Annual Question Time - 'Is Procurement Prescriptive?':

Who should make the decision and does the process add value?

Procurement and outsourcing groups have many masters to satisfy. Charged with maximising the impact of their purchasing power, they have both internal and external customers. But does the procurement process add value to the marketers and internal customer groups or has process overtaken quality? What are the main drivers for making a purchasing decision? And what are the implications for the suppliers that have to work with procurement groups? At the Pharmaceutical Marketing Society's Annual Question Time held recently at the Reform Club in London, a distinguished panel of leading figures from procurement, pharmaceutical marketing departments and the service industry set out to explore these questions.

• What are the main drivers for making a purchasing decision and who should make it? Is cost the only driving factor or is there a win-win option?
  
• Who owns the relationship with suppliers and what is the value of trust, expertise, and a long-term commitment?
  
• Should procurement be on a global or national basis?
  
• How should suppliers react to the procurement model?
  
• How should marketing departments work with procurement?
  

Back row l-r David Pilley, Ben Davies, Louisa Pau, Carl Emerson, Andrew Davis Front row l-r Steve Mackenzie-Lawrie (PM Society), Gloria Gibbons, Mike Gale (PM Society)

Working together
David Pilley, Global Category Manager for Medical and Marketing Communications at AstraZeneca, firmly believes that procurement can add value if applied correctly "There's a tougher regulatory environment out there, enforced downward pressure on prices, spiralling parallel importation, shareholders increased expectations; not just in terms of delivered profit, but shareholders also want assurances that the company's money is being spent wisely; that there are auditable processes in place to ensure no financial irregularity; sound governance and that the company is seeking best value with their investment a sound procurement strategy is vital."

David passionately believes that if procurement is to be successful in Marketing, those in the procurement department have to understand the needs and drivers of the marketers, the services that they buy and the reasons why they buy them. "Only then do they have the potential to add value."

He believes that procurement departments in isolation should not select Agencies but similarly it is inappropriate in today's climate for marketing departments to be allowed to work with any agency. just because they want to. 'Agencies should be selected by enlightened marketing and procurement professionals working together, to agree a strategy that meets both parties' needs," says David. "That way they will get the right services from the right agency delivered in the optimal way."

"Marketing is a massive spend area that is critically important for the industry to get right. Similarly, the agencies that support us are increasingly reliant on a handful of organisations for delivering a large proportion of their profit. The relationship that exists between the two is key. The relationship must be mutually trusting and genuinely proactive though, in David's view, such transparent relationships are far from being achieved at the moment.

Who owns the relationship? It could be a marketer, it could be a procurement person, but ultimately the relationship is owned by the business. "This means everyone involved in the process should understand how the organisation/business interacts with agencies." As David says: "Most agencies understand their touchpoints with a Pharma company far more effectively than anyone in Pharma understands all their touch points with the agency."

As to whether procurement should be on a global or national basis David is not convinced by the global argument. ". We need to follow whichever option delivers the most sensible solution. A pan-European PR programme delivered by a network of agencies may be possible; a global print solution is probably not. The focus has to be value. Focusing on rate cards should never be the sole focus; repeatedly negotiating down rates will ultimately be counter-productive. An unprofitable agency cannot invest in people with the creative ability and intellectual strengths that you need. It is therefore important to focus on value, not just cost."


Commodity versus skill
For Ben Davies, Managing Director of PAN Advertising, while many elements of the agency's role have remained consistent over last 10 15 years, the introduction of the procurement department to the agency selection process has been a fundamental change. Procurement processes were originally designed for consumables and plant yet, according to Ben, "Good agencies aren't and should not be a commodity purchase - and never can be when there are people and skills involved." Ben also believes that procurement has been a positive factor for agencies and has added value to their business. "It has made us raise our game," he says. "Systems and costs have all been reviewed to make us more efficient. This has also allowed us to improve profitability in some cases."

In the view of Carl Emerson (Contracts Manager for UCB and Chairman of the Pharmaceutical Contract Managers Group) the difficulty with procurement is deciding what is appropriate to pharma business and what isn't. "In pharma, it's not like buying pencil sharpeners," says Carl. "Those working in procurement need to be clear what they are buying. Are they buying a flexible service/relationship or a fixed commodity? It's not just about cost cutting." David Pilley of AstraZeneca agrees: "No one size fits all in procurement. We need to allow for the differences in the commodities and services that are being purchased."

Carl Emerson firmly believes that the mainstream procurement department has a lot to offer, however. They have a tremendous amount of experience, they know how the markets work, and they know the drivers of costs. Yet there is often a lack of understanding of the business. "If procurement achieves a 30% cost reduction, it simply means that 30% of the services are lost and the relationship is messed up." Rick Morton of Westaway Gillis stresses that price and cost can be two different things: "If you drive down price you don't necessarily cut costs from a health economic perspective." This means it is important not to just take a short-term view but to assess long-term costs.

For Gloria Gibbons, Chair of Ogilvy Healthworld in the UK, it is a question of finding a way to measure the value and quality of what an agency is offering. To do this Carl Emerson suggests talking to your supplier: "Ultimately your supplier understands the quality of the service they give." Ben Davies of PAN Advertising adds that quality can be measured by any number of parameters: "If you have enough of them you begin to see a trend and can then get an objective measure."

Clearly clients' procurement processes represent a challenge to agencies. As Ben Davies of PAN Advertising says: "Procurement is not going to go away so it needs to be embraced." Of course there are drawbacks: the procurement process can sometimes seem like a bit of a Dutch auction. In addition, services provided at ludicrously low rates mean that resources are cut and, inevitably, quality suffers. Global procurement deals do not seem to be working: with no ownership at a local level, marketing managers do not own the management of projects on a day-to-day basis, yet the successful agency does not own the project either, having to work to a particular global cost structure. Clearly the needs of the procurement partners are markedly different and this often leads to friction, something that needs to be addressed.


The role of industry
For the client, outsourcing should not be about cutting costs. Andy Davis, Managing Director of Takeda, explains that Takeda outsource all non-core pharma functions while medical and financial functions are retained in-house. This allows for flexibility: "Outsourcing allows us to call in business partners with more resources available," says Andy. "Takeda can tap into the resources of a large agency as and when we need to. The knock-on effect of taking out operational logistical issues is that more time can be spent on our core pharmaceutical business and strategy can be looked at in more detail."

"This means we have responsibilities to our business partners and, on the whole, the industry is not particularly good at this - we don't give good briefs, we always blame the agency when things go wrong, we drive down costs and then complain when we don't get good service." Takeda have addressed these issues by making the two largest agencies they use part of their senior management team, even down to attending board meetings. This means that the agencies can then plan their own resourcing much better. "The procurement departments in Takeda are not about cutting costs," says Andy. "It's about adding value, and value for money."

What can industry do to improve the procurement process? David Pilley of AstraZeneca conducted a survey among 70 account managers in the industry which revealed that top of their list of key factors was the brief - what the client tells the agency and how that information is shared. This means investing time up front to provide a proper briefing document and conducting a proper briefing meeting. Also regarded as important was how much the client understands about the process within the agency, and the relationship with the agency as supplier and partner. Above all, it was agreed that the process requires constructive feedback.

Based on this information, David Pilley is now rolling out training aimed at improving the client/agency relationship. "We need to chip away at bad behaviours and reward changes," he says. Gloria Gibbons of Ogilvy Healthworld agrees that training has a vital part to play: "It is important to provide training for both marketers in the company and the agency on the procurement function, and to educate on best practice." And while it is difficult to extrapolate from other businesses, Carl Emerson would welcome dialogue with other sectors to discover what elements of procurement can be applied across the board. David Pilley agrees: "We need to spend more time looking outward and less time looking in," he says.


Agency advantages
"If the main intention of procurement is solely to drive costs down, then it is questionable whether it will add value to either party. It makes it difficult for agencies to offer good people." This is the view of Louisa Pau of Woolley Pau, who also chairs the Healthcare Committee of the IPA. In her view, the client should see the agency as an ally, because if the agency gets it right then the potential upside for the client is high. It is therefore important to motivate and reward agencies; driving down hourly rates will not achieve this. "There is a big difference between being cost-focused and cost-blinkered," stresses Louisa.

Anne Hinsley of Pharmaceutical Business News questions whether in the past the relative cost to the pharma industry of using agencies has been too high. "Industry may well have paid too much and not been careful enough in appointing agencies," says Anne. "Indeed, industry may still be paying too highly." Carl Emerson agrees that in the past there has been a lot of money in the system meaning there has not been the driver towards efficiency. This raises the question of profit margin. According to Louisa Pau the IPA's view on profit margins for advertising is 20%. "Very few agencies make more than that, and many actually make less," says Louisa. Andy Davis of Takeda stresses that long-term agreements (i.e. for five years with potential breaks) are often front-loaded in terms of fees, and everything is generally open and transparent.

Louisa Pau agrees that in this respect procurement can be positive for agencies. As she says: "It can ensure that contracts are in place, and means that terms of business are agreed, processes set up and expectations assessed." In Louisa's view, good procurement people understand marketing services and work with agencies over the long term. "It is also that case that, because marketing people often move on within a business, procurement people at their best can be the brand guardians and interested in business continuity for the good of their company and their brand."

Ben Davies of PAN Advertising agrees that procurement has advantages for agencies: "Better processes are put in place within companies that mean agencies get paid, and on time." The process also puts distance between financial haggling and the day-to-day work, meaning the relationship between the agency and marketing manager is much better. A good procurement process also encourages long-term relationships. "Good process supports good agencies," says Ben.

Louisa Pau has three tips for agencies working with procurement departments:

• Open up and don't be defensive. What have you got to hide? On the other hand being transparent does not mean you have to tell the client what everyone in your agency earns.
  
• Agencies should come to an intelligently determined price and then be proud of it. If you mean it then be prepared to say to the client that you cannot go below the asking price. There is no rule that says you have to be cheap. The client will then have to come to a view as to whether you're worth it.
  
• Use quantification. Agencies are not good at this. Try and find out what value you have added to your client's business. Are you worth what you say you are?
  Getting results
  

On the issue of bonuses, Gloria Gibbons of Ogilvy Healthworld believes that there should be some element of payment by results if this does not just mean penalise when targets are not hit, but also rewards with a bonus if performance exceeds target, and Louisa Pau stresses that the IPA recommend three relevant measures: business performance; the performance of the campaign (both qualitative and quantitative); and agency evaluation via formal two-way evaluation. Chris Doyle of Affiniti agrees, having himself set up a system of long-term subjective measures combined with varying fees on a three-monthly basis. "It was a complex and arduous process but effective in the long term," says Chris.

Louisa adds that Woolley Pau is often asked by clients about payment by results and has put forward proposals yet thus far no client has taken up the option. This may be because budgets are always tight and companies cannot deal with going over budget, meaning it can be tricky to manage an agency exceeding expectations. Steve Mackenzie Lawrie (Vice - Chairman of the PM Society adds however: "Within the clinical environment it is possible to have payment by results if you plan long term." Andy Davis of Takeda agrees: "A long-term value/reward programme could work well if it were linked to actual sales performance. It would encourage people to want to work with us."

And Carl Emerson of UCB adds a twist: "If an agency wants a bonus on results then that is a good indication of their confidence of being able to achieve that target. That is worth knowing."

When it comes to the pitching process, Gloria Gibbons of Ogilvy Healthworld believes that clients are increasingly asking more agencies to pitch. "Whereas it used to be three or four," says Gloria, "Now as many as seven or eight agencies are asked to pitch." In Louisa Pau's view this is unreasonable, recommending a maximum of four. Ben Davies of PAN agrees, adding that good pitches are run by good procurement departments. "The pitch must be a fair and professional process," he says.

As to whether clients should pay for a pitch Louisa Pau stresses that Woolley Paul always ask for a pitch fee. In her view it makes the client look at their reasons for having the pitch. "The client should ask themselves whether pitching is in fact a good proposition. The question is not whether the agency should be paid but why the pitch is taking place." It may well be that the client is just looking for ideas raising the difficult issue of intellectual property.


Adding value
As for the agency pro-actively engaging in the procurement function, Ben Davies believes that agencies must embrace procurement and work with it, and educate the clients to add value to their role. This will result in a better deal for the agency. Louisa Pau agrees, adding that it is important to get to know the client first. "Often they don't have much experience of working with advertising agencies. For this reason, some of the larger agencies have taken on their own procurement people to deal with the procurement department on the client side. In future we should embrace openness and do all we can to understand our customers." Above all, says Louisa, "Don't whinge!"

The final word goes to David Pilley: "Procurement can add substantial value to business, but a knowledge of marketing is important and the focus should be on driving value, not just cost. If it is done properly marketers and agencies alike should welcome procurement as a process that can be a productive and profitable arrangement for the business. We should not be afraid to experiment with new ways of working."



The next educational event being organised by the PM Society is the summer evening marketing module - Practice Based Commissioning - the implications for Pharma. This module is being held at Haymarket Publishing in London during the evening of Wednesday 29th June 2005. Further details will be available in the very near future.

Held on: 26/04/2005