Middle-market medical device companies are finally realizing the benefits of letting outside partners manage R&D and production facilities.
By Richard McBlaine
What’s the best way for a company to minimize cost and ensure consistent service quality in facilities operations? For corporate leaders in most industries, the answer is clear: Outsource facilities management to a company focused exclusively on facilities and real estate.
While multinational life sciences have long realized the benefits of outsourced facilities management, some businesspeople believe that only global companies truly benefit from this strategy’s economies of scale. But that is not so: Medical device companies of all sizes can benefit greatly from facilities outsourcing strategies.
Historically, OEMs believed that it was too risky to outsource sensitive R&D operations and highly specialized production environments to outside partners. Consequently, life science and medical device manufacturers—aside from the very largest—have been relatively slow to entrust facilities management to external providers.
However, an increasing number of middle-market life science and medical device companies are now becoming converts to facilities outsourcing because it helps them control costs, drive revenues, and improve production processes. As a result of this shift, this sector is now among the top three largest practitioners of facilities management outsourcing, according to KPMG’s 2012 "Real Estate and Facilities Management Outsourcing Pulse" survey.
Because real estate and facilities comprise one of the largest line items on the balance sheets of medical device firms of all sizes, facilities operations is arguably one of the best places to look to contain costs without negatively impacting the business. Real estate offers many opportunities to save money as well as enhance the overall business.
Consider Energy Use. Approximately one-third of the energy used in buildings is wasted as a result of inefficient or improperly operated equipment. An expert in facilities energy management can gather useful data on the performance of building systems and continually implement improvements that save millions of dollars as well as reduce the company’s carbon footprint.
Facing competing demands on internal resources, even the largest life science companies may not be prepared to invest in in-house energy management expertise and infrastructure. With its focus on facilities, a large real estate services company can prioritize investments in the technology, professional training, and specialized expertise required to implement a robust energy management program on behalf of the client. By outsourcing their facilities management activities, companies can enable their in-house staff to acquire the expertise required to benefit from a building-performance management program.
However, energy management is just one aspect of an integrated facility management program. The benefits are clear in virtually every other area of outsourced services, including corporate real estate management, critical-environment management and regulatory compliance, safety and security, sustainability, systems and engineering expertise, sourcing efficiency, and career paths for facilities staffs.
Corporate Real Estate Management. An outsourced real estate services provider with a global client base that includes life science companies will bring diverse best practices to bear on a medical
device company’s portfolio. Large-company practices can be applied to middle-market companies, and approaches used in other industries can be applied at medical device companies. For example, an outsourced real estate service provider can apply best practices to shorten the considerable—and costly—lag time between the completion of a merger and the execution of the follow-on real estate strategy.
Critical-Environment Management and Regulatory Compliance. Outsourcing to a facilities team focused on life sciences can help a company improve its compliance procedures and prevent manufacturing plant shutdowns. A facilities management provider with expertise in medical device operations can handle a range of property types, from data centers and offices to scientific, pharmaceutical, and biologic production facilities. The outsourcing partner can also offer expertise in regulatory compliance, hazardous waste management, safety and security, and more.
Improved Safety and Security. An outsourcing real estate services provider with life sciences expertise can help companies manage risks associated with handling extremely valuable or hazardous materials. The provider can also manage the sophisticated security systems required to reduce the risks of intellectual property theft or threats to employees that handle highly valuable ingredients or controversial projects.
Sustainability. Qualified real estate service companies train engineers and facilities managers in energy efficiency and environmentally sustainable practices and materials. Sustainability efforts can include such measures as installing occupancy sensors that automatically turn off lights in unoccupied areas, promoting recycling and waste reduction programs, and eliminating harmful chemicals from office furnishings and cleaning products.
Smart Systems and Engineering Expertise. Advanced facilities management companies have the engineering expertise to install and manage computerized smart systems that remotely monitor all aspects of building performance across a portfolio of facilities. By installing automated monitoring systems, medical device manufacturers can anticipate potential problems that might otherwise go undetected.
Sourcing Efficiency. Through bulk buying and experience in evaluating, engaging, and managing suppliers, an outsourcing partner can reduce procurement costs while supporting corporate social responsibility objectives related to diversity and sustainability.
Career Paths for Facilities Staff. Every outsourcing service provider wants to keep its facilities' existing staff in place for the sake of continuity. Moreover, they strive to keep the transition from in-house to outsourcing activities as smooth as possible. Over the long term, facilities professionals can benefit from working for a real estate services company that offers advancement opportunities in their areas of expertise.
Sophisticated facilities management vendors are willing to contractually align incentive-fee structures with the achievement of particular outcomes. If the client’s goals are not met, they agree to a lesser fee. Key performance indicators (KPIs) are commonly established at the outset of every new facilities management relationship.
Based on measurable criteria, KPIs typically comprise both financial and nonfinancial goals. Financial KPIs might include reducing procurement costs by 10% or lowering direct real estate occupancy costs through office space consolidation by 12%. Nonfinancial KPIs might include achieving an average score of 4.5 out of 5 on employee satisfaction surveys or ensuring 100% up time for all manufacturing facilities. KPIs might also include project management goals, such as managing a relocation or renovation project within a certain time period or without interrupting operations.
Companies have even been known to design KPIs to protect the jobs of in-house facilities staff during a transition. For example, the vendor may be required to meet a KPI of hiring and retaining 90% of the client company’s facilities management staff during the first contract year.
It is fair to ask prospective vendors how their account team leaders are compensated in order to ensure that they are motivated to achieve KPIs. Ideally, the team leader’s compensation includes a base salary plus an annual bonus based on the achievement of the KPIs.
In addition to helping OEMs achieve cost savings by initiating centralized purchasing, energy management, and other measures, corporate real estate and facilities management vendors can increase the strategic use of facilities. Underutilized or poorly located facilities can be a drag on revenues. Conversely, a sales force may see its revenues rise after fully implementing a new workplace strategy. Medical device companies that outsource R&D facilities management can even reduce the cost of R&D as a percentage of revenue—a key financial benchmark that is particularly critical for companies considering a merger, acquisition, or initial public offering.
When selecting an outsourcing partner, medical device manufacturers should ensure that prospective vendors have the specialized expertise and experience required to manage R&D facilities. In some cases, this means acquiring in-depth knowledge of the proper ways to handle high-risk functions, such as the disposal of hazardous materials.
The facilities management team must be properly trained to ensure that hazardous waste storage and collection areas do not turn into danger zones. Without adherence to strong safety procedures, problems such as a deadly chemical reaction, a quickly spreading fire, or a treacherous spill could threaten the facility and its occupants. Radioactive waste, in particular, requires special handling and education; employees who are not properly trained in managing this waste could be at risk of exposing themselves to unsafe radiation levels.
Besides safeguarding facilities personnel from potential threats, hazmat disposal procedures must also comply with stringent federal and state regulations. When these regulations are not followed correctly, a company could incur heavy fines. Among other compliance tasks, professional R&D facilities management also ensures that the right shipping codes are used, that documentation is prepared correctly, and that waste materials are disposed of within the proper timeframe. Facilities staff should be aware that even a small error can result in fines totaling tens of thousands of dollars, a sum that is multiplied when the same violation occurs at each of an organization’s lab sites around the world.
Finally, improper hazmat disposal procedures can threaten a company’s research and innovation efforts—the lifeblood of a life science organization. Without a well-trained facility management staff, medical device companies may ask their scientists to physically carry hazardous waste themselves to a designated collection or consolidation area, distracting them from conducting research. A much more effective way to manage waste disposal is to have facilities professionals handle hazardous materials.
Hazmat handling is just one example of a facilities management process that is unique to medical device and other life science organizations. When performed correctly, third-party hazardous waste management can deliver sustained annual cost savings of 10 to 20% while minimizing critical risks and helping to maximizing lab or plant efficiency. However, medical device companies should ensure that outside firms entrusted with these processes have the experience and dedication to follow proper procedures, enabling them to achieve good results and eliminate threats.
The medical device industry and the entire life sciences sector is under continual pressure to control costs without sacrificing research timelines or safety. By outsourcing its facilities management activities, medical device OEMs can play a pivotal role in transforming their corporate facilities portfolio into a strategic investment rather than merely a cost center.
Contrary to popular perceptions, middle-market life sciences companies can benefit enormously by outsourcing facilities management and related services. Service providers can ensure that best practices drawn from the life sciences and other industries are infused into every program, regardless of company size.
A qualified facilities management provider can generate millions of dollars in savings by undertaking operational efficiency improvements, creating workplace environments that promote sustainability and productivity, and ensuring safety and regulatory compliance across a life science company’s facilities. The best news? Middle-market medical device companies can still seize the opportunity to be among the first of their size to reap these benefits.
Richard McBlaine is international director of Jones Lang LaSalle, where he helps lead the life sciences team and helps life sciences companies optimize and manage their facilities. He received an MBA from Keller Graduate School of Management and a BS in mechanical engineering from Illinois Institute of Technology. He also serves on the board of editors for the Journal of Corporate Real Estate and frequently speaks on corporate real estate management issues. E-mail him at firstname.lastname@example.org.
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