Branded Pharmaceuticals Embrace Spend Management

November 2, 2006
Pharmaceutical Technology, Pharmaceutical Technology-11-02-2006, Volume 30, Issue 11

Branded pharmaceutical companies have long been immune to the cost pressures faced in other industries. With robust research and development pipelines, long periods of patent protection to ensure continued high margins, and a regulatory environment that has virtually eliminated the threat of overseas competition, pharmaceutical companies have traditionally considered spend management an afterthought. Recent changes in the pharmaceutical industry, however, have begun to erode Big Pharma's once-imperious position.

Branded pharmaceutical companies have long been immune to the cost pressures faced in other industries. With robust research and development pipelines, long periods of patent protection to ensure continued high margins, and a regulatory environment that has virtually eliminated the threat of overseas competition, pharmaceutical companies have traditionally considered spend management an afterthought. Recent changes in the pharmaceutical industry, however, have begun to erode Big Pharma's once-imperious position.

Chris Merchant

Increased competition from generic drugs, shrinking R&D pipelines, a less favorable regulatory environment, and other supporting factors have led to significant top-line revenue pressure for branded pharmaceutical companies. To remain profitable, they must make spend management a priority. Spend management is the fastest, most efficient way to reduce risk, optimize resource management, and gain competitive advantage in the global marketplace.

Lynn Crouse

Consolidate purchasing power

Many large branded pharmaceutical companies were created by numerous acquisitions and mergers and they maintain separate business segments that perform different functions for the overall company. This decentralized nature often leads to missed opportunities to maximize purchasing power by consolidating spend. By pooling spend in similar categories such as plastic bottles and packaging materials, companies can take advantage of increased market power to negotiate significant cost reductions. Savings of 18–25% are a realistic target across most categories.

Establish common spend-management processes

Pooling spend for increased market power is easier said than done. Many companies face multiple challenges in understanding where they spend their money: multiple Enterprise Resource Planning systems that house spend data detail, spend leakage in cases where business segments may be purchasing off-contract, procurement team members who are not aware of others within the global organization that have similar spend categories, and decentralized business units. Overcoming these obstacles requires significant change management and the implementation of technology and best-practice processes that can help drive results. Individual procurement team members must understand how they can collaborate with others across the organization to effectively manage spend. They must have knowledge of the company's sourcing process and a combination of technology, commodity expertise, and services they can use to acquire the goods and services they need at the most competitive combination of price, quality, and service.

Focus on an end-to-end solution

To generate savings that are measurable and sustainable, companies must manage spend throughout the contract lif cycle. For example, a negotiated contract might not prevent business stakeholders from continuing to purchase from a noncontracted supplier or buying off-contract when they need items that fall under spend thresholds that require approval. So, companies must establish standard processes for negotiating and authoring contracts and put mechanisms in place to ensure that stakeholders purchase from them.

In addition, establishing a single system through which supplier interactions can be managed throughout the procure-to-pay cycle can greatly reduce the cost of transactions and drive organizational efficiencies that further enhance the bottom line.

Make spend management a priority

Pharmaceutical companies have a long history of focusing on tactical buying rather than on strategic cost-reduction opportunities. It is important not to understate the level of effort required to overcome a history of myopic tactical focus. Companies that embark on a spend-management transformation must ensure they complete a thorough organizational assessment and have top-down support before beginning the journey. A thorough evaluation of an organization's people, processes, and technology will ensure that the transformation is successful.

With the right combination of technology, commodity expertise, and services, pharmaceutical companies can launch and execute effective spend-management strategies that enable them to manage the current challenges they face and prepare their businesses to compete in the future.

Chris Merchant and Lynn Crouse are members of the Strategic Sourcing group at Ariba, Inc., cmerchant@ariba.comlcrouse@ariba.com

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