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Finding the Value in Supply Chain Contract Management

07/22/19

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Kevin Lewis, Consulting Director, Advisory Solutions – Supply Chain Operations

Ideally, 90% of transactions within the health care supply chain should be covered by a contract. Yet, with more than 100 different contract management software platforms available today, many organizations still use spreadsheets and filing cabinets to manage them. Is this truly maximizing a contract’s purpose and value?

There’s more to contract management than centralization, storage and lifecycle maintenance. That’s only half of the story. Too often in my career I’ve witnessed health care organizations spend countless hours, months and years on so-called “contract management,” only to have everything finally centralized, streamlined, automated, systematized (insert your preferred corporate cliché term here) only to ask themselves, “What’s the value of our contracts?”

Understanding contract value

Where’s the value in having any sort of contract in the first place? In essence, a contract should represent the single source of truth of an agreement between a health care organization as a whole (“systemwide”) and any type of commitment from a supplier, vendor or distributor. There should be minimal-to-zero rogue or evergreen contracts that the organization has not thoroughly scrutinized, and there should be no contracts that the entire organization does not stand behind as a whole.

In addition to a contract being the source of truth of an agreement, the ultimate point of a contract should be to extract the most value out of the agreement in direct relation to the organization’s financial, clinical and operational performance. By creating business partner agreements that link to the financial, clinical, and operational performance of the organization – and monitoring benchmarks and analytics to hold those partnerships accountable – contract management should be at the center of any value-driven health care organization.

How do you measure the value of a contract?

You’ve heard the phrase before, “You can’t manage it if you can’t measure it …”

A key challenge for many contract management systems is that they don’t have a real-time data feed to assist in calculating the projected or actual value of a contract, or the positive or negative impact of an upcoming contract with different pricing, rebate structure, or other incentives. In today’s data-driven world, it should be implicit that every contract include benchmarks to measure the impact of the contract to the organization at any given time.

Ask yourself these questions. Is the business partnership improving performance over last year? Or is performance stagnating? In decline? Most business partners should be able to provide some sort of metrics to show their impact and value. However, do their metrics line up with how your organization measures success? Are you comparing vendors, suppliers and services equally? Don’t be afraid to create a fair playing field by using your own key performance indicators (KPIs) to compare business partners and rank value. Work with key stakeholders in your organization to identify the best components to benchmark and measure contract value in terms of financial, clinical and operational impact(s).

How do you measure partnership and contract compliance?

Are you, as an organization, a good business partner? Are you holding up your end of the bargain in an agreement? How about your business partners? Are they treating you well as their customer? Are both parties sharing accountability for performance and risk equally? If so, how can you tell? Just as the value of any given contract should be measured in real time, so should the compliance to the contract be measured.

Proactively identifying contract price, service improvement opportunities and financial risk based on compliance are essential to an effective contract management system. Many price improvements and other valuable contract incentives often go unnoticed due to contract terms and incentives being buried in a spreadsheet, attachment or a filing cabinet, not integrated with real-time data.

For instance, if a health care organization has a contract that includes pricing tiers based on spend, then that organization should get rewarded with better pricing immediately should their spend qualify them for a higher tier. Credits should be issued accordingly each time qualifying tier pricing is not updated in real (or at least reasonable) time. Similarly, if an organization has agreed to reward a business partner with more market share in order to achieve better pricing, but fails to do so, the potential negative impact should easily be calculable to show the organization what's at risk.

Business partners offer competitive pricing and services for specific reasons; health care organizations standardize and convert their market share for specific reasons. A commitment to value analysis decision-making and value-based care should be common ground for both entities to meet, where business partners can prove their value in the marketplace to increase revenue, while at the same time reducing health care costs and improving overall performance. Just as the value of any given contract should be measured in real time, so should the compliance to the contract be measured.

So many contracts, too little time …

Effective contract management protects organizational performance and staff bandwidth by limiting the number of suppliers and vendors. As contracts in product and service categories expire, contract management should serve as a safeguard to prevent rogue or unnecessary contracts. Minimizing the number of supplier and vendor contracts under consideration per product or service category helps make the value analysis decision process much easier. Having data readily available to help measure each contract’s potential impact to the organization also makes decision-making much easier.

If you’re still using spreadsheets or filing cabinets to manage your contracts, consider gaps in your business process that may leave contract value unrealized. Explore other software programs that you may already have access to such as tools from your group purchasing organization or enterprise resource planning (ERP) system. Work with industry experts and key stakeholders to identify best practices in measuring contract value, and link each contract’s lifecycle and maintenance to data-driven financial, clinical, and operational performance improvement today.

About the author. As a consulting director for the Vizient advisory solutions supply chain operations team, Kevin Lewis provides subject matter expertise, guidance and mentoring to help health care organizations transform their supply chain operations into competitive, leading practices. His experience consists of more than 25 years in a wide variety of health care settings including direct patient care, clinical information technology, population health, supply chain services, value analysis and comprehensive sustainability. Lewis is highly skilled in process improvement and software services aimed at systematically reducing supply chain costs while improving quality, safety and sustainability based on data-driven analytics.

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