INSIGHT ON PROCUREMENT

Ten Steps to Lower Procurement

Costs in Life Sciences
Drive Bottom Line Results in only Four Months

Regardless of the economic conditions, companies that can quickly respond and take action to stay in the
game ultimately emerge as market leaders. Now more than ever, the next generation of pharmaceutical
and biotechnology leaders is being tested. Organizations that manage their cost structures and position
themselves for growth can gain significant market share as the economy improves and the U.S. healthcare
reform program evolves.

Times are tough: Large pharmaceutical companies are reducing staff, closing facilities and M&A activity is
on the rise in an effort to maintain revenues and profits. Smaller firms are facing even greater difficulties.
According to a recent report by the Biotechnology Industry Association, venture capital investment in
the industry is down more than 50% from the previous year. Ninety percent of publicly traded bioscience
companies have experienced significant losses in their market capitalization, and some have less than a
year’s worth of operating capital remaining.1

The economy is expected to bear the worst of the recession through 2009, and companies that want to
offset these effects must launch initiatives that will show definitive results this year. As companies look for
ways to reduce costs as well as generate revenue, procurement has an opportunity to step up to the plate
and provide these results. In fact, two-thirds of the respondents to Aberdeen Group’s recent report, “The
CPO’s Agenda 2009,” indicated that the economic downturn has positively impacted the role of the CPO.
The report also notes that for CPOs, 2009 will be as much about execution as it will be about leadership.

To help your procurement organization hit a homerun during these trying times, Archstone Consulting and
SciQuest are pleased to provide you with this actionable plan that life sciences organizations can use to
gain tangible and measureable business value in only four months. Let’s get started!

ARTICLE BY:

About the Authors

Michael Eckstut is a Principal and the Life Sciences

Practice Leader at Archstone Consulting. He has 30 years
of business and operational experience in large, small and
early stage companies in the life sciences industry as an
executive, consultant, investor, advisor and board member.

Ken Roy, Vice President of Life Science Practice at

SciQuest. He architects automated procurement solutions
to help life sciences and other organizations in SciQuest’s
served markets to realize the full value of strategic
proprocurement.
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Start with Strategic Procurement

I n the life sciences industry, a strategic procurement approach that

gives researchers fast and easy access to the supplies they need can
have a dramatic impact on their productivity.

Today’s source-to-settle procurement automation and supplier catalog management solutions also
empower life sciences companies to gain real-time visibility over spending, aggregate purchasing
power, and negotiate better terms and conditions with suppliers. These solutions effectively
enforce contract compliance and tightly integrate the procurement process with existing financial
systems. Strategic procurement provides the insight into spend data that enables the efficiency and
effectiveness of existing resources to be maximized without requiring headcount additions.

The strategic procurement approach significantly decreases costs—savings of up to 20% on goods

and services are not uncommon—and gives rise to numerous process efficiencies. Yet, the benefits
are not limited to functional areas where purchases occur:

• In contrast to revenue growth, which delivers only a fraction of every dollar

to profitability, procurement savings directly impact the bottom line. On
average, six dollars of revenue growth must be generated to match the
profitability impact of a single dollar of procurement savings.

• In an economic environment ripe with constant change, a dynamic

procurement organization supported by proven systems and processes can
rapidly adjust approaches to sourcing, categories, contracts and vendors to
keep pace with the present environment.

• Procurement transformation is evolutionary — initial gains created through

strategic procurement efforts lay the foundation for long-term, sustainable
programs that improve the financial health of the entire organization.

Your Action Plan

To help you get started, 10 actions that procurement leaders can implement now to deliver
value and boost the bottom line are outlined below. These items are highly executable and can
typically be accomplished with little or no additional staff, overhead or need for significant capital.

The initiatives are grouped by the four challenges they address: Sourcing, Governance and
Compliance, Supplier Relationship Management, and Self Funding. These actions do not require
execution in any particular order, thus providing you with the flexibility to focus on those with the
greatest organizational impact first.

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 Your Action Plan

1. Mine Value from Segmentation:

Revisit category segmentation and re-evaluate major categories. Identify categories (or
sub-categories) where there has been significant market change and where new opportunities
for cost savings may exist. Categories where current economic and market conditions may
benefit your organization are: Fleet and Transportation, IT (Capital and Services), Professional
Service Categories (Consulting, Legal, Accounting, Banking, and other services), Travel, and
Sourcing

Contract Research Organizations.

2. Build Opportunities in Spend:

Don’t wait – review contracts now, especially long-term and those for high spend categories, to
see if there have been significant economic and supply market changes, or other trigger points
for cost savings that could justify an early discussion with the supplier. Combining these reviews
with the latest technologies will enable you to:

• Maximize the benefits of negotiated contracts by enabling real-time links between orders/
invoice approvals and the contracts (both pricing and terms) governing them.

• Maximize the benefits received from volume discounts and contract renegotiations through
automatic tracking of spend against contracts.

3. Eliminate Sacred Cows:

Increase spend under management by obtaining a commitment from senior management to
pursue “sacred cow” categories and to manage other categories that are currently outside of
procurement’s responsibility. The use of preferred or other supplier segmentation methodologies
Governance and Compliance

will drive user spend in these categories to suppliers that deliver the highest economic return in
the short term, delivering immediate return to the bottom line.

4. Build-in Best Practices:

With resource constraints, it’s not uncommon for an organization to still have purchasing
practices in use that were created five, 10, even 15 years ago. Thoroughly review your
procurement processes to ensure they are still relevant and, as appropriate, are what is
considered a “best practice.” Since automation drives compliance and compliance drives cost
savings, take stock of areas where the latest technologies could drive deeper savings as well as
efficiencies for your organization. For example, automation tools can help you to quickly verify
that approval processes are in place and working effectively to promote demand management
and avoid “maverick” spending.

5. Lower Sourcing Threshold:

Resource limitations and manual processes have led organizations set an artificially high
dollar value on purchases that must go out for competitive bidding. This, in turn, limits the
opportunities for savings. Best-of-breed solutions, which can be implemented in a matter of
weeks, enable the automation and linking of the requisitioning and sourcing process. This allows
the sourcing threshold to be lowered to capture further savings without increasing the workload.

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 6. Never Overpay:
Without automation, the most efficient way for many organizations to validate that supplier
pricing complies with negotiated contracts is to spot check invoices. The missed opportunities
Governance and Compliance

for savings this creates may now be exacerbated at organizations that are experiencing staffing
constraints. Automation technologies can quickly pay for themselves by ensuring that your
organization never overpays for goods and services. Automation tools provide an efficient way
to verify that invoices are in compliance with contracted pricing and/or the goods or services
received; buyer involvement is only necessary when exceptions are flagged.

Additional savings to support automation funding can be realized by establishing Close Loop
Invoice Matching. Many A/P organizations expend resources to handle invoice exceptions.
Studies have shown that while only 8-10% of invoices have discrepancies, resolving them can
consume upwards of 60% of A/P resources. Automated electronic purchase orders linked to
product receiving and invoice matching can eliminate up to 90% of invoice exceptions. Reducing
overpayments and duplicate invoice payments will drive additional savings. Many organizations
set a tolerance of 5-10% on invoice-to-order discrepancies to minimize exception handling.
Automating the process and linking orders to invoices allows the tolerance to be lowered,
driving further savings.

7. Mitigate Supplier Risk:

Almost every organization has been affected by the recession and your suppliers are no
Supplier Relationship

exception – it’s possible they may be experiencing issues that you are unaware of. Review
suppliers to identify those that could be “at risk.” Risk factors could include financial or product
quality issues. Establish risk mitigation programs for these critical suppliers; for example:

• Ensure that you have back-up suppliers for critical commodities.

• Source alternate suppliers for all categories that have the potential to take on a more
strategic role in your supply chain.

• Ask for an audited bill of health.

• Seek information from third-party organizations, such as Dun & Bradstreet, that provide
viability reports.

8. Ask for a Stimulus Package:

Suppliers are likely more willing than you think to work with you in the short term to maintain
your business in the long term. Request a “stimulus program” from your key suppliers. This
can take the form of a limited-time discount that provides a lift for your organization while
Self Funding

guaranteeing business to a supplier during tough economic times.

9. Negotiate a Self-Funded Discount:

Establish an early payment discount program with key suppliers in exchange for discounts.
Many suppliers are willing to extend a 1-2% discount for payments received within 10 days of
invoicing versus typical net 30 or 40. Offset the cost of capital associated with early payments
and receive even more impact from your early payment discounts by extending payments to
other suppliers to 45-60 days.

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 10. Have Lunch with Marketing:
Self Funding

Once the previous 9 initiatives start to pay financial dividends, you should promote your
procurement success. Start by identifying the metrics that can be used to measure performance.
Establish a baseline and put performance targets in place. Then have lunch with key members
of your organization’s marketing team. Use their expertise to help you leverage transaction data,
dashboards and scheduled reporting to communicate and promote procurement successes
across your organization.

In order to stay in business, companies will have to keep spending. Therefore, saving must start with
sourcing and continue all the way through payment. By identifying the areas within your procurement
environment that can reap the most benefit from the above actions and starting execution as soon
as possible, you can gain solid results for your organization in the short and long term. According to
the Aberdeen Group report, “The CPO’s Agenda 2009,” best-in-class organizations have an average
of 88 percent of spend under management and cost savings of 8.5 percent as a percentage of total
spend. How does your organization compare?

To help your procurement organization hit a homerun during these trying times, Archstone
Consulting and SciQuest are pleased to provide you with this actionable plan that life sciences
organizations can use to gain tangible and measureable business value in only four months. Let’s
get started! Ready. Set. Go!

SciQuest, Inc.
SciQuest, Inc. TEL 919 659 2100
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