Strategic Outsourcing: Mitigating Risk

31 August 2006 (Last Updated August 31st, 2006 18:30)

The medical device industry is experiencing huge growth. To cope with this challenge, outsourcing is increasing. Aarati Ajay of Frost & Sullivan examines the key factors for the medical device industry.

Strategic Outsourcing: Mitigating Risk
Figure 1. The split of medical devices revenues globally.

The global medical devices market is valued at $184bn, according to the European Medical Devices Association, Eucomed. Despite the explosive growth witnessed in most medical devices sectors, there are inherent challenges faced by medical device vendors, such as:

  • Decreasing bottom lines
  • Increasing costs of product development
  • Cumbersome regulatory processes
  • Plummeting product life span
  • Threat from low cost manufacturers
  • Supply chain complexities
  • Difficulties in expanding regional presence

To cope with the demands of the industry, medical devices industry professionals recruit experts to control different areas of their process, from product design to development through to manufacture. This enables the original device manufacturers to increase variable costs and decrease fixed costs, which proves beneficial in the long-term. The cost of training personnel to work on new technologies is time-consuming. Contracting incurs costs but saves time.

"To cope with the demands of the industry, medical devices industry professionals recruit experts to control different areas of their process."

Medical devices companies employ more people for sales and marketing than for the research and development of devices as a strategic initiative. Outsourcing the design and development enables control of the entire process, and, as technical experts are involved process flow is efficient. Figure 2 shows the percentage split of Medtech companies with less than 50 employees.

Outsourcing implies ‘sourcing outsiders’ to perform functions traditionally considered non-core to the organisation. The trend began in the IT sector but has transcended boundaries and is now the reality in every industry.

However, it would be unfair to compare and contrast outsourcing in the IT industry with that of healthcare, as the products involved are tangible, unlike in knowledge and information-based industries, such as IT and banking. Outsourcing can be done at two levels:

  • Traditional business-process outsourcing
  • Operational outsourcing

Traditional business-process outsourcing brings in an external agency to perform across-the-board activities of the business, such as HR, finance and customer services.

Customer support is one of the most important areas companies outsource, as it ends the need to hire dedicated personnel. When outsourced to a remote location this results in significant reductions in costs.

Operational outsourcing tends to be technology-based. Companies engage contract manufacturers/designers to design and or produce equipment, which is then sold by the vendors under their brand names.

By outsourcing non-core areas to experts, medical device manufacturers ensure significant time savings but are also able to perform the function at a fraction of the costs it would have taken them to manufacture it in-house.

STRATEGIC THOUGHT PROCESS

Outsourcing in the medical devices industry has become a trend from product design to development of prototypes and the complete manufacturing and packaging of the device. Industry observers believe there are now more medical devices companies with fewer than 50 employees. Employees are mostly customer-facing and communicate their ideas to product designers who, in turn, take up the process of designing.

By bringing in experts with the technical expertise and commitment to launch the product on time, original device vendors can avoid investment in cost-intensive capital equipment. With a considerable reduction in product turnaround periods, coupled with the increasing need for complicated functionalities, outsourcing is the preferred strategy for most medical device manufacturers.

"Industry observers believe there are now more medical devices companies with fewer than 50 employees."

In addition to cost benefits, outsourcing to other regional destinations enables geographic expansion. With geographically diverse operational backing, the company can ascertain the feasibility of conducting a business by understanding the sociopolitical environment and the economic situation of the countries.

To decide whether or not to outsource, organisations need a well-defined strategic thought process. The next step is to decide on what non-core areas are cost- and time-consuming. Figure 3 illustrates the strategic benefits of outsourcing.

OPERATIONAL OUTSOURCING

The medical devices industry is undergoing rapid changes. Market consolidation is widespread and reimbursement trends are unpredictable. Original equipment manufacturers find it beneficial to invest resources in partnering with experts with core competencies.

Past experience suggests outsourcing results in speeding up the product development process and reduces the time to market – ultimately resulting in increasing profit margins. The major areas that are being outsourced are:

  • Product design and development
  • Component manufacturing
  • Supply chain management

The original equipment manufacturers (OEMs) partner with contract manufacturers for a pre-decided budget, enabling efficient financial management. Due to contractual obligations, timely delivery is assured.

Outsourcing component manufacturing would help the OEM to save money that would have otherwise been invested in acquiring capital equipment requiring maintenance or other services. There are several players in the market specialising in supply chain management, from sourcing raw materials to delivery of the end product.

Despite outsourcing's numerous advantages, the risks cannot be overlooked. Outsourcing creates the need for complete knowledge transfer, data transfer and transfer of control. Control of data and processes should be decided during contractual discussions, avoiding confusion about management of data and intellectual property.

To facilitate an efficient outsourcing mechanism, the company should establish communication protocols with its outsourcing partner that aid effective data transfer and maintains contractual boundaries. The risks are intensified in cases of offshoring (outsourcing to other regions). Figure 4 underlines these risks.

Several checks and measures need to be in place to avoid the risks involved in outsourcing. Many of these can be mitigated with adequate control over the process and dedicated personnel to liaise with the contract partners – ensuring there is effective knowledge transfer and aligning the strategic interests of the equipment manufacturer and the outsourcing partner.

WHAT LIES AHEAD?

"Several checks and measures need to be in place to avoid the risks involved in outsourcing."

A recent trend has been to outsource to multiple contractors to prevent delays in production processes, spreading the risk across a larger base. However, this also presents issues such as controlling multiple outsourcing partners. The industry needs to see more collaborative relationships, which would result in longstanding partnerships between an OEM and an outsourcing company. This would mean the interests of both parties involved are consistent.

Figure 5 shows the growth curve for the global medical devices outsourcing industry. The market for outsourcing is surging forward, fuelled by the medical device industry’s growing demand patterns.

OEM participants are increasingly involving outsourcing vendors at all stages of the product lifecycle. This is a lucrative trend if the companies involved make astute judgement about the outsourcing companies and maintain control of the process.