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Outsourcing: How medical device companies can make this smart strategy work

By David Blumberg and Vicki Phelan, KPMG LLP Outsourcing is certainly not a new phenomenon. […]

By David Blumberg and Vicki Phelan, KPMG LLP

Outsourcing is certainly not a new phenomenon. However, for the $300 billion global medical device industry,it is rapidly becoming a trend with newfound appeal. In fact, the market for medical device outsourcing is estimated to climb as high as $44.7 billion (1) by 2017.

And it is easy to see why. New technologies, manufacturing process advancements, and a growing and aging population have contributed to explosive growth within the medical device market in recent years. At the same time, an evolving and increasingly complex regulatory environment and a rapidly growing and intensely competitive marketplace pose significant hurdles for the industry. As a result, more medical device manufacturers are considering outsourcing as a way to help lower costs, increase agility, reduce time-to-market, and boost their return on investment.

Still, in the current market environment, achieving those objectives is no easy feat. Mature and emerging markets alike are dealing with a barrage of complex regulatory and compliance issues with siloed country-by-country requirements. Such vast diversity of rules and regulations add layers of complexity to the unfolding global medical device market landscape.

Meanwhile, industry competition continues to heat up worldwide. While the U.S. has long faced strong competition from medical device companies in Germany, Japan, The Netherlands, and Bermuda, countries such as China, Brazil, Korea, Taiwan, and India, are becoming more formidable global competitors. In particular, companies in these countries are slowly gaining traction in regional markets that have typically been underserved, such as Africa, South America and Asia.

Facing changing market dynamics and a convergence of mounting challenges, many medical device manufacturers are seeking new business model opportunities that can help to better manage risk, reduce costs and improve service delivery. Hence, many are exploring the strategic value of outsourcing to support their business strategies.

Multiple approaches

There are many variations of outsourcing models available today that can suit an organization’s needs. In the medical device industry alone, outsourcing services run the gamut from full service to targeted functions including product design, development and production, engineering services, and packaging to supply chain management. It also includes more traditional areas of procurement, finance and accounting, HR, real estate and facilities management (REFM), customer care, R&D, and, of course, information technology.

While pharmaceuticals have long known the benefits of outsourcing, medical device suppliers are beginning to catch up. In a number of publicly available mentions over the last several years, device manufacturers such as Baxter, Johnson & Johnson, Stryker, Medtronic and Boston Scientific, have launched outsourcing projects in Sweden, Canada, China, Eastern Europe and India for a variety of specialized functions such as manufacturing, IT services, payroll processes, application development and finance and accounting.

As a result of such momentum, many medical device outsourcing service providers are broadening their focus and expending their capabilities to include full end-to-end service offerings. According to the research firm, Global Industry Analysts, Inc, over the next several years, companies “with dual prototyping and production abilities are poised to score the maximum gains as OEM preferences skew steeply towards service offerings that promise radical reductions in time to market”. They also predict that Asia will be the most preferred offshore location over the next several years due to quality and scale being offered from those areas.

Clear benefits

Outsourcing offers many benefits including cost savings and business process improvements. In fact, according to a recent KPMG survey (2), which surveyed 94 respondents in the medical device and service provider industries, cost reduction and improved service delivery are two of the primary drivers for outsourcing. IT outsourcing (ITO) was identified by 38 percent of respondents as a top means for cost reduction, while 26 percent of respondents viewed it as good method to improve service delivery. In comparison, business process outsourcing (BPO) was viewed by 30 percent of respondents as a top means for cost reduction, while 19 percent of respondents believed it was a good method to improve service delivery. As these industries mature in their use of outsourcing, this gap should narrow.

Interestingly, respondents rated governance significantly higher as a service delivery improvement measure than as a cost savings measure. Based upon client engagement experience, KPMG has found that service delivery improvement and increased outsourcing services provider oversight can result in significant cost savings.

Top means to improve service delivery/reduce costs

Current levels of outsourcing show significant opportunity for both the buyers and suppliers among the medical device and service providers surveyed. IT was identified as the most mature area of outsourcing, with more than a third of respondents (36 percent) reporting two or more outsourcing years under their belt, followed by another 20 percent each for R&D and customer care during this time.

Outsourcing usage levels

As the chart above indicates, IT is still the most widely adopted outsourcing function. According to the survey results, 55 percent reported the IT function was either outsourced or in the process of being outsourced, with approximately 24 percent reporting that the function remains in-house. Of the amount that remains in-house, more than half (13 percent) of respondents said it is being considered for outsourcing. The most popular areas in the process of being outsourced are Research and Development (R&D) followed by Human Resources (HR). As these two functions face increased budget pressure from healthcare and R&D, outsourcing is seen as a practical way to contain these rising costs.

Cloud potential
In an effort to realize further cost reductions, many organizations are seizing the advantages of new technologies, such as cloud computing. For many industries, the cloud can be a competitive game-changer but its impact on medical device outsourcing is still uncertain.

While private clouds are the type most frequently considered, cloud computing is garnering slow adoption rates as executives remain cautious about transferring enterprise-grade applications to a mixed or all-cloud configuration of IT resources. The highest usage of cloud technology remains in IT, according to 22 percent of survey respondents followed by sales/marketing (15 percent) and human resources (12 percent).

Cloud usage by function

Notably, more than 60 percent of those surveyed say they intend to expand the scope of their cloud computing projects in the future. As cloud offers quick, reliable, available resources, the competitive advantages will eventually outweigh some of the risks and adoption is likely to increase as companies will have to meet remarkable growth, cost and regulatory challenges.

Looking ahead

Looking ahead, we will likely see the lines in healthcare, pharmaceuticals and medical devices blur. As a result, companies that make sound investments to increase their agility and adaptability, reduce operational costs, ensure compliance, and look to increase efficiencies in their global delivery models will become the new market leaders. As a result, outsourcing will play an increasingly key role in the success of performance-based business strategies.

The good news for the medical device industry is that it can learn a great deal from earlier adopters. As we enter into what we believe is a new era in outsourcing, we are inherently taking ourselves farther down the road to becoming more competitive while reducing risk. If you are interested in exploring new or enhancing current outsourcing options and unsure of how to start, consider these next steps.

  1. First, objectively review where your organization is and where you want it to go in the future.
  2. Review regulations regularly and look for regulatory competence from your outsourcer.
  3. Take a look at current outsourcing relationships and shared services capabilities both within and outside the industry to find not only proven, but new ideas.
  4. Review your service delivery strategy. How are your vendors identified, evaluated and responsible for the services and functions they are providing?
  5. Consider geography. Are all current markets being served? Are you prepared for expansion into future markets? Do some markets pose geopolitical and/or environmental related risks?
  6. Look at technology. Consider whether existing platforms support the integration of processes and providers along the supply chain. Is it a competitive asset? Or is it a risk?
  7. Don’t forget culture. Will it support a governance structure that provides comprehensive oversight of services, including performance metrics? Even under changing regulations, situations and environments?

Clearly, there are risks and benefits to consider, but many innovative medical device companies are seizing great opportunities by integrating outsourcing into their business model strategies.

David Blumberg is KPMG’s Pharmaceutical practice lead advisory partner.

Vicki Phelan is a director with KPMG’s Shared Services and Outsourcing Advisory practice where she focuses on the Pharmaceutical and Life Sciences Industries.

(1 Global Industry Analysts, “Medical Device Outsourcing,” September 2011)

(2 KPMG Medical Device Outsourcing Research Study, November 2011, N=94. Respondents included device makers and service providers from health care/equipment services, pharmaceuticals, biotechnology and life sciences, and medical devices/diagnostics, are approaching shared services and outsourcing.)

This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG LLP.


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