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Disconnected business processes in contract administration, managed markets, rebates, sales compensation and related areas cause waste and inefficiency for company management
Imagine a pharmaceutical manufacturer that has been growing successfully using its own proprietary revenue management system to track contractual agreements with its partners, pay rebates and incentives, and track other finance functions.
One day the company notices an increase in the number of unauthorized deductions from its distribution partners that’s cutting away at its revenues. Most companies, faced with this challenge, would seek out a chargeback solution to automate the process and safeguard their revenue. They’d implement it and call it a day. Problem solved, right?
Maybe not. By focusing on just the problem itself, this company fails to identify other impacted departments and processes that should be addressed at the same time it’s solving the chargeback issue. Consider the many departments and employees this problem would touch:
Accounting would probably be the first to recognize the chargeback issue and set in motion the effort to find a solution. At the same time, customer service or an account manager would be tasked with smoothing out the situation and managing the relationship with the partner. Your contract department and sales team would need to reconcile direct sales to chargebacks and returns, creating a potential gap in assessing performance and compliance.
As you can see, even a seemingly localized issue can ripple outward into other parts of the business fairly quickly and pervasively. In addition, revenue leakage, largely attributable to mismanagement of pricing incentives and reconciliation processes, costs pharmaceutical manufacturers an average of 4.4% of revenues annually, according to IDC Health Insights.
For high-growth companies, the situation is even more dire: a rapid-growth enterprise can see its exposure increase to more than 13% of revenues if its supply chain is not aggressively managed. For a company with $1 billion in revenues annually, these percentages amount to anywhere from $44 million to $130 million left on the table due to inefficiency.
This example is indicative of a widespread issue brewing in the pharmaceutical industry that has been limiting manufacturers’ ability to grow revenues and draining profits from their bottom line. This problem has been fueled by the constantly shifting regulatory landscape and the increasing need for deeper insight into the inner workings of revenue and pricing.
The challenge stems from new ways that manufacturers have been forced to operate. Previously siloed functions, such as contracts, pricing, and compliance, are, by definition or requirement, too interdependent not to be considered in concert with one another. Yet in many companies, they aren’t, and that exposes manufacturers to significant business risks and operational inefficiencies.
The problem, quite simply, is in how these companies solve problems. More often than not, organizations solve issues in isolation, ignoring the ripple effects of any one problem throughout the company. The first step in rectifying the situation is to take a step back, recognize the other connected functions, and incorporate those into the discussion, creating a holistic remedy across the entire organization.
Let’s first examine why so many companies still operate in silos, then explore the reasons why isolating processes is no longer a sustainable business practice, and finally introduce the methods that organizations can implement to solve this problem in order to retain more revenue and position themselves for continuing growth.
Why isolated business processes are a losing strategy
In today’s large life sciences companies, it’s not uncommon to see isolated operations. One team handles contracts, another covers managed markets rebates, a third group monitors chargeback processing, and yet another team might oversee Medicaid and government pricing.
With multiple little islands managing information and building their own stores of business intelligence, however, these companies have limited visibility into their overall processes and how their interdependencies impact the bottom line. Each group typically maintains its borders and doesn’t extend beyond its specific purview.
It’s easy to see why companies would drill into a single issue. They’re looking for the best solution to a problem, so they limit their focus to find the optimal route. It’s the old adage: “If it ain’t broke, don’t fix it.” But by tackling a pain point head on, they may address the specific issue with a solution that’s ultimately short-sighted and poses serious business risks.
The interdependencies in any organization’s finance and compliance functions demand a broader view of the issue to truly resolve the problem and optimize the system. Here are three examples of how disjointed departments can derail your revenue growth:
1. Government compliance
Pharmaceutical manufacturers are forced to keep up with the relentless litany of regulations from various government agencies. They must complete and file a host of monthly, quarterly, and annual calculations and simultaneously monitor pricing to covered entities in order to remain compliant. Keeping an eye on all these processes is no easy task and requires a team with a range of specialties.
Unfortunately, the individuals responsible for handling these government pricing functions often work in different departments and communicate infrequently, and even then, only in narrow terms. This creates operational hurdles since calculating pricing and maintaining compliance require comprehensive data or insight from a number of internal divisions.
Organizations need to pool data for pricing calculations in order to reconcile current discounts and develop incentives that are based on chargeback information. They need visibility into the top-line perspective out of their ERP system, their direct sales perspective, as well as their different rebates, whether managed care or back-end customer rebates.
In the absence of managing all that data under one roof, it becomes difficult to join different sources of data since systems can vary in the way they represent customers, products, and even dollar flows. This data is typically gathered from disparate silos, such as chargeback systems, ERP systems, contracting systems, financial systems, and all too frequently, spreadsheets or some other loosely cobbled together manual solution.
Consider, for example, how 340B Drug Pricing Program compliance can quickly create unintentionally disjointed views of a transaction. Customers that qualify for discounts under the program are likely identified with a DEA reference for original sales, but the same entities might later be referenced with a 340B identifier. This change could signal a refund of overcharges or another similar payment. In addition, the original chargebacks that caused the overcharge refund might be processed in a system completely separate from the system where the refund is issued.
In order to simply maintain compliance, organizations routinely invest significant effort, assets, and time in gathering and verifying data from these myriad disparate systems. In the event of discrepancies or data anomalies, companies have to go back to the originating system to fix it. Even worse, they sometimes fix the data in their compliance solution.
The result is disorder that could lead to costly mistakes and serious compliance violations. Solving an issue in any one of the many systems used by the average pharma company can create a number of new issues when it comes time to reconcile pricing information.
2. Gross-to-net and performance optimization
Just as for regulatory compliance efforts, organizations need to pull data from a multitude of systems to explore gross-to-net profitability and downstream price impacts. From a business intelligence and analytics perspective, these areas allow organizations to see the interrelated trends and drivers in their revenues, including details about product or customer performance.
At most organizations, however, this need is hampered by a number of roadblocks on top of the siloed systems and different representations of data. For example, the levels of accuracy and parity can vary across each of the systems, and users combining data might not know where data originated or the process used to gather it, limiting its value.
When organizations gather their data to try to get a holistic view of their business performance, such as through a downstream data warehousing strategy, it takes much more time and effort than should be required. Even then, once all the data is gathered, there may be errors from a manual system that can distort the information the data reports.
For instance, if identifiers change or if new identifiers are introduced for tracking customers, products, and contracts, companies have to make those changes in multiple systems. This creates a risk for out-of-sync data and a misunderstanding of the impacts those different transactions have in different systems.
3. Reporting for sales rep compensation
Maintaining isolated systems can even impact payroll. If the sales team is incentivized based on pull-through and other metrics, many organizations have to look across disparate systems to find the information about who’s eligible for what incentives.
Even beyond incentives and compensation, maintaining isolated systems makes it difficult to assess employee performance at all since information about sales rep efficiency and effectiveness must be gathered together from these different systems, again with no guarantee that the final product is accurate due to the varying representations of that data.
How to solve the problem
The new environment for pharma manufacturers means that their business processes and data-driven insight into those processes are inextricably linked. Companies need to recognize the interdependencies of downstream and upstream processes, and as a result, take an enterprise approach to core functions of master data, contracts, transaction management, and compliance. An integrated approach leads to more effective and efficient analysis and supports better decisionmaking.
Instead of silos of information run by different users and carrying different data formats, manufacturers should compile a unified contract repository for all their agreements with partners, integrating their contract management with the management of complex pricing scenarios and compliance automation.
This approach reduces the amount of time spent calculating and filing, diminishes the risk of out-of-sync data, and frees up previously occupied resources, all by streamlining and standardizing contract management procedures, defining and automating the execution of pricing scenarios, and supporting improved analysis and compliance reporting.
It’s tempting to attack just a single pain point when it appears, which is why most companies operate that way. It takes a forward-looking management perspective to recognize that these functions are all interconnected and that companies that target individual processes are really doing their business a disservice.
Here’s one example from a global pharmaceutical manufacturer: As business grew, it had trouble juggling compliance, contract milestones, and pricing execution because it tracked these functions in limited and error-prone spreadsheets that couldn’t scale as quickly as the company was growing. Rather than seek out a quick fix for compliance, contracts, or pricing individually, however, this organization wanted a comprehensive solution that would improve its performance across the board.
After automating its systems on a single platform, the manufacturer was able to increase the speed and accuracy of its transactions, more effectively identify process bottlenecks, and gain more insight into the performance of its agreements and B2B relationships. Its staff, once focused on tracking and updating spreadsheets, now fulfills more strategic business functions.
By taking an enterprise view of contracts, pricing, and compliance, and sharing data across applications, companies can gain deeper and more relevant business insight. A suite-level system reduces risk by housing data, processes, and information that would otherwise be managed in multiple different platforms. Efforts are managed and supported around common master data, eliminating the need for employees to learn various skill sets to understand and integrate so many different systems.
Both from an IT perspective and an allocation support perspective, a single enterprise platform can be managed by a smaller team that allows companies to narrow their focus. Such systems become easier to adopt within the organization as well as offer easy maintenance and reduce the cost of ownership.
So seek out a unified enterprise solution that can integrate your contracts, pricing, and compliance efforts to create one source of master data that’s always up to date and accurate. Favor systems that offer automation and customized analytics so you can quickly grasp the current state of your business.
Companies that fail to recognize the risks of operating in silos could watch the problem get worse before it gets better, as they are likely losing revenue or, worse, setting themselves up for major fines and reputation damage as a result of non-compliance.
As the industry continues to face stricter, more complex, and continually changing regulations, as well as a need for more holistic insight, pharmaceutical companies must take a big picture view of their company and implement tools to help them see it that way. Only then can they successfully manage the pharma industry’s many challenges, grow and protect their revenue, ensure compliance, and remain competitive.
ABOUT THE AUTHOR
Jon Smith is Director of Industry Development at Revitas, a provider of integrated Enterprise Revenue Dynamics (ERD) solutions for contracts, pricing, and compliance that drive higher profitability and lower risk. He also writes for The Revitas Blog at http://blog.revitasinc.com. For more information, visit www.revitasinc.com.