senior managers from both organizations talk with each other regularly about the general performance of the work, the quality of the relationship and the business direction of each, in regards to how this could affect future work. Neither party waits for the other to initiate these discussions.
The contractor is responsive to changes in the sponsor’s administrative systems (e.g., enterprise resource planning systems such as SAP or Oracle).
Business ethics are never an issue. The contractor understands the customer’s principles and behaves accordingly.
- Commercial Arrangements
The contractor demonstrates a willingness to accept contractual terms that are favorable to the buyer while being fair to both parties.
Contractor affiliates will work with the customer on the same terms as the supplier. This promotes growing and extending the business relationship.
- Project (or Work) Execution
Contractor resources are dedicated to the customer’s business, sufficiently adequate for the work required and the management of the relationship. The customer is able to influence personnel selection, how they work and where they focus.
The contractor takes a project management or team approach to the customer’s business such that counterparts know each other and work closely together, yet have clearly identified leadership and overall accountability for the work.
- Commercial Arrangements
Capital investments and equipment required for the customer’s work are discussed well in advance, with clearly agreed upon strategies for who will purchase, own and maintain the equipment or facilities.
The contractor demonstrates a willingness to invest in new equipment at its expense as a means of growing its own capabilities (e.g., adding a mass spectrometer to an analytical lab).
- Project (or Work) Execution
The status of work is communicated regularly and routinely. There are no surprises. The customer hears about problems as quickly as if it had performed the work in-house.
- Work Administration/Management
Communications occur routinely across levels and functions between the customer and supplier.
Procedures for routine written, electronic, verbal and face-to-face communications at the customer/contractor worker level are understood and occur regularly, not just when problems arise.
Functional counterparts (e.g., customer purchasing/contractor business development, accounts payable/ receivable) know each other and converse regularly to understand how the work is going. These discussions are prompted by the supplier.
Entering into a preferred customer-contractor relationship needs to be a data-based business decision on the part of both parties. It should not be taken lightly, as the level of startup and ongoing commitment that is required can be substantial. Customers will often make the mistake of assuming that since they are outsourcing to an expert in the field, they can forget about having to manage that particular piece of their business. What they are overlooking is the importance and value of interpersonal relationships in accomplishing work, particularly the complex work of pharmaceutical development. While it may take less time to manage the day-to-day business that is being handed over to an external supplier, the effort required to understand and gain alignment with expectations and objectives, coupled with that required to build strong relationships, can far exceed that required for in-house work.
Both the customer and contractor must ask each other and themselves, “What do we expect to get out of a ‘preferred’ relationship, and what are we willing to invest to get it?” This is not the same as buying something over the counter at the local hardware store, or buying a used car. In these cases, it may be fair to assume that, because I am paying a certain sum of money, I have a right to expect a well-defined product or service. This is easy in one-off consumer transactions. In preferred business relationships however, both parties may have significantly greater expectations of the other that are largely information-dependent. So if the customer expects to get information, giving information up front may be critical.
The need and willingness to share information leads to the issue of trust. Before entering a preferred relationship, both the customer and contractor need to be willing to share information with each other that they might not normally share with another customer or supplier. A customer attitude of “do it this way because I said so and I’m paying for it” is a power play that does not yield effective long-term results. Jordan Lewis addresses this in detail in his book, Trusted Partners—How Companies Build Mutual Trust and Win Together: “…[C]ompanies that wield purchasing power over their suppliers, like modern Napoleons, get hostility in return. They also receive much less value from those suppliers—in terms of inferior costs, quality, technology, cycle time and more—than do firms that develop trust with them.”(3)
Issues Facing Industry
The dynamics of the pharmaceutical industry can both promote and hinder the development of preferred relationships. Favoring such arrangements are the long lead times associated with clinical studies and development, which result in firms working closely together over extended periods. The frequent, almost universal requirements for confidential disclosure agreements can promote open discussions about the customer’s business direction and what is necessary for both the customer and contractor to be successful. Working with the same contractor over multiple projects may lead to a de facto preferred relationship even though the desire for such a relationship may never have been expressed openly.
However, in such situations, parties should periodically ask themselves, “Am I in this relationship because it’s right for my business today, or simply because I ended up here over time?” In the latter case, although it may be awkward and time-consuming to leave a mediocre incumbent relationship and pursue better value, it may be the right long-term business decision.
There are also adverse factors within the industry. Turnover of personnel on both sides of the customer-contractor fence, including both technical leaders as well as business development personnel, is a problem. It gets in the way of developing strong interpersonal relationships that lead to collaborative customer-contractor interactions. It can also lead to buyers moving business from one firm to another to stay with a person who has provided good service in the past. This is why it is important for suppliers to make sure that they meet the customer’s critical outcomes with systemic approaches versus key person-dependent methods. Another issue facing suppliers is being flexible enough to deal with a “dyed-in-the-wool” big pharma manufacturer that wants everything done a certain way, as opposed to a “virtual” pharma company that is pursuing its first lead compound and does not know how to get started.
The benefits to a customer for having a preferred contractor that can deliver the critical outcomes of quality, timeliness and value to the degree discussed earlier are significant. The contractor that wants to be “preferred” needs to consider if it can afford to make this level of commitment to one or more customers. Is it in a position to offer a competitive advantage to a customer? Can it do so without compromising its own strategy or other business relationships? The buyer willing to consider a preferred contractor needs to ensure that its internal customers really understand the commitment they need to make to develop and maintain the relationship.
The investment required by the customer and the supplier, in terms of time and effort, may be larger than either expected. In return, such performance may result in a long-standing profitable business relationship for both.
(1) Webster’s Ninth New Collegiate Dictionary, Merriam-Webster Inc., Springfield, MA, 1991.
(2) Competitive Advantage. Porter, Michael E., Free Press, 1985, p. 3.
(3) Trusted Partners. Lewis, Jordan D., Free Press, 1999, p. xv.