The EU’s good faith
The procurement of a vaccine is certainly the most important negotiation of the EU at the moment.
Every day counts and with every vaccination a human life can be saved. It is incomprehensible why other countries get the vaccine, but the EU has to wait for deliveries.
With this article I would like to analyze the EU’s negotiation with AstraZeneca. With Gerd
Kerkhoff, expert for procurement, I will explore the mistakes of the EU from this negotiation.
Important: As always, my articles are not about a political opinion, I focus purely on the negotiation.
The crucial question in the preparation of any negotiation is: ‘Is there an alternative to
my negotiating partner?’
If yes, we can identify the best alternative. In the context of a negotiation, we use the
term “BATNA – Best Alternative To a Negotiated Agreement”.
In a procurement role, one will always try to qualify several suppliers to create and provide alternatives. By having alternatives, the price can be negotiated.
If alternatives do not exist, then there is only one partner, a monopoly. In negotiations with a monopoly, the supply must be secured, the price of the product is secondary.
Based on my experience consulting for negotiations, many do not recognize that the positions of power can change. This moves from a monopoly to a BATNA negotiation.
Of course, it is more difficult if I assume BATNA and do not realize, that I am facing a monopolist.
This is exactly what has happened in the procurement of a vaccine with AstraZeneca.
In the summer of 2020, there were four possible suppliers, BioNTech, CureVac, Moderna and AstraZeneca. Meaning the Negotiation was conducted in terms of alternatives. In November 2020, one supplier crossed the Finish Line and thus became a monopoly.
With only one negotiation partner, the strategy should have changed fundamentally from the offset. The security of supply should have become the absolute priority, with the cost consequent. The opposite of security is risk and the risk of non-delivery MUST be negotiated in the contract and secured with penalties. A clause such as “Best Reasonable Efforts” is meaningless in this situation, you cannot and must not trust the supplier to “make an effort”.
With a “Best Reasonable Efforts” clause, a party undertakes to achieve the intended contractual objective to achieve the intended contractual objective to the best of its efforts. The party must, at considerable expense of time and money make various attempts to achieve the contractually agreed goal. There is naturally a huge room for interpretation.
The contract with AstraZeneca states:
“AstraZeneca has committed to use its ‘Best Reasonable Efforts’ to build capacity to manufacture 300
million doses of the Vaccine, at no profit and no loss to AstraZeneca.”
Interview with Gerd Kerkhoff
Mr. Kerkhoff, you are an expert in procurement negotiations. What are your thought on the EU vaccine orders?
There is no negotiation result, only a letter of intent from AstraZeneca. Procurement is about securing the right product, with the right quantity, in the right place, at the right time, at a respectable price. These goals must be clearly negotiated and agreed upon.
What went wrong?
The EU did not understand that negotiations take place in a monopoly situation.
There is the Monopolies Commission and the Anti-Trust Office to prevent monopolies and no market-dominating position may arise. However, if a manufacturer receives the first approval, that manufacturer is a de facto monopolist at that point.
In June 2020, negotiations were held with four manufacturers who were assessed and evaluated as possible suppliers for the vaccine. As a result, the first manufacturer to receive approval will become a monopolist and dominate the market.
How does negotiating with a monopolist and a supplier differ in a functioning market?
In a functioning market with multiple suppliers, there is public bidding, which is defined in a process and is mandatory. The goal is to achieve the best possible price.
And in the case of a monopolist?
With a monopolist, it is not about achieving the best possible price. There are two targets: time and availability.
Availability is regulated in a contract. For example, if in June 2020 a supplier promised to deliver 5 units, the EU could secure 2 units of that.
On November 12, 2020, the EU Commission accepted a supplier in a legally binding manner. From this point on, all previous commitments will be processed in sequence. If there are any delays in production, this will consequently lead to a delay in the commitments.
What mistakes were made in the contract design?
Politicians are surprised that there are difficulties in production, but the UK continues to be supplied in full. With a new production process, we have to assume that there will be difficulties.
The EU – Health Commissioner Stella Kyriakides speaks of a breach of contract, AstraZeneca is unfair and arrogant.
No, the suppliers are behaving correctly in a market economy.
The contract says “Best Reasonable Efforts,” what does that mean specifically in this contract?
The “best efforts” clause should not be accepted under any circumstances in such an important contract. The procurement of a vaccine is a top priority for ethical and economic reasons.
What would have been a better solution?
We would have suggested offering suppliers incentive systems to be supplied on a preferential basis in terms of time and quantity. This could have been designed in a contract so that deliveries in December and January were given an early delivery bonus. This would have been possible, for example, by voluntarily adding a 100% surcharge to the December purchase price and a 50% surcharge to the purchase price for the month of January. This would have ensured that we would receive the produced vaccine as early as possible.
In addition, we would have required the supplier in the contract to notify us weekly of the planned delivery quantities over the next 4 weeks. This lead time is absolutely necessary to ensure the complex supply chain up to the available vaccination dates.
My Negotiation tips
1. Is there a real alternative to a negotiating partner?
2. If yes, “qualify” all possible alternatives so that all can provide the same performance.
3. After all alternatives have guaranteed the identical range of services, the price negotiation can begin. In the public sector, the RFP replaces the price negotiation.
4. Difficult negotiations show no alternative.
5. In difficult negotiations you only have one partner.
6. In purchasing it is the monopolist or a single source, in sales it is the only customer, in your private life it is the parents, children, or your partner.
7. When there is no alternative, the strategy must be without an alternative.
8. You must not talk about alternatives when an alternative does not exist.
9. Continue to see and believe in the good in life.
10. Protect your good faith with contracts and never accept a “Best Reasonable Efforts” clause.
The EU negotiated in good faith for a partnership solution. This belief honors the EU and demonstrates the long-term partnership approach.
However, in a crisis, this belief is misplaced. The risk of cooperation must be equally shared and hedged for all parties. Currently, there is no risk for AstraZeneca; the risk is borne solely by the EU.
The EU should have switched to crisis mode in the negotiations as early as summer 2020. The goals should have been clearly defined: Security of supply and a quick decision.
Security of supply was abandoned with the “Best Reasonable Efforts” clause. The quick decision was gambled away by long-term detailed negotiations. The USA, UK and Israel had signed the contracts months before the EU.
For further EU negotiations, I recommend a saying by Benjamin Disraeli: “I am prepared for the worst, but hope for the best.”