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Transforming life sciences contract management operations into sustainable profit centers

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Globally, life sciences companies spend anywhere from $700 million to $1 billion annually on contract management operations and systems. These systems process billions of dollars’ worth of transactions, thousands upon thousands of contracts, and pay out an estimated $80 billion each year in rebates and discounts. This also results in immense pressure on pricing and contract management functions to prevent revenue leakage and profitability while managing increasing complexity of contracts as well as stringent compliance requirements.

It is safe to say then, given the volume of dollars and contracts involved, that for any company to get part of this operation wrong, even marginally, would likely have a dramatic impact on profitability. Small wonder, then, that so many life sciences companies are investing heavily to upgrade their contract management operations and systems.

What is surprising, however, is that many of these companies appear to be doing the same things again and again, year after year, while each time hoping for a different result. That is, they hire consultants on a one-off basis who then analyze systems, suggest upgrades, and implement system enhancements. But these enhancements are often almost immediately inadequate in the context of rapidly changing technologies, regulations, markets, product developments, and business objectives.

Many of the same disruptive forces that are impacting product development and evolving markets and global economies are also undercutting the effectiveness of organizational best practices for life sciences companies. The winds of change are only getting stronger and more dangerous in ways that require corporate leaders to look seriously at entirely new contract management business models.

Contract management costs are escalating. Chargeback and rebate process costs alone are projected to rise up to 50% over the next five to ten years. New business models, intense pressures on margins, and increasingly complex and evolving regulations and compliance requirements are further stressing on contract management operations for life sciences companies.

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Inconsistent membership rosters, incorrectly validated pricing, and duplicate, incomplete sales data rank among the most common points of vulnerability in these systems. We continue to find significant inaccuracies, housed within ever-increasing volumes of client data, whenever we use advanced analytics to assess these systems. Yet most organizations continue to be victims of revenue leakage, often caused by inadequate operational data, technical failures, and issues related to personnel.

Barriers to change

Contract management systems and analysts, when it comes to upgrading processes with the need for continuous assessment and improvement, can be roadblocks to progress due to their inability to harness advanced data analytics. One major factor in this is that data analysis and insight generation, for many companies, are isolated by department or function.

Traditionally, contract management has been regarded as a discrete area of operations, not to be integrated with critical information from marketing, sales, economic forecasting, or contract compliance. Furthermore, low-quality data plagues contract management systems because membership data is frequently incomplete or erroneous.

Regulatory changes, such as the Affordable Care Act and 340B (Drug Pricing Program), place new requirements on legacy contract management systems. Now, pharmaceutical manufacturers need to guarantee that covered entities are receiving designated pricing for approved drugs. Unfortunately, this is not always the case. In other client assessments, we have found multiple customer records for a single customer, rebates given for products no longer on the market, and chargebacks awarded to the wholesalers based on incorrect customer sales.

The wave of consolidation in the life sciences and healthcare payer industries also poses data integration problems for the newly combined entities. Sorting out customer reporting and management responsibilities, or simply determining which customers get which of the merging companies’ products, could bring many systems to their knees.

Contract management organizations may be managed by isolated employees who have been doing the same thing in the same way for far too long. These days, contract management must be an integral part of enterprises’ business strategies and risk management plans. Legacy staff may not have the financial, intellectual, or management resources to develop and implement a sustainable transformation of contract management operations.

Choosing the right solution

Many companies have been trying to renovate contract management processes in-house. Ultimately, what these companies often find is that they are tinkering in piecemeal fashion and at considerable cost with systems and operations requiring a broader, enterprise-wide approach to be successful. Our experience delivering proven, scalable, measurable results to 15 of the top 20 global life sciences companies demonstrates that wholesale reengineering of the operation is necessary in order to implement a sustainable contract management solution.

This revamping must be designed to develop and implement an integrated, end-to-end solution based on a continuous improvement process that enables companies to erase data silos, reduce isolated information gathering, simplify processing and reporting systems, and evolve into a state-of-the art and cost-effective profit center.

The first step is to identify the target outcome for the process. This can be margin expansion involving price and revenue management, or a range of risk-mitigation objectives. The process team must begin by identifying the appropriate metrics for each target outcome. This involves a careful assessment of information gathering and existing analytics across the enterprise in order to clean up and validate the data the company uses. This can include marketing and sales, key performance indicators, contract analysis, benchmarks, compliance, and performance metrics.

We call this process Data-to-Insight. It leads into the second step in the process, which is designed to improve and develop enhanced, ongoing visibility into existing processes. What information is available? How complete, clean, and valid is the data collected? Are collection and analysis systems well integrated? How can systems and data be upgraded so that the company has a complete, useful, scalable, cost-effective, and technologically advanced enterprise-wide program? These are the types of questions that, once answered, provide visibility into operating processes.

The second step also involves running analytics on the data to create insight into the targeted operations. We call it Insight-to-Action. As shown in the chart, there will inevitably be some data consolidation and master data preparation. The result, the ability to perform pricing and contract analytics faster and at scale, enhances customer profitability, increases revenues, and supports compliance. Other key results include far more useful and reliable operational reporting, and more effective monitoring for claims processing.

As shown in the chart, this continuous improvement process then uses the insights produced to improve the execution of the targeted practices, which can include contract request automation and setup, web-based tracking and workflows for membership updates, and more efficient handling of changes and exceptions. The assessment and resulting insights can significantly improve the timeliness and accuracy of contract audits for leakages and overpayments.

Once a company understands and develops its data capabilities to maximum efficiency and usefulness, it can use the resulting enhanced insights to make more intelligent, fact-based decisions. This Data-to-Insight-to-Action process means integrating the right technology along with the right analytics and the right processes—a tall order for many companies, since it first requires asking hard questions of people, teams, and departments across the enterprise. From there, it involves investigating the answers openly, and embedding the proposed solutions in the organization and running them at scale.

This requires not only relevant technologies but also advanced analytics, qualified staff, and sufficient, clean, and valid data. It requires total buy-in and support at all levels of the organization. Only then can the enterprise develop a continuously insightful, data-based program that includes prioritizing areas for predictive analytics, reviewing the impact delivered, and creating a test and learn environment for continuous improvement.

If the new contract management framework does not produce an embedded methodology for continuous improvement and sustainability, the company will have wasted a good part of its effort—it will be leaving money on the table, in effect, having squandered a variety of revenue and cost improvement opportunities. Any truly effective transformation will necessarily include a roadmap of an evolutionary process that leads to continuous improvement.

The Lean Six Sigma framework offers the methodology for continuous improvement, in this, as in other, management processes. It can help ensure that analytical models and reporting are continually refined to improve customer management and provide critical new information to secure better outcomes from contract negotiations. To emphasize, Intelligent OperationsSM offer a pathway to ongoing efficiencies and enhanced profitability. They enable organizations to continuously learn from prior iterations, sense changes to their operating environment, and respond dynamically by setting and achieving target metrics that are progressively refined and always aligned with business outcomes.

Why it is worth it?

The impact of Intelligent OperationsSM on enterprises can be startling. Optimizing price and revenue management can improve margins up to 5%. Clients may realize, for example, that their rebate and discount programs are too generous or inconsistent; at all events, rationalizing them based on solid market data will yield significant savings. We have seen contract management operating costs lowered by close to 50%. At the same time, companies enjoy significant revenue improvements across the contract management value chain. Pricing negotiations and account segmentation both become more accurate and effective. The offer-to-contract cycle shortens. Managing exceptions and monitoring compliance becomes more efficient. Regulatory and compliance problems and violations are minimized, and it becomes easy to track purchasing performance and rates of compliance against forecasts. All of this greatly enhances risk management and makes a company more alert, agile, and competitive.

How do you get there from here?

While life sciences companies are justified in closely guarding their contract management data and processes to protect competitive advantage, it is also true that companies in general have great difficulty transforming this complex operation without help. A knowledgeable, proven partner can discover and determine deficiencies, prioritize solutions, and help implement optimal processes in a way that, quite simply, companies find very difficult to do on their own.

Building a sustainable framework requires ongoing monitoring and more transparent communications than many companies are accustomed to. This is another reason why an outside perspective and presence can be invaluable. Increasingly, companies are finding that advanced operating models that include offshoring or near-shoring all or a significant part of their contract management operations to a trusted partner offer tremendous cost savings and efficiencies that are not possible in-house. A partner with proven experience can streamline operations and increase efficiency by up to 50%, freeing up capacity to undertake strategic projects and perform more complex analysis to support contract management.

Whereas, ten years ago, this solution would be unprecedented and unlikely, today, by increasing the overall competitiveness of contract management, business process outsourcing and reengineering can offer significant opportunities and rewards for global life sciences companies.

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