Analytics enabled contract management solutions

Recent advances in analytics are making contract lifecycle management (CLM) solutions both functionally appealing and cost-effective to a wide range of companies. The reason is that analytics facilitates an understanding of future liabilities and accruals, while also measuring the potential value of each account (both purely financial as well as strategic) and negotiating discounts commensurate with that value.

Contracted accounts include governmental agencies, pharmacy benefits managers (PBMs), health maintenance organizations (HMOs) and group purchasing organizations (GPOs). Analytics-enabled CLM solutions integrate and leverage information about these accounts captured from third-party data providers such as market share and competitive formulary evaluations, along with account/contract-specific performance and discount data. By processing all of this information in proprietary, equation-based, what-if models, a next-generation CLM solution can protect pharmaceutical manufacturers from the risks of entering into relationships with accounts that do not meet profitability targets while fully exploiting the potential of high-value accounts.

By pre-qualifying accounts in the pre-contract phase, analytics can help determine the discount levels that should or should not be offered to achieve the desired business results. By the same token, by monitoring existing contracts, analytics arms companies with the information they need at their fingertips to make better decisions.

In short, a CLM solution that incorporates an analytical capability can anticipate the value of future contracts, and ensure that existing contracts perform to expectations, thereby empowering pharmaceutical manufacturers to:

• Minimize discounts paid.
• Optimize the return on discounts paid.
• Leverage account and contract information to increase the effectiveness of sales and marketing campaigns.
• Use contract analytics to better forecast financial commitments and liabilities.

Minimize discounts paid

The importance of minimizing discounts paid to accounts cannot be overstated for the simple reason that in terms of overall expenses for manufacturers, discounts are generally second only to sales and marketing. In fact, for large and small manufacturers alike, 80 percent of product sold flows through contractual agreements that stipulate the payment of discounts that can climb to over 40 percent of the gross sales. As a result, for the largest manufacturers, it is not unusual for discount expenditures to exceed US$3 billion per year.

Analytics can minimize the sums paid out in discounts by ensuring that contracts are not signed – and discounts not provided – to accounts that do not exercise a significant level of control over market share for the products covered. In addition, analytics can determine if discounts paid under existing contracts are commensurate with this level of control. If not, discounts can be reduced or eliminated when contracts are renewed.

Not to be overlooked is the fact that an analytics-enabled CLM solution can continuously monitor contract performance and ensure that terms associated with discounts are, in fact, met. If not, adjustments can be made that minimize expenditures. If, for example, an account fails to garner the market share required in the original contract, discounts can be cut.

Optimize the return on discounts paid

In addition to reducing dollars paid out in discounts, analytics can be critical in ensuring that the return on discounts paid is optimized. An analytics-enabled CLM solution does this by ensuring that discounts are allocated according to the ability of an account to deliver pre-agreed sales volumes or other relevant market performance information. In other words, analytics can ensure that accounts with greater influence over their markets are given greater discounts because they are more likely to sell more products – which, of course, translates into greater profitability for the manufacturer.

Equally important, with a robust analytical capability, manufacturers can determine if market conditions and account-specific attributes will enable accounts to become more productive if discounts are increased – and conversely, whether cutting discounts will or will not impact sales volumes. For example, in cases where pre-authorizations are under negotiation, accounts will be constrained relative to a competing account whose providers do not face this market obstacle. By calculating the actual costs of pre-authorization – in terms of lost market share, volume and profitability for the manufacturer – analytics can deliver the intelligence manufacturers need to monetize the impact of a pre-authorization in order to make the determination of whether the discount required is worth the increase in sales. This information can then be a key factor in deciding the impact of increases or decreases in discounts paid.

Leverage account and contract information to increase the effectiveness of sales and marketing campaigns

The analytics models that empower manufacturers to minimize discounts and optimize their value are all driven by account and contract data, as well as third-party information pertaining to market conditions and formulary access environments. Next-generation CLM solutions further leverage this resource to help manufacturers determine how to increase the effectiveness of their sales and marketing efforts.

Knowledge of the formulary access environment and the account’s market strength in a particular geographical region, for example, can enable sales force tactics to be adapted for specific needs. If formularies are non-restrictive, for instance, the sales approach may emphasize that fact; in more restrictive environments the sales tactic may focus more on the product, with messages aimed at mitigating the impact of the formulary barriers.

If an account requires pre-authorization and the manufacturer does not want to operate with this condition, they can restrict their sales efforts accordingly. After all, it makes little sense to sell to accounts who cannot meet operating mandates. This same logic can be applied to restrict marketing dollars for products in regions of the country where health plans do not support that product.

Use contract analytics to better forecast financial commitments and liabilities

Analytics also optimizes revenue by ensuring that liabilities are always controlled. And, with more complete information about liabilities, analytics can then empower pharmaceutical companies to better forecast their financial commitments. This is accomplished by the accurate assessment of revenues and liabilities both at the level of specific contracts and in aggregate across all contracts.

Once the parameters of a contract have been established either before or after signature, it is necessary to develop a clear understanding of expected performance of that contract in terms of both revenue and rebate or discount liabilities. This forecast must be based on determining the impact of various parameters that have an impact on each contract. At one level these will be contract-specific details of pricing and discounting structures. At another level there are the pricing decisions that impact all contracts. Also there are market conditions of economic, competitive and regulatory impacts that need to be brought into the analysis. Each of these levels provide another layer of understanding, each contributing to an improved view into the expected performance and expected liability of the contract. At the granular level the evaluation of the contract offers insight into performance of that specific contract and its terms and supports the correct decisions regarding individual contracts.

Furthermore, this contract-specific analysis can become a contributor to a higher-level system-wide analysis. This produces a view of the overall revenue implication across all contracts. This aggregate analysis becomes fundamental to establishing both an accurate financial picture of liabilities and revenue across all contracts for future quarters as well as an accurate assessment of strategic and market assumptions. Furthermore, a systematic and repeatable approach to forecasting liabilities allows for a post-contract review of the actual results with the previously forecasted results to remove systematic biases and incorrect assumptions from the contracting process.

Analytics optimizes revenue

More is only better when it comes to account, market, and formulary data if there is a means to take action: the more actionable data available to a manufacturer, the greater their ability to minimize the amounts spent on discounts, to optimize the value of discounts offered, and to boost the effectiveness of sales and marketing efforts. But these benefits can only be achieved if a manufacturer is armed with an analytics-enabled CLM solution that can convert the data into actionable information.

This next-generation approach to sell-side contract management can optimize revenue by enabling manufacturers to better forecast liabilities and accruals, qualify accounts, negotiate better contracts, control how discount dollars are allocated, and create a flow of information that can be used to boost the effectiveness of sales and marketing expenditures and the performance and productivity of staff members.

What it comes down to is this: with a single solution, pharmaceutical manufacturers can minimize expenditures in their largest cost centers and, at the same time, optimize new revenue streams. Clearly, analytics-enabled CLM is a solution that warrants serious consideration by any manufacturer seeking to maintain and garner market share.

David Blumberg is the Executive Vice President of Fulfillment Services at I-many, the leading provider of contract lifecycle management solutions.