Medical Device Link.

Originally Published September 1999

BUSINESS PLANNING & TECHNOLOGY DEVELOPMENT

Outmaneuvering the Competition through Outsourcing

For companies seeking to jump ahead of the pack, strategic use of outsourcing can be just the right move.

Carol Nast

Among medical technology companies, the universal need to identify business drivers and develop strategic business plans often results in remarkable uniformity across the industry. It is not uncommon for companies to target the same market opportunities with only slight variations in technical approach.

One of the many tactical approaches a company can use to differentiate itself in this environment is to leverage its resources and capabilities by outsourcing. Recently identified by the Harvard Business Review as one of the most important management practices of the past 75 years, outsourcing is one of the most readily available initiatives that a company can undertake—and often among the most poorly executed. Knowing when, why, and how to outsource is essential for today's executive.

Every business activity presents an opportunity to outsource. The emergence of virtual companies is testimony to the broad range of outsourcing services available to medical technology companies. The array of alternatives includes management consulting, contract manufacturing, financial services, information systems, human resources services, contract research and development, and clinical trials management.

Company leaders who are preparing to implement an outsourcing program would be well advised to establish a standardized process for ensuring that their program is both complete in scope and comprehensive in detail. Development of such a process can be complicated and time-consuming, but fortunately even this function is one that can be outsourced.

Strategic Opportunities for Outsourcing

Successful companies customize their strategies based on thoughtfully selected and developed core competencies—the vital abilities that define and differentiate their company. All other organizational needs then become candidates for outsourcing. Decisions to outsource should be driven by essential strategic requirements.

For example, a start-up company that has identified R&D as its core competency may discover that such a focus precludes it from developing the specialized expertise required to design and conduct clinical trials and ensure an efficient path through FDA and international regulatory bodies. In addition, the company may not have the engineering expertise to design repeatable manufacturability into a new product. These functions, critical to timely product introduction, would be opportunities for the company to augment internal resources through outsourcing. As discussed below, there are many such organizational challenges that represent opportunities for outsourcing.

Dealing with Resource Limitations. A company with limited resources may have gaps in critical functions and financial limitations. For example, a quality control issue may arise that is beyond the experience of in-house personnel. The time and resources required to obtain education and experience or to recruit, hire, and train new personnel may represent significant risks in terms of product quality or regulatory compliance.

Filling Interim Requirements. Outsourcing can enable companies to overcome temporary gaps in their staffing without taking on the burden of permanent employees. A new company, for instance, may lack executives with the experience needed to create strategies and implementation plans. Such skills can be outsourced on a temporary basis to enable the company to establish a solid direction or implement robust systems and processes.

In other examples, a mature R&D organization might elect to staff at less than full capacity, deciding instead to augment appropriate functions on an as-needed basis. And a firm preparing to implement an enterprise-wide software program might require specialized expertise, but not want to be burdened with additional staff once implementation has been completed.

Achieving Best Practices. A manufacturer may lack the experience needed to make use of the best practices and technologies. A new product under development may require costly capital equipment or technologies not typically used for medical devices. It is risky to invest in acquiring such equipment and expertise, especially if the market for the product is not established. Also, it may be difficult to justify or implement future product improvements if substantial capital investment in specialized equipment is made too early in a product's life cycle.

Reducing Time to Market. New products are essential to sustain any company. They are especially important in the medical device industry, where the first market entry is invariably awarded a large and enduring market share.

Lead times for procuring and validating facilities and equipment can substantially prolong the time required to launch a new product, resulting in lost revenues and compromised market position. Quick time to market also requires the manufacturer to determine whether activities typically done sequentially can be done in parallel when appropriate resources are available.

Improving Financial Performance. Executives seek effective tools for improving financial performance and reducing cost of goods, capital investment, and expenses while improving cash flow. The possibility of lack of market acceptance or substantial competition can threaten the bottom line. Considerable incremental investment in infrastructure systems or facilities presents similar threats.

Although any of these factors may represent a strategic opportunity for outsourcing, executives must also consider a number of additional factors when deciding whether to outsource a portion of their company's operations.

Answering the Hard Question

For company executives, determining whether to use outside resources in place of company operations and support processes requires careful assessment of the associated risks and potential gains. It is shortsighted to view outsourcing solely in terms of whether it is the least expensive solution. The bottom line should include not only economic benefit but also potential increase in quality. The cost equation itself must not be oversimplified. In a manufacturing scenario, determining the cost of outsourcing requires an understanding of assembly, quality, overhead, raw material, and handling costs.

Assessing the risks and benefits of outsourcing also requires consideration of issues that go beyond determining the cost and quality gains. Excellent legal skills are essential for the protection of intellectual property. Exclusivity, if it is an issue, must be clearly defined. The company must have sufficient knowledge of the outside resource's financial solvency to ensure uninterrupted service or product supply.

Manufacturing brings with it myriad questions. Is the equipment provided by a contract manufacturer flexible enough to enhance future product improvements? If the company invests in capital equipment, will its amortized cost negatively affect the cost of goods? Would an outside supplier provide better response to market fluctuations requiring either greater or less capacity?

There are no easy answers to the many questions that must be considered, but careful decision making will help to ensure that outsourcing, if used, will be profitable.

Implementing the Outsourcing Process

Once the decision to outsource has been made, company executives can optimize their outsourcing arrangements by adopting the best practices outlined below. While the practices described here focus primarily on issues related to manufacturing suppliers, the general principles are also applicable to many other industry functions.

The Plan. It is critical that the company develop a written implementation plan that is in alignment with the size, type, and criticality of the activity to be outsourced. The type of plan needed to outsource the accounting function of a start-up company will be very different from that needed to outsource the manufacturing of a critical-care medical device for a large multinational corporation.

The company's plan should include methods and criteria for supplier selection, financial analysis, supplier qualification activities, contract negotiation and completion, information transfer, evaluation of performance, and ongoing monitoring. Responsibility for the outsourced activities should be assigned either to a functional manager responsible for each activity, or if the project is large and involves several functions, to a project manager. For a simple project, a knowledgeable employee with other responsibilities may be able to develop and manage the plan.

A capable, motivated project manager is a critical player for ensuring that complex outsourcing projects—such as those involving manufacturing, automation design, or product distribution—are successfully completed. This individual must have the ability to develop the plan as well as to monitor its progress.

Often such personnel assignments involve considerably more responsibility than authority. Therefore, the personal characteristics of the person selected can be as important as technical project management skills. Project managers must be leaders with strong communication, negotiation, and problem-solving skills. Seemingly impossible projects can succeed if the project manager is exceptional, and ridiculously simple projects can fail if the project manager is weak.

Supplier Selection Criteria. Selection criteria include not only function-specific requirements but also general requirements. General requirements include financial health, satisfactory standards for quality, compliance with all applicable regulations, and good references for similar types of work. Specific requirements deal with the content or technical abilities of the supplier.

In selecting a supplier it is a good starting point to determine how top suppliers of similar services would perform in terms of the parameters the company identifies as critical. Even though the best choice for a particular situation may not be the top supplier, for reasons of cost or supplier capacity, knowing how various suppliers rank in comparison with the top suppliers can help in decision making.

Supplier Selection. There are many ways to find suppliers. The most reliable is by referral. Colleagues, employees, and other suppliers and consultants can provide high-quality information about potential suppliers. Trade shows, publications, and Web searches can also help build a list of supplier candidates that are likely to meet company needs.

The number of suppliers that are evaluated typically ranges between two and seven, depending on the number of potential suppliers, the criticality and complexity of the service needed, and the resources available to conduct the evaluations.

In rare cases, it is acceptable to consider a sole supplier. Typically this is done only as a logical extension of an existing relationship, such as a development project that evolves into a manufacturing agreement. In this case, the benefits associated with having a supplier high on the learning curve may outweigh the disadvantages associated with having a single supply candidate.

To obtain relevant information from a supplier, it is a good practice to develop a supplier information and requirements document. At a minimum, this document should contain a description of the service, identification of critical requirements and expectations, and schedule milestones. This document is not a replacement for a supply agreement; it is used primarily to articulate the scope of the service requirements and to provide uniform information to all potential suppliers. The document should be presented to the representatives of potential suppliers. If it is relevant to the project, this is also the time to obtain a confidentiality agreement.

It is important to provide candidates with an overview of the company and some sense of the company's culture. Companies should listen carefully to supplier responses and questions, which can provide important clues to supplier strengths and weaknesses. The foundation of the relationship is started in this initial meeting. From this point forward, it is important to objectively note both the quality and timeliness of each potential supplier's response. This is often a good predictor of future performance.

A written response to the supplier information and requirements document should be requested from the supplier. The response should include information on supplier credentials and capability, relevant experience, projected schedule, project costs, and references. If assembly or manufacturing is being outsourced, the response should be expanded to include an overview of the supplier's quality system, approach to project management, equipment and facilities, and capacity. Once the written responses are received, the information should be reviewed and each supplier given a rating based on the established supplier selection criteria.

After the vendor is selected, the supply agreement is negotiated. Contract manufacturers are generally very savvy in structuring such agreements. The key terms can vary widely, so it is important to have someone with specific knowledge of supply agreements negotiate the contract.

Implementation. One person in the company must be the contact person for the supplier. On complex projects, project managers may be required by both the supplier and the company. If this is the case, the company project manager leads the overall project. The person responsible for the project routinely reports to executive management on implementation progress.

It is essential for the company to develop an overall implementation plan with tasks and timing approved by all stakeholders. It will be tempting to skip this step on smaller projects, but if plans are not prepared, the risk of problems and misunderstandings escalates.

Supplier Management. As with all aspects of business, the supplier's performance must be managed on an ongoing basis. Management changes, financial problems, and capacity shortfalls head the list of many factors that can compromise the supplier's ability to perform.

Benefits of Outsourcing

Medical technology executives can reap a multitude of benefits from using outsourcing strategically and following a standardized outsourcing process. Reducing the demands on a company's time and tangible resources can enable it to focus the energies of its core competencies on designing, developing, and launching products that can both define and protect its business. The judicious use of high-quality, experienced consulting services in specific functional areas can permit a company to focus its attention on critical management issues.

The benefits of meeting temporary needs without generating long-term commitments are obvious. Somewhat less obvious are the benefits of using interim management in senior executive positions, an increasingly popular practice that can lead to the creation of strategies and implementation plans for new ventures. Successful consultant executives typically have well-established reputations for getting results. Additionally, interim managers can function in open positions until well-qualified candidates can be found.

The emphasis that outsourcing companies place on their product offerings can translate into best-of-class performance. Selecting a team of suppliers in the top tier can place a company ahead of competitors that choose to build internal expertise, as they will suffer from the distraction of trying to do too many things at once.

Reduced time to market can also result from using outside services to conduct market research; perform clinical trials; interface with regulatory agencies; write instruction manuals and marketing materials; and design, qualify, and validate equipment and processes.

Outsourced manufacturing or assembly may eliminate lengthy tasks, such as those associated with identifying, purchasing, and validating equipment and facilities. Often slightly higher product costs can be offset by establishment of earlier revenue streams.

Outsourcing can be an effective tool for improving financial performance. Properly negotiated supply agreements can improve cash flow and inventory investment. The cost of goods can also be minimized. Contract manufacturers that specialize in specific types of manufacturing can often provide cost-efficiencies that are difficult to duplicate. Additionally, their overhead is spread over many products, their buying power is enhanced by volume discounts, and scrap and variances are low because of the use of well-qualified processes. Even allowing for supplier profit, the economies offered by such contract manufacturers can frequently provide products at lower cost.

With all its benefits, effective outsourcing must be given careful attention. The activities and functions to be outsourced must be carefully selected, suppliers meticulously chosen, and a standardized, proven implementation process used. Executive-level oversight will significantly improve the success of the outsourcing effort.

These efforts will be rewarded. Successful outsourcing can create an enduring advantage in a competitive landscape.

Carol Nast is founder and managing partner of the Enterprise Catalyst Group (Palo Alto, CA) and a member of the Medical Device Executive Portfolio editorial advisory board.

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