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Custom Contracts: The challenge of compliance versus flexibility

October 24, 2012

Those responsible for contract terms often encounter demands for more flexibility. There is frequent conflict between the demands for ‘compliance’ (which most take to mean rigid standards and templates) versus ‘flexibility’ (which seems to mean high levels of custom drafting).

Is there no other way, no middle ground between these positions? That was a question that my friend Craig Guarente and I recently discussed, based upon an article entitled A Strategist’s Guide to Personalized Medicine. Based on this conversation, Craig wrote the following.

The Strategist’s Guide offers an interesting look at the healthcare industry and how pharmaceutical companies are using metrics and market segmentation to drive the business and increase profits.   In the article the authors describe how there is a movement in big pharma to create medicines that are more personalized.   For example, there are medicines that are designed only to treat cancer in people with a certain gene. In fact, there is an example cited where a medicine was only effective in 25% of the test patients.  In the past that medicine would never have come to market but in this case the drug company segmented the cancer patients into smaller groups.   This drug was approved based on its effectiveness in that 25% group.

Contracts professionals can draw some parallels from the experience of drug companies developing “personalized medicine.”  In fact, I’ll go so far to say that we as contracts professionals need to develop more “personalized contracts.”   Okay, okay, maybe I won’t go that far, but there are lessons to be learned.

The authors write that pharmaceutical companies “recognize the competitive advantage that could accrue from a segmented customer base with structures, processes, and capabilities to match. They are just unsure about how to leap ahead into practice.”  Does this sound familiar?  The IACCM best practices call for contracts personnel to first look at the market when designing processes, tools, and terms.  We must understand our customer base (internal and external) to ensure we can meet their demands and provide a quality agreement that is acceptable to both sides.   You can’t have a one size fits all approach to contracting if you are buying from or selling into different markets with different competitive forces and pressures.

The challenge for contract professionals, and in particular those in the medical/pharmaceutical space, is how we can guide the business to take advantage of these opportunities rather than following a course that is dictated to us.  The IACCM offers a large knowledge base and a host of research topics that can guide us through the process.  In fact, I’ve used this research as both an in-house contract practitioner, a functional executive, and now as an outside advisor to other companies.  The IACCM’s “Future Of Contracting” research and analysis has provided me with concrete examples and strategies in my work helping companies and organizations advance up the value chain.

Traditional thinking has us believe that we must create one process with one contract to obtain maximum efficiency, lower costs, etc., or alternatively that we must offer custom negotiation in order to be ‘responsive’.  In truth we should work on creating one option within a particular segment.  If one contract will work for 25% of your customers without negotiation then that is something worth pursuing.   This doesn’t mean you ignore the other 75%.  Quite the contrary,   perhaps there is another contract vehicle that works for other segments.  In the end, what would you rather have – a portfolio of contracts that are easily accepted by distinct customer or supplier groups, or one contract that is highly negotiated or creates significant dissatisfaction in a high percentage of your transactions?

Planning is also important.  The authors write, “To be successful, they [drug companies] will need to take into account three elements of their current reality: First, the prospects for innovation; second, the right value proposition; and third, the capabilities needed to deliver on that proposition.”  The same assessment must occur within your contracting organization, be it in finance, legal, or operations.   One area where leaders often stumble is in assessing the organization’s capability to deliver.  If you are segmenting your customer base into high value and low value, then one natural outcome will be the need for increased business acumen and contracting skills for those people on your staff handling the high value contracts.  Unfortunately, just wanting to deliver a good product/contract is not enough.  Your team must be able and willing to produce.  If you have an existing organization that might mean undergoing an assessment to analyze how close you are to being able to deliver your goals.  You shouldn’t go live with a new contract or process if you won’t be successful.

Another parallel to draw is the connection between data and action. We in contracts often attend to the squeaky wheel first.  We find ourselves to be firefighters going from emergency to emergency extinguishing the latest business bonfire.   A better approach would be to use hard data and analytics to analyze your market before engaging it.

To be successful, “pharma companies will need to emphasize diagnostics — which, historically, has been a very different business from pharmaceuticals.”  Again, does this sound familiar? Contracts personnel are often of the mindset that every contract and every negotiation is different.  Every attempt to quantify or qualify is met with resistance.   We need to break through this barrier once and for all.  There are scores of examples of contract organizations using proper diagnostics before going to market.   These must become the norm if we are to continue our climb up the value chain so we are brought in to discussions and not merely informed of decisions.

The IACCM’s research clearly shows the need for the contracting profession to not only use, but also embrace, technology and analytics.  It is not that we should use technology for the sake of technology.  Rather, technology and analytics enable us to truly analyze our business and offer insight that executives may not have.  We can help our companies make better decisions, seize untapped opportunities, and avoid pitfalls.  Through years of research, case studies, and practical application, the IACCM had developed a bevy of information that can be used within any industry.

I will leave you with two final quotes, each of which could well be applied to the contracts, legal and procurement community.  First “Personalized medicine could also require changing hearts and minds because it affects the character of an enterprise.” And, “many of these innovations must overcome the medical community’s profound resistance to change.”   Inertia is a powerful force and the more data you have, the more likely you are to move your organization.

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