Contract performance can be a sourcing spot

Because contracting represents such a fundamental — and some even say foundational — element of supply chain management Supply Chain professionals should be seen as the experts in the process. Furthermore, they should live up to those expectations.

In fact, those organizations striving to prevent “back-door, direct-to-clinician or shadow purchasing” by requiring all contracting to be handled by Supply Chain Management generally wield the argument that Supply Chain pros possess the contractual expertise and negotiating skills that clinicians and other administrators don’t.

But as a universal axiom, do they?

Yet Supply Chain pros should not get so carried away about their perceived — self or otherwise — expert status, according to Lauren Dominik, Senior Strategic Account Executive, MediTract.

“Although supply chain professionals are experts in the contracting process, there are many instances in which contracts must be evaluated strategically and not solely as a means to reduce spend on a single product or service,” she said. “Contracts, specifically in healthcare, have multiple compliance aspects associated with them. Key stakeholders must review such contracts to ensure they are in line with regulatory standards. The omission of key individuals in the contracting review process can slow down the contracting process, leading to unnecessary spend, contracting with another vendor to provide duplicate services and increase in internal resource burden. Referral-source-based contracts should be managed with regulatory compliance in mind. Contracting for price without focus on mitigating compliance risks can lead to noncompliance and result in penalties and fines.”

Don’t wait too late

Still, others contend that the challenges actually may be occurring much earlier in the process than the contracting.

“Although the contract itself is created at the end of the sourcing process, perhaps the greatest opportunity to create value and reduce costs takes place at the very beginning — in the identification of the suppliers that will be invited to participate in the RFP process,” said Stephany Lapierre, Founder and CEO, tealbook. “A typical process for supplier identification usually starts with procurement collecting information on the current incumbent suppliers —assuming there are some — and then doing additional research to discover other qualified alternatives. This process may combine information from Internet research, trade journals, analysts, conferences, etc., but research shows that 70 percent of procurement and sourcing professionals feel that their internal peers are actually the most credible source of supplier intelligence.”

Therein lies a problem, Lapierre pinpointed.

“While it is a natural and understandable inclination to want to consult one’s peers when looking for new suppliers, the associated process is time consuming and inefficient — especially considering the fact that any valuable information collected usually evaporates rather than being recorded or stored centrally for future use,” she indicated.

Lapierre applied the “tried and true” 80/20 rule here.

“Eighty percent of the mistakes that will have a measurable impact on costs are made before the RFP process even begins,” she noted. “There is a ‘procurement funnel’ that functions in the same capacity as the funnel so often discussed by sales professionals as they chart the progression of leads from prospective customer to contracted client. They know that there is a significant fall-off between lead and deal. Procurement must plan for the same. Some prospective suppliers will exit the process because they are disqualified, some because they make the decision not to continue in the process, and some because they are outpaced by their competition. The more qualified options procurement can bring back to the decision making team at the end of the RFP process, the better the end result for the company as a whole. Therefore, starting the process with the right suppliers — a sufficient number with proven, trusted qualifications — makes all the difference in the eventual outcome.”

Chris Gormley, CEO, Medpricer, concurs that sourcing has a better handle on price, contracts and the negotiation process.

“Supply Chain professionals are contracting experts and have a holistic responsibility for the contracting process,” he said. “Sourcing is leading the charge across the organization to ensure that the overall value of what is being purchased is procured in such a way that maximizes financial performance with the lowest network or organizational costs. But it isn’t about just getting the lowest price. The needs of the local users also have to be considered and balanced with cost containment and value. Supply Chain Management has the expertise needed to contract, plus they know how to avoid supplier pitfalls that could be missed or overlooked by an administrator or clinician whose core competency is not in contracting and negotiating.”

Gormley posits that Supply Chain tends to suffer from four key problems when it comes to sourcing and contracting.

1. Many healthcare providers overly rely on their [group purchasing organization] contracts and do not pursue enough self-contracting, he asserted.

“In our experience, this leaves a substantial amount of money on the table,” Gormley said. “We have worked with smaller healthcare organizations that self-contracted categories and received prices that were better than the top-tier of GPO contracts, which are typically only available to the largest IDNs in the country. It’s less about aggregation and more about commitment. Suppliers will provide the best price when they know there is committed volume.”

Gormley believes that more healthcare providers decline to pursue self-contracting because GPOs have bundled in financial incentives, such as rebates/sharebacks, that make self-contracting look less beneficial to organizations. Also, they do not have the staff because they have historically relied on GPOs, and they don’t have the tools to manage the RFP, negotiation, contracting process. For these reasons, they find it “faster and easier to just buy off the GPO contract,” he said.

2. Many Supply Chain professionals always go back to incumbents to get price concessions using third-party benchmarks to avoid the time and effort of pursuing a full competitive bid or the cost of changing the incumbent with a new supplier, he said.

“In some instances, this is the right business move,” Gormley acknowledged. “However, it is important to consider new suppliers and to engage in competitive bidding process and at a very minimum this should be done each contractual period. At the end of the day, the competitive market for your goods and services is the benchmark. An organization can still award to its incumbent, but it will have new supplier options to consider, market-based prices from all bidders and an incumbent who doesn’t take its business for granted.”

3. During the contract management process, when the needs of the stakeholders are not taken into account, it can lead to contract non-compliance, he said.

“Stakeholder needs and concerns must be factored into the desired outcome of a contract negotiation,” he said. “If this doesn’t happen, people won’t use the contracts that are put into place. If the contract isn’t being used, savings are lost. For medical/surgical and physician preference items, this isn’t as much of a problem as with purchased services. This is because purchased services has not traditionally been an area of focus and tends to be a more decentralized function, which makes it difficult to get stakeholder input from all local users.” And this happens before any RFP mistake, he added.

4. Supply Chain Management professionals don’t provide enough detail about their needs, volumes and service requirements to the suppliers so they can provide the most favorable pricing, he concluded.

“Many times sourcing groups will short-circuit the process involved with creating RFPs or RFQs and don’t provide enough documentation about what they really want or need,” Gormley said. “Because of this uncertainty, suppliers are not confident they are getting the full picture and will inflate their costs to make up for uncertainty. Then, when suppliers don’t get enough information, they will ask questions to help them get clarification on the details of the RFP so they can best optimize the needs of that organization. When Supply Chain professionals don’t actively respond to these questions, suppliers are unable to create the most competitive proposals.”

Short shrifting the supplier can have serious repercussions, according to Tom Wessling, Vice President, Contracting Operations, Intalere.

“The most common mistake we see is not utilizing suppliers’ knowledge and expertise,” he said. “Many Supply Chain individuals base their RFPs and product selections on what the facility is doing or buying today and not what the facility could or should be doing tomorrow. Suppliers possess a wealth of knowledge to increase the value Supply Chain professionals can bring to the facility and the patients/residents they serve.

“The days of an adversarial role between the Supply Chain professional and suppliers has got to change if we are going to bring supply chain to the forefront,” Wessling contended. “We need to move out of the mentality of the actual cost of an item into the total cost of ownership as it moves through the system both pre- and post-purchase.”

Not accounting for total cost of ownership — particularly involving capital equipment — is a major no-no, according to Jocelyn Bradshaw, Senior Vice President, Strategic Sourcing, HealthTrust.

But that’s one of six that also includes “not fully assessing the operational impact of their decisions; not addressing — or ineffectively overseeing — implementation; not setting the right performance expectations, nor consequences for suppliers that fail to meet them, in agreements; not defining the strategy upfront and ensuring the RFP is tailored to their desired outcome; and not actively managing the addition or discontinuation of products during the term of the agreement,” Bradshaw added.

Tech boom, savings boon?

Once the contracting fundamentals have been relatively honed, the use of technology can play a key role in taking the process to the next level. Technology can bring operational efficiencies and strengthen the contracting process, according to Bradshaw.

Conventionally and traditionally, technology can remove the administrative burden of the process, according to Gormley, by capturing and integrating all data related to the contract and day-to-day task routines, as well as tracking the process, providing visibility into the status of a contract and facilitating reporting and compliance.

“What becomes even more critical for the contract management process is how technology allows you to rapidly accelerate the RFP or RFQ process using live bidding events, which creates competition with suppliers and increases the number of rounds that you can run in a given amount of time,” Gormley said. “In every round feedback is provided to the suppliers resulting in improved contract conditions and significant cost savings. Without technology, most hospital systems can only do one round at most, they don’t have pricing visibility to the suppliers, and the suppliers don’t get any feedback.

Gormley further noted that it can be very labor intensive to do multiple negotiation rounds, particularly when you have to mail out the RFPs, receive them back, return feedback out to the suppler and manage responses. “This isn’t only an auction where it’s only about price — live negotiations include negotiating non-price terms/conditions as part of the live negotiation to satisfy preference and other concerns beyond price,” he added.

Technology also enables contact information storage, retrieval and long-term retention, Gormley indicated.

“Since most contracts are renegotiated every three years, instead of starting from scratch, you can use the original contract and build off of that,” he said. “Or if you have a person in your department that is doing RFPs in a particular category and he leaves the organization, you have to start over because you can’t easily get your hands on all the information and templates.”

Finally, technology can enhance the supplier management process, he continued. “It provides visibility into supplier performance over time that can be used in negotiations. It also improves the supplier communication process by tracking feedback from supplier about how they did. It allows you to collect past supplier bids against RFPs and establish market benchmarks for comparisons,” he said.

“The use of technology facilitates creation of oversight, efficiencies, transparency, cost avoidance and mitigation of compliance risk,” said Stephanie Haywood, Senior Director, Group Account Management, MediTract. “In the ever-changing healthcare environment, use of technology to improve efficiencies is key. The standardizations and efficiencies put in place by a contract management solution and process creates a level of increased control in contractual processes and reduces the risk of potential loss of oversight of agreements going through the process due to volume of contract requests and other daily responsibilities. Technology can eliminate the challenge of a ‘one-size fits all’ contract review process and allow for focus on compliance areas of contracting, including performance metrics, review for Stark Law and anti-kickback statute risks and contractual spend.”

Technology use can facilitate Supply Chain pros managing day-to-day operations as well as planning for the future, according to Wessling.

“Supply Chain professionals need to not only focus on their own metrics and measure but those of the total facility,” he said. “Where is the facility going and how can Supply Chain help get there? Using technology to anticipate and bring solutions to senior leadership of the facility to reduce cost and improve quality will not only improve the contract management process but will elevate Supply Chain within the facility.”

Contract management technology has been available for decades, according to Lapierre, with the earliest types literally e-filing cabinets that centralized contract files and improved searchability by making the contract available across locations and geographies, and highlighting contract-specific metadata such as supplier, expiration date, SLAs, index-based pricing, etc.

“Unfortunately, with competing demands and busy schedules, procurement professionals are no more likely to ‘browse’ electronically stored contracts than they were their hard-copy predecessors,” Lapierre observed. “What we need today are contract solutions that alter the interactions between companies and their contracts, different internal functions, and companies and contracted suppliers. Rather than being solutions designed for holding contracts, they should be information or knowledge management solutions designed to meet the needs and seize the unique opportunities of the contract management process.”

Lapierre advocates for any type of automation that can remove work from procurement’s desk, such as what is being discussed with so-called “smart” contracts. “Why manually compile and monitor a contract when software can do the same?” she asked.

Integration plays a huge role, too. “In order to keep contracts ‘alive’ they must be associated with the business transactions and processes they are designed to guide,” she said. “When transactions and processes are housed in other systems, and integration is possible with a contract management solution, terms such as pricing, delivery obligations, demand projections can be monitored and flagged when they vary from expectations.”

Jones stressed the need for contract lifecycle management software, which “can streamline processes by eliminating steps altogether.” That includes “common bottlenecks spanning contract creation, negotiation, approval and renewal/termination.”

Such software also offers real-time visibility on contract information and not just trigger-based alerts, according to Jones. “Many organizations have contracts scattered across varied business entities or in departmental systems, often locked in filing cabinets or hidden on individual employee hard drives,” he noted. “Traditional filing approaches taken by organizations all too regularly leave key contracts and information forgotten in massive stacks, cabinets or spreadsheets with important obligations missed. With such time-sensitive data and critical information scattered and decentralized, the risks and potential business losses increase exponentially.”

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