The rise – and pitfalls – of preferred vendor lists

By Laura Cusumano | March 1, 2013

Reading time: 6 minutes

Abstract

As preferred vendor lists grow in popularity, we need to ask: Are they causing more headaches than they were intended to solve?

Research Topics:: Marketing Research-General | The Business of Research
Industry/Market Focus:: Health Care (Healthcare) | Pharmaceutical Products | Research Industry
Content Type: Research Methodology

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Procuring a problem?

Editor's note: Laura M. Cusumano is director, Integrated Marketing Associates, a Bryn Mawr, Pa., research firm.

A trend has developed over the past 10+ years of larger pharmaceutical marketing research organizations (MROs) moving to preferred vendor lists (PVLs). Generally, the initiation of PVLs has been driven by the procurement departments in these companies, with the broad goals of reducing costs and/or increasing the value of the current spend. MROs presented an easy target, being – in theory at least – a cost center spending millions with little or no oversight outside of marketing. MROs pushed back, viewing the role of procurement as best applied to goods (e.g., office equipment) or clearly-defined services (e.g., maintenance of HVAC). However, some of the pushback by marketing research was no doubt misinterpreted as an attempt to protect favorite vendors or simply to maintain full control of vendor selection. It is easy to imagine that procurement and MROs did not start off on the right foot or understand each other’s objectives clearly.

A way of life

PVLs and procurement are now a way of life in large pharmaceutical companies, with no going back to the good old days. It is generally accepted that the goals for PVL are to: reduce costs and/or increase value; set a vendor-quality standard; reduce the complexity of commissioning research; and assure that the company is dealing with reputable, financially-sound vendors.

Ideally, the procurement processes are intended to create the best-possible value and secure services of the required quality at the lowest available cost. However, as the process becomes more complex and the outcome more restrictive, these objectives may not be met – resulting in reduced quality and more complex processes, requiring time and effort from both the MRO and the marketing research vendor (MRV). Some preferred-vendor applications have over 100 questions and require copies of résumés of all staff in addition to the financial information.

Despite the significant value PVLs may provide an organization, the protracted process and lists are not without their limitations and problems. Some pharma companies are more effective than others in minimizing the negative side effects of PVLs. It takes a conscientious effort to create and maintain a PVL that really works for the organization without a negative impact or labor-intensive process.

Some PVLs are more like guidelines instead of mandates. The companies with more-relaxed PVLs generally allow a set percent of spend with companies not on the list, if there is adequate justification provided. They also tend to have longer lists. Procurement generally assists and oversees but does not generally take the full leadership role.

At the other extreme, some PVLs are directed by or managed with procurement. These tightly-controlled PVLs and the process to create them can include and/or result in:

A limited choice of vendors based on a specific type of research. For example, the company may identify two marketing research vendors to conduct all of the pricing research for the organization.
Extensive application processes to be considered for the PVL, which are demanding for both the company and the vendor.
Detailed documented processes on issuing requests for proposal (RFPs).
Limits in the interaction between the company contact and vendor during the commissioning of research.
Specific formats for proposals to be submitted.
Required rebates from vendors on total annual spends by the client company.
Unfavorable terms for payment (e.g., 90 days), which can be crippling for smaller firms.
Suppliers paying a fee to be screened and included on a preferred vendor list.

Have side effects

It is universally agreed that the best intentions do not always result in the best outcomes. Some of the intended goals and processes established for PVLs have side effects (Table 1) that can actually reduce value and increase complexity.

Other issues surface in the process of establishing and maintaining PVLs. They can be addressed if an MRO and its procurement team are sensitive and prepared to troubleshoot potential issues. Some of the more common pitfalls include the following.

Not all marketing research services and skills are created equal. This is the most legitimate argument for minimizing a procurement or strict PVL approach. Even if the sample size, target audience, methodology and vendor experience sets are exactly the same, comparing marketing research services is not like comparing apples to apples. There will always be differences between market research vendors, their processes and deliverables. For example:

Independent of years of experience and training, moderators have different skills and levels of expertise.
Some MRVs offer proprietary methodologies or unusual databases/respondent panels that they have developed and manage.
MRVs vary with regard to their skills in managing the research process. There is always a chance of something not going as planned, especially in global research. Some MRVs can handle problems and issues smoothly and quickly without disrupting the process or incurring costs, either because they have a broader range and more and deeper experience support staff or they are tuned in to preventing/managing problems early and quickly.
Some MRVs are simply more creative with techniques, more flexible, easier to work with or have better presentation skills, can establish rapport and credibility with the brand team faster and/or demonstrate closer attention to detail.

Frequency of updating preferred vendor lists. In most industries, the preferred vendor list is revisited every two to three years. This enables a vendor to demonstrate performance and value in a reasonable amount of time, allowing for the development of an intimate understanding of the client’s needs. It also allows a vendor to demonstrate improvement as the research and relationship develop. However, many pharmaceutical companies revise their PVLs every year. This is a very short performance-measurement period for the limited services provided. In addition, updating a PVL requires a significant amount of time both by the client company and the MRVs, which can be a distraction from meeting the business needs. This time required by MRVs ultimately costs the pharma company because the professional time required.

Number of companies on the preferred vendor list. There is no magic number for the ideal number of vendors on the PVL. The optimal number is different for every company, and it should broadly reflect the: number of brands and therapy areas in which the company is actively involved; distribution of the stages of the product life cycle the brands reflect; number of marketing-research managers commissioning research; and total marketing research spend.

For example, if all of the supported brands fall into three therapy areas, or if only six brands are actively supported, or if the company’s total spend is $2 million, then the PVL is likely to be relatively short. However, if the company has a diverse product line, an active pipeline, a $20 million market research budget and 15 market research managers, then the PVL list will have to be significantly longer.

Ways to optimize

So what are some ways to optimize PVLs? Following are some strategies:

Ensure adequate choice among vendors. No matter the company’s situation, marketing research managers should feel comfortable that they have sufficient choice in vendor selection and they will want to avoid dependence on too few vendors. There are various reasons it is risky to have a PVL that is too short for an organization:

Vendors may be too busy to take on all projects sent by a client company, which may compromise quality or wreak havoc with deadlines. It is very difficult for a MRV on a PVL to refuse work because they are too busy or because they are not comfortable conducting a project.
Market research managers within the same company may be competing for MRVs.
Working with only one or two vendors may eventually create a research bias or a stale approach.

Provide the option of going off the PVL. There MUST be an option for marketing research managers to go off the PVL list to either explore new vendors or meet an immediate or unique research need. If a company sets up a PVL, there should be an opportunity for experimentation with vendors who have not yet secured a place on the PVL. Too many restrictions may limit a pharma company’s access to new methodologies, approaches or marketing research professionals. However, it is important for companies to limit off-list vendor use for the benefits of the list to be realized. A broader vendor base may provide expanded experiences and educational opportunities and support a company’s success.

Valuable and effective

Do PVLs really save money and improve research quality? No doubt, certain aspects of PVLs are valuable and effective but a look back over the past 10 years shows little to support a highly-restrictive PVL. Would MROs have fared better by simply reducing or capping spend, sharing best-practices and letting the free-market forces balance it out? Hard to say. But the continued expansion and complexity of PVLs warrants a critical eye, because the benefits are challenging to identify and even more difficult to measure.