GETTING VALUE From Vendor Relationships

Most information professionals with responsibilities for content acquisition worry about how to stretch their limited budgets - and the headaches involved seem to get more and more severe each year. Vendors are gaining more market

So, how do information acquisition professionals avoid developing chronic migraine in their endless pursuit of delivering more for less? Doctor's orders are relentless focus on the following:

* Taking a strategic approach - getting your information acquisition vision and corporate goals aligned

* Developing excellence in the art of negotiating

* Actively managing vendor relationships so they deliver what you want

Taking a Strategic Approach

As the information industry consultancy, Outsell Inc., pointed out in one of its recent reports, "Many Information Management (IM) functions are putting the cart before the horse, rushing to create . . . services without first articulating exactly what role IM should play and why ..."

To avoid getting into that type of situation, one must step back and look at the bigger picture, asking these two fundamental questions: "How does published information content contribute towards the objectives of my organization?" and "How should published information content contribute towards the objectives of my organization?"

For the Anglo-Swedish pharmaceutical company, AstraZeneca, where I work, the answer is that published content helps key decision makers make faster and better decisions and thereby speeds up the R&D processes as well as improving the quality of the R&D pipeline. This, in turn, contributes toward a reduction of total costs throughout the value chain. Consequently, if the library in AstraZeneca is not adequately convinced that a particular information resource helps the company become faster, better, or more cost-effective, AstraZeneca will not licence the content.

In fact, a direct link exists between corporate strategy, functional strategy, the priorities of the library, and the published information content we ultimately license. For example, AstraZeneca's corporate strategy involves obtaining industry leadership through growth. Part of the R&D function's response to that is to pursue growth in new areas, such as diabetes and biologicals. As a consequence, the library will licence information content that supports those areas.

Corporate strategy ultimately drives which sources we license. But AstraZeneca also develops an information acquisition vision to support the corporate strategy. Having an information acquisition vision can help stakeholders focus their energies and resources toward a common goal and thereby - hopefully - create unstoppable momentum. To achieve that level of buyin, three key requirements need to be met.

First, the vision needs to be shared among stakeholders. At AstraZeneca, we achieved this by developing the vision with key stakeholders to ensure shared ownership. Second, we need to align our vision with other relevant visions and strategies within the company to ensure a conjoined approach. Finally, the vision should be based on key value drivers applicable within the information content acquisition space.

The term "value drivers" refers to the key methods of creating value through content acquisition. AstraZeneca defined the following value drivers:

1. Good old-fashioned haggling and negotiation. Value can be created by resisting vendor- imposed price increases, combined with increasing the size of deals with vendors, e.g., by pursuing multiyear deals and/ or buying journal archives - as long as it results in a substantial saving on one-off document delivery requests.

2. Working smarter. AstraZeneca staff spend a lot of time and effort performing contractual work and negotiation. Working smarter is a source of value creation in its own right. Evidently matching the level of resource used to the value of the contract is good practice. Also, AstraZeneca found that developing its own standard terms and conditions was a time saver. While most vendors will not adopt a customer's terms and conditions wholesale, almost all will negotiate individual clauses. Once a legal principle has been agreed upon, AstraZeneca can then instantly suggest contractual wording, without ad-hoc, time-consuming consultations with the legal department.

3. Vendor relationship management. For those complex, high-value vendor relationships, one can derive value by consolidating the relationship to create more equitability This can also put the buying organization in a better position to tap into the vendor's innovative capabilities. And this can create value for the entire organization rather than necessarily reducing content spend. Such value, when recognized, may even lead to a higher content budget.

4. Demand management and streamlining. Value can be created by ruthlessly canceling sources that only add marginal value. Work towards integrating information into workflows for a more seamless decision-making support. Try to ensure that the buying organization derives the maximum usage of services licensed under flat fee enterprise agreements. Demand management and streamlining is essentially about "doing the right thing, and doing it smarter."

Based on the value drivers outlined above, AstraZeneca's information acquisition vision is to "create a competitive advantage by driving the way AstraZeneca licenses, manages, and exploits published information content."

Strategies, linked to each of the value drivers, have been developed to move AstraZeneca forward towards its stated vision. For example, linked to the Working Smarter value driver, we have put processes in place to ensure that the right amount of internal resource is deployed to enter into contracts, and the negotiation of some agreements has been outsourced altogether.

Sir Winston Churchill once said this: "However beautiful the strategy, you should occasionally look at the results." This certainly holds true when it comes to effective information acquisition. Internal and external environments change constantly. Consequently, a great strategy from 2 years ago may have become ineffective in responding to new environments. To avoid having its information acquisition strategy become obsolete, AstraZeneca regularly ensures it is aligned within these areas:

* The supply market

* The organization

* Priorities of internal customers

* Resources

* Management preferences

* Corporate vision

If, for example, a reorganization means fewer resources and different management thinking, the strategy must adapt accordingly.

Developing Excellence in the Art of Negotiating

Much has been written in the negotiation literature about the importance of developing a good Best Alternative to a Negotiated Agreement (BATNA). A BATNA basically identifies the point at which you would be better off not reaching an agreement, because the alternatives are more attractive. You have three key reasons for identifying your BATNA:

1. Effective business decisions cannot be made without knowing what the alternatives are.

2. Knowing your BATNA helps you avoid being pressured into an agreement that you will regret later.

3. BATNA forms an integral part of an effective negotiation strategy.

Brainstorming is one effective technique to develop a BATNA. Consider what you would do if the vendor you plan to negotiate with did not exist. What alternative products would you subscribe to and at what likely cost? Consider what the other side's BATNA might be, as well as what assumptions you both might be making about your BATNAs. The vendor might need your business to break into a new market segment or simply to stay financially afloat.

In addition to brainstorming techniques, business analytical models, such as Porter's 5 Forces [Porter, Michael E., "How competitive forces shape strategy," Harvard Business Review, March/ April 1979], can be used to develop an effective BATNA. The model explores how the following competitive forces impact an industry or market:

* Power of buyers, including your own organization

* Substitutes for the services provided by the market under analysis

* Power of vendors

* Barriers to new entrants

* Industry rivalry

When analyzing the supply market using Porter's 5 Forces, you may, for example, identify areas with low barriers to entry in which new players may emerge who represent alternatives to the deal under negotiation. Equally, thinking about substitutes may prompt ideas of untraditional sources or a combination of information sources. In areas in which significant industry rivalry exists, tendering or auctioning the business requirement may constitute a viable option.

In the ejournal market, one alternative to buying journal archive packages from publishers is to buy copies of individual articles on a one-off basis through a document supplier, such as Infotrieve or The British Library. So the question becomes, "At what point does buying article copies one-off become the best alternative to buying an electronic journal archive package?"

The answer depends on the cost of the journal archive package relative to the usage the organization expects for it. AstraZeneca considers an investment in a journal archive package worthwhile if it can pay for itself within 3 years. In other words, over a 3-year investment horizon, the present value (PV) of the savings realized from not having to request one-off documents (as a result of owing the journal archive) must be greater than the purchase price of the journal archive package. AstraZeneca uses historical usage statistics to estimate likely future usage. Where the criteria of a positive net present value (PVless the purchase price of the archive package) is not met, continuing with one-off document delivery represents the BATNA, and AstraZeneca can confidently walk away from the negotiating table.

In summary, a well-explored BATNA empowers you to accept what should be accepted and reject what should be rejected.

Managing Vendor Relationships

Managing vendor relationships can consume resources and time. Therefore, you should focus your energy where it really matters. Segmenting the vendor base can help achieve this focus. Don't expect to treat all vendors equally, as they will most likely not be equal in terms of their importance to your organization and the amount of money spent on their services.

To determine how to manage a vendor relationship, therefore, first assess the relationship in terms of "complexity" and "criticality." The following may serve as indicators of how "complex" the relationship is:

* Number of individual relationships (contracts) your organization has with the vendor

* Variety of information products licensed from the vendor

* Degree of fragmentation of the vendor group, i.e., to what extent does the group act as autonomous units?

"Criticality" is the negative impact your organization would suffer if the information content were not licensed from that particular vendor. The more complex and critical a vendor relationship, the more time and effort you should invest in managing it. This approach ensures the highest ROI.

If the vendor relationship is uncomplicated and noncritical, you should probably use an opportunistic approach focusing on managing costs. Dealing with such vendors at arm's length is adequate and the least resource-intensive.

For vendor relationships of medium complexity and criticality, a collaborative approach is more appropriate. For AstraZeneca, this means conducting regular business review meetings in addition to managing costs. However, the relationship is not complex and critical enough to justify building a truly strategic relationship with the vendor.

Strategic relationships should only be developed with those few vendors when the relationship is highly critical and complex. A strategic relationship takes time, effort, and senior management commitment for both parties, which is why AstraZeneca only pursues this option with a few vendors. One aim of strategic relationships is to leverage the total relationship by creating one relationship rather than many. An equally important aim is to exploit the expertise of the vendor fully.

Cost Management: An Opportunistic Approach

Since most information content is proprietary, vendors can be thought of as monopolistic or quasimonopolistic suppliers. Look how the prices for information licences increase substantially above general inflation each year. In an environment such as this, one needs a multifaceted negotiation approach. In past renewal negotiations, AstraZeneca has managed to ensure that the vendor- imposed price increases did not result in an overspend of the content budget while at the same time maintaining service levels for users. We achieved this through a combination of the following:

* Bargaining. Negotiate down the increases whenever possible.

* Increasing bargaining power by consolidating deals and spending more with selected vendors. For example, we spent more on ejournal archive packages, where the estimated saving on document delivery would exceed the price of the archive. The additional expenditure with the publisher was then traded against a full or partial elimination of the renewal price increase.

* Changing the vendor's perception. Up until recent years, many vendors appeared to assume that the content budgets of their customers would expand to accommodate any price increase. One vendor sales rep actually told me that this was his expectation! The pharmaceutical industry has changed fundamentally recently, in particular with respect to added cost pressures. This has had an impact on information content budgets as well, which are now shrinking or, at best, staying constant. AstraZeneca has repeatedly communicated this "new" reality to vendors.

* Managing demand. Be vigilant about cancelling content you do not need or content which only adds marginal value. Print journals for which you also hold electronic subscriptions are a good example.

Business Reviews: A Collaborative Approach

Business review meetings can help manage the performance of vendors. We have found it useful to jointly agree on some key performance indicators (KPIs) with vendors. However, performance is often a two-way street. Therefore, some of the KPIs also measure our performance in the relationship. By itself, creating KPIs does not create better performance, but, if well thought out, KPIs can serve as a platform for a constructive dialogue between the vendor and the buying organization. With both parties looking at the same mutually agreed upon facts and figures, you can start conducting meaningful root cause analysis and taking subsequent corrective action.

A scorecardlike approach to KPI development can be useful, as it helps focus the attention on areas of importance to most commercial supplier/customer relationships. We use the following scorecard approach to develop KPIs within four areas:

1. Financial perspective. A KPI is used to track AstraZeneca's on-time payment performance and another tracks vendor price increases.

2. Supplier quality perspective. KPIs are used to track down time for a supplied service and response time to fix technical glitches.

3. Communication perspective. KPIs track communication within the relationship, such as the number/frequency of business review meetings and the number of meeting actions acted upon.

4. Internal customer perspective. KPIs track customer scoring of the service, i.e., customer's perception.

However, just having KPIs for the sake of it wastes everyone's time. Both parties must be willing to act if a KPI does not track as intended. If there is no will to take corrective actions, there is no point in measuring the KPI in the first place. For KPIs to be effective they must be:

* Relevant

* Easy to generate

* Difficult to manipulate

* Limited in number, i.e., only two to three for each scoreboard area

Developing Vendor Relationship Management: A Strategic Approach

Often the buying organization only utilizes a fraction of a top vendor's capabilities. In our situation, we had a sense that some suppliers could contribute more to AstraZeneca's success if we developed a closer relationship with them. Vendor relationship management is a way of achieving this.

But to get to that stage, we felt we had to first create one relationship to manage. Relationships with top information vendors tended to become very fragmented, involving sometimes 10 to 15 separate contracts with the same vendor group. So, our first step was to consolidate these agreements into one framework agreement to create the foundation for a transparent relationship and bring together all internal customers dealing with the vendor. On the vendor side, this can also encourage separate companies within the vendor group to collaborate more. Though this initial step took time and effort, in the long run it will save resources, as contracting for new vendor products becomes simpler with 80% to 90% of the contractual terms and conditions already prenegotiated within the framework agreement. These are typically the general terms one would expect to find in any agreement.

The way AstraZeneca has structured its framework agreements, either party can use the legal entities of their choice. This means the legal entities entering into the overall framework agreement can differ from the legal entities used to enter into service-specific contracts sitting under the framework agreement. You do have to convince the vendor to become a willing participant in developing a closer relationship. Senior management in both organizations need to buy in to the concept and sponsor the initiative, i.e., actively promote and support it.

Sponsorship within the buying organization is crucial because implementing the approach is as much an internal challenge as a challenge to convince the vendor. To successfully manage the relationship, you must gain total internal visibility of the following:

* All subrelationships

* Current spend

* Future demand (3- to 5-year plan)

AstraZeneca aims to map all activities in which AstraZeneca contributes to the vendor's revenue stream. This includes licensing of databases and ejournals, procurement of reprints, advertising in journals, sponsorship of journal issues/websites, and participation on publishing/editorial boards. Gaining visibility for the future information demand of key internal stakeholders is important, as it allows for longer-term planning with the vendor and facilitates joint innovation to find the best information solutions.

One AstraZeneca model for creating a VRM team includes having one overall relationship leader with other team members responsible for managing the day-to-day interactions relating to various defined parts of the relationship. Ideally, the vendor should create a similar team mirroring the one within the buying organization.

Conclusion

Navigating an environment in which vendors appear to have the upper hand can seem daunting, but at the end of the day both parties in these relationships need each other in order to prosper. The tried and tested tips in this article have proven useful in building more equitable relationships.