To reduce the cost of procurement, many governments have either drafted country specific laws or interpreted regional directives to their local needs like the EU PPD. Because of this, procurement in the life sciences industry may take multiple forms. Moreover, and unfortunately, this heterogeneity of regulations has created a daunting degree of complexity — and manufacturers must find solutions to manage it.
Here, I will focus on one trend in procurement: tenders. The procurement methodology of tendering is becoming more and more important as described in a previous post. Tenders are an efficient way for governments to artificially increase competition in the market, causing prices to plunge and overall healthcare expenditures to decrease. But tendering encompasses many different specific procedures. Still, given its regulatory nature, tenders follow a well-defined process.
In the graphic below, you’ll see an overview of some of the different types of “tenders” that exist. In addition, you’ll notice distinctive dimensions. Ultimately, you should understand all of these elements depicted below, as well as other regulatory frameworks governing tendering. You should also have a sense of the various stakeholders involved in the process so you can successfully navigate this complex environment.
Framework Agreements are defined by the Classic Directive from the European Commission, whereas Tenders are defined in local laws. Even though Tenders are very heterogeneous, there are some cases where there are similarities, particularly in the European Union.
Framework Agreements are reached among tender and contracting authorities and suppliers to establish the frameworks of contracts to be awarded within a given period. Essentially, they define the roadmap of the game of procurement. There are various types of framework agreements:
- Framework Agreement (Sensu Stricto): This type of framework agreement requires the creation of additional binding relationships beneath the framework in order to set up all the terms and conditions. In this case, there is a single winner, also known as an exclusive winner. And in order to finalize those terms, another tender must be published. This tender is labelled “Reopening of Competition” (see graphic). It’s another process very similar to “Restricted Tenders.” However, some terms and conditions are already defined. For example, the maximum price may have been previously established. That means new submissions from participants can be lower than this threshold.
- Framework Contracts: This type of framework agreement enables the contracting authority to place orders immediately. All the binding terms have been defined in the framework, which authorizes two or multiple parties to have a legal relationship. It’s commonly called an “entry-ticket” into the market.
Now, let’s turn to tenders. There are multiple types. Moreover, keep in mind that governments like to increase the number to increase competition, stabilize and bolster supply, and to ultimately drive down prices.
- Open Tenders: A formal procedure open to all potential respondents that are aware of the opportunity. Often, it results in a high number of participants and leads to delays in the procedure.
- Restricted Tenders: A procedure that is open only to pre-qualified suppliers. The suppliers will receive an invitation to tender and in the EU, an official publication is made through a platform like TED (tenders electronic daily) in order to get suppliers to participate.
- Competitive Negotiation: A process consisting of a direct negotiation with multiple potential suppliers. A request is made to each supplier for a price quote, which are assessed by the issuing body.
Each type of tender can be split among multiple awardees or left to an exclusive winner. Exclusivity tends to lower prices. However, multiple awardees may guarantee supply over the course of the tender. This is particularly true for hard to supply drugs, such as plasma-based products.
In all, the traditional tendering process represents 10 different procedures, as well as various outcomes. But it can be more easily understood — and utterly demystified — by focusing on these three dimensions: competitive pressure created by the procedure, the quality of the bids submitted to the issuing body, and the workload created for the issuing body.
Drilling Deeper into the Details
Open Tenders will create the most competitive environment. However, bid quality cannot be ensured and neither can supply quality. But over time, bid quality should increase as both sides improve their processes. The Competitive Negotiation and the Framework Agreement with Exclusive Award create the lowest competitive pressure. Bid quality is also higher and very consistent, allowing both sides to build a reliable partnership.
Also, the longer the procedures the higher the workload for the issuing body. Negotiated Tenders and Framework Agreement with Reopening Competition are time-consuming procedures. Nevertheless, the issuing body will see average prices due to average competitive pressure and they’ll get high-quality bids and supply.
In conclusion, these procedures have advantages and disadvantages and some of what we discussed here depends on the countries, the products subjected to tenders, and the respective suppliers in the market. Also, the smaller the country, the easier the process will be. Ultimately, it’s important to know which environment you are entering — and to deeply understand all the nuances and complexities of it. If you follow this approach, your win rate may increase, as well as the profitability of your bids. Also, if you want to improve your tender management processes or are thinking about implementing a global strategy, read our posts on tender management, as well as the white paper we have published.
Insights Through Practical Experience and Benchmarks from the Industry
The ability to strategically and operationally address tendering in global markets continues to be of critical importance given increasing competitive factors in the industry. We surveyed the life science industry on their tendering practices, and these are the results!
Now available: our analysis on the results from the Tender Benchmarking survey!