Excellent relationships are the key to success in life—wouldn’t you agree? So why, when I reflect on contract manufacturing organizations (CMOs) working with pharmaceutical companies, do I see a major gap in capability and focus in this all important area? I don’t actually have a definitive answer to that question, but I do have some thoughts on how CMOs and pharmaceutical companies can get great value from their relationships.
Let’s explore this gap in detail.
Category Management
First, CMOs need to understand the processes and tools by which pharmaceutical companies manage their procurement activities—a process collectively known as Category Management.
Category Management is a generic process that is used in many big companies today. The basic approach is simple. Pharmaceutical companies split all the money they spend on products and services into common chunks, or “Categories.” From the pharmaceutical company’s perspective, CMOs are usually one of those Categories (often split into 2 Categories: API and other CMO outsourcing). For any Category, the pharmaceutical company has to understand its context and what needs to be delivered—amount and structure of spend (both past and future), analysis of the market, and an in-depth understanding of the true needs of the business from the Category. From this collected analysis, the pharmaceutical company formulates and agrees upon a strategy. The aim is, of course, to execute that strategy to generate a required set of benefits (savings, secure supply, innovation, etc). Figure 1 shows a schematic of how these elements fit together and flow through to delivery of benefits.
Figure 1.The execution of a Category strategy is achieved through 1 or more of 3 channels:
- Strategic Sourcing
- Stakeholder & Customer Activities (internally facing initiatives)
- Supplier Management
Relationship management falls into the third channel.
Different companies use different models for Supplier Management, but they all have 4 elements in one form or another:
- Performance Management (performance against Key Performance Indicators (KPIs) reviewed on a regular basis with action plans for improvement)
- Risk Management (risk is the overriding factor for pharmaceutical companies, and outsourcing is a high priority. Therefore, we see a focus on all types of risk— supply, SHE, Quality, Corporate Social Responsibility (CSR)— so that they are understood, mitigated, and managed)
- Relationship Management (the tools and processes to manage the relationship, usually focusing on structure and frequency of meetings)
- Supplier Improvement (usually only a feature of true partnership arrangements but the processes by which the industry drives continuous improvement and innovation)
Figure 2 illustrates a 4-box model for Supplier Management including the KPIs that can be used in each box.
Figure 2.I hope that you noticed the subtle comment under No 3? "Relationship Management" as described by the establishment and use of "hard" skills—tools, processes, structures for meetings, etc. Most often the soft skills of relationship management, including listening, influencing, empathizing, and so on, are not highlighted and thus become lower priorities.
Now we begin to see how the gap has appeared—focus on "hard" skills (process, tools, standardized meeting structures) at the expense of soft skills. And do not think that this is a pharmaceutical company-created problem; the CMOs and other suppliers are just as guilty in pursuing their strategies, training "hard" negotiating skills, and not focusing proactively on the essential soft relationship skills.
The 5 “Secrets” of a Successful Relationship
We have briefly reviewed how the pharmaceutical industry works regarding sourcing, and we can see how the structures and disciplines used can distract both sides from enhancing and leveraging the relationship fully. Our next question might be “So, what are the secrets of success?”
Well, truth be told, there are no secrets: it is in all of us if we only recognize it and use it.
First, the answer is not to change the "hard" skills. These skills are important for having good supplier management as long as a balanced approach is taken that also highlights those soft skills. You might think that changing the structures, tools, and processes that your customer imposes on you would be a good way to progress, but, apart from anything else, pharmaceutical companies are notoriously slow to make changes of this type. You have to face up to the fact that you, as a CMO, are stuck with what the customer has put in place today. What you actually need to do is to establish a healthy balance between hard and soft skills.
Before we go further, we should consider how pharmaceutical companies segment their suppliers as this also influences how you can achieve better relationships. Most procurement organizations in large corporations will segment their supplier base to enable them to have the right focus and use time and resources more effectively. Suppliers do the same thing by looking to segment their customer base for the same reasons. The lesson here is to be sure that the position in segmentation that the customer gives the CMO is compatible with the position that the CMO gives the customer (discussion of this is very often a taboo topic in the relationship—all know it is there but no one wants to raise it).
Different models are used for segmentation of suppliers—3 tiers, 4 boxes, etc. A typical 3-tier model that I tend to favor divides suppliers into Strategic, Core, and Basic segments against a set of procurement and business criteria. The nature of the business between CMOs and pharmaceutical companies (high business risks, long-term business cycles, high barriers to change) means that there is most often a desire to have a true strategic partnership established between them (from both sides). It is for that reason that I will continue to explore the relationship conundrum in this context—leveraging a partnership. However, the principles I am describing are equally applicable to "Core" relationships although the depth and complexity of the relationship will not be as great. Thus the factors below can be the foundation for a recipe for success within any CMO/pharmaceutical company relationship.
Five considerations are important factors for success.
1. Clear Understanding of Ambitions
This is the "segmentation challenge." Almost every CMO will aspire to be a strategic partner with its pharmaceutical customers. However, the customer may or may not have the same aspiration. If the pharmaceutical customer has a radically different positioning to the CMO (not seeking a strategic relationship), then the CMO is "whistling in the wind" in terms of making significant progress towards the relationship it aspires to. Put plainly, having common aspirations for the overall relationship is a prerequisite for forming a great relationship. You would be amazed at how many times this simple question is not addressed by the supplier or customer (possibly because the customer does not want to demotivate the CMO and the CMO does not want to risk getting an answer it does not want!).
2. Common Philosophies
Having established a common goal, the partners can progress to building and leveraging a great relationship. A common CMO mistake, in my experience, is to focus immediately on “value add” activities such as close collaboration, innovation, and focus on Total Cost of Ownership (TCO). The flaw in this approach is that focusing on these “value add” stages prematurely will not gain traction if the “basics” have not been firmly established. The “basics” I am referring to are quite simple and can be summarized as “solid performance” consisting of:
- Green KPIs
- Secure and reliable supply
- Appropriate costs
- Managed risks
The cost issue, in particular, is often one that the CMO will want to avoid for fear of pressure on pricing. However, like it or not, cost is one of the key criteria for the customer and thus forms part of building a strong relationship.
Ultimately, there has to be sufficient overlap in the ambitions of each company to enable true progress. Each may not fully agree with the other’s position but needs to understand it, and there should be a degree of acceptance of any disagreements.
3. Intellectual Arrogance
An acquaintance of mine from the pharmaceutical industry coined the term “intellectual arrogance” to summarize the general mindset and behaviors of pharmaceutical companies. Simply put, pharmaceutical companies can often behave as though they know best in every respect, and, therefore, expect the CMOs to fall into line and do as they are told! If this approach is mirrored from a supplier perspective, a difficult relationship will develop. Intellectual arrogance is not likely to change anytime soon, and so it must be navigated.
I should stress at this point that I am not criticizing any company or suggesting that intellectual arrogance is a completely bad thing; I am merely describing what I have observed many times in many different scenarios.
So what is the point? It is important for a CRO to recognize this intellectual arrogance, accept that it will not fundamentally change anytime soon, and work out ways to navigate it in a positive, constructive way. My experience is that CMO personnel either become submissive for a quiet life or react strongly, creating a friction-charged situation. Neither of these positions makes for a healthy, balanced relationship.
My next "secret" gives some clues for mitigating the difficulties generated by intellectual arrogance.
4. Early and Open Communication
Communication is clearly one key to all of this and can easily be the subject of a number of articles on its own. However, the way both sides communicate or, more precisely, their attitudes towards communication, are important. Stephen Covey tells us that we must first seek to understand before we seek to be understood (The 7 Habits of Highly Effective People). This lesson is also true here. On both sides, the players must listen first rather than dive straight into selling their position. Once each side understands where the other is standing, progress can be made towards meaningful and productive dialogue and mutually beneficial solutions.
The other point to make here is the “early and open” part. CMOs often do not like to admit there may be a problem. They aim to solve it and then tell their customer about the problem and the solution at the same time. This is actually counterproductive when the goal is to develop and maintain great relationships. Being open builds and keeps trust. Communicating an issue early enables both parties to bring their combined knowledge to bear on finding the best solution.
5. Personal Chemistry
Much has been made of the need to avoid the trap of a relationship’s success being solely the result of 1 or 2 individuals. Indeed, the relationship between 2 companies must be able to continue to survive and prosper as individual players enter and leave the relationship over time. However, this does not mean interpersonal chemistry is not important. If you have individuals in place who genuinely “click” with each other, leverage it while you can because it’s a true win/win. The trick is to ensure that the personal relationship is not all that defines the soft parts of the partnership.
One final “secret,” or maybe a pitfall to be wary of, is how one moves from a suboptimal relationship that may exist today to the perfect one that I am imagining. If you recognize that you want to change the way you work with your customers (or suppliers) by rebalancing the hard and soft aspects, do not make an overnight change in approach without discussing it or at least putting up some signposts. Otherwise, your speaking partner will wonder what has happened and be suspicious of this sudden change. You need to promote dialogue on the areas I highlight above (the 5 “secrets”) as well as demonstrating in your actions over time that you are changing. Simply, find direct and indirect ways to signpost to the other side that things are changing, and will continue to do so, as you make the journey together to a more effective relationship.
In Summary
The key to truly great relationships between CMOs and pharmaceutical companies is having a good fit-for-purpose “hard” framework within which both sides can deploy excellent “soft” skills. Figure 3 illustrates this.
Figure 3.By achieving that balance, everyone wins and life is more successful for all!
Kevan Reeve has over 30 years of real life, commercial experience, 13 years of which have been spent in Big Pharma procurement managing global sourcing from CMOs and procuring direct materials for manufacture. Since leaving AstraZeneca, Kevan has worked successfully in helping others to be better with their incoming supply chains, with a focus on building successful relationships.