R&D's success has been traditionally linked to quicker product development cycles at lowered cost. That approach needs to be revamped thoroughly, writes James S. Varelis, Principal, PwC Health Industries, Pharmaceutical & Life Sciences sector.
If a car’s gas mileage dropped by 10%, we’d know it’s time to take a close look under the hood.
The Medtech industry needs to start thinking the same way about R&D. A while back, PwC research showed that R&D’s impact on revenue growth for the Medtech sector (essentially a measure of R&D Return on Investment) had declined by 10% from a baseline set in 2005.
That prompted us to take a close look at the drivers of ROI for R&D, and based on our work over the past two years, we reached the conclusion that the industry should do more than simply change its R&D spark plugs – it needs to consider some serious revamping of the R&D model.
As we were digging into the root causes of this ROI malaise, a global survey we conducted of the MedTech sector revealed that organizational constraints (named by 54% of the respondents to the survey) were far and away the main curb on the agility and performance of R&D.
That response well outpaced financial, regulatory and other concerns. Organizational considerations include not only the structure itself, but also other internal elements such as functional collaboration, incentive alignment, systems, and processes.
When it comes to evaluating R&D productivity, the primarily focus of MedTech R&D executives has traditionally been on the speed at which products flow through the pipeline and minimization of the costs and resources spent during this process.
Once the production of a device was ramped up and handed over to the commercialization team, it then became the job of the marketing and sales teams to ensure market success. At which point, the R&D team acted more in a supplementary technical role. A problem with this model is that the goals and benchmarks of R&D , marketing and sales are, in many cases, distinct and divergent.
In today’s era of dwindling R&D productivity and the ongoing struggle to find organic growth, R&D organizations at medtech firms will find benefit from shifting their focus from “time to market” to “time to market success”.
One way to kick-start this process is by realigning R&D performance measurement to include more downstream metrics that would allow clinical impact and outcomes to be front and center in the minds of the R&D team not only at early stage reviews but continually throughout the concept and design phases.
This shift of perspective to a longer term view is especially critical in today’s healthcare industry in which the ultimate customer – the patient -- is becoming an increasingly powerful economic force and where all companies are being forced to adapt to a “no outcome, no income” economic model.
Ensuring that the R&D organization is aligned to deliver value to the customer and company throughout the development cycle while just one dimension of R&D productivity, is an important one.
So, how can scientists and engineers who typically comprise the R&D team develop the expertise to understand deeply the clinical needs or predict the market trends five years down the road?
Three ways to do that stand out:
A key example of how to apply this theory in the real world of contemporary research, and how to create a replicable solution, was uncovered in a PwC benchmarking program designed to analyze R&D productivity. In this case, we recently assessed the R&D function of a leading medical diagnostic instrument company. We found that project contracts -- the real world equivalent of business cases -- were not being updated frequently, if at all, once a project made it through the front-end innovation stage-gate review and into the product development process. Regrettably, this has been an all too frequent finding in our benchmarking engagements.
Project contracts turn out to be a critical element in ensuring that an R&D product development process can develop high-margin products and launch them on-time. Ideally, all major business functions involved in the ideation, development and launch of a product help to draft and develop a robust project contract that spells out what targets the project must meet in order for it to be successful. They can also determine how much variance there can be before a significant action is required, such as an off-cycle review by executive oversight between stage-gate reviews.
Typically a good amount of effort goes into these contracts for the first stage-gate review to get project approval, and most functional parties are involved (i.e. R&D, marketing, operations, quality, regulatory, clinical, etc.). Too often, however, as a project progresses through the product development process, cross-functional input is lost, the contract is not updated at defined intervals, not updated for critical elements such as market size, adoption rates, penetration rates, margin, etc. Before you know it, the project is over-budget, under resourced and some of the key features are no longer driving the value in the marketplace that was originally estimated. That’s just the kind of organizational constraint that erodes overall ROI for R&D.
What is the solution?
We think it’s critical for medtech companies concerned about the efficiency of their R&D efforts to review, update and refine the key elements of their organization/process including market success criteria. Then revamp it if necessary by actively managing all contracts, ensuring that all business functions are involved and signing off on contract updates, and that the governance structures in place for the product development process contain the right level of accountable and action-oriented senior managers to make the tough decisions. That could mean requiring a deeper audit of a project, or even implementing a “track and kill” program dedicated to quickly ending projects that no longer meet their intended business targets as set out in the project contract.
So Revamping medtech R&D requires understanding of two broad elements - a) extending the timeline for judging the value delivered by R&D out through an assessment of clinical impact and return on invested R&D dollar and b) tightening up what needs to be an ongoing cross-functional, open innovation process of evaluating and updating the plans and assumptions expressed in a project contract. Those two combined approaches can provide a way forward to ensure greater efficiency and higher returns for R&D.
One caveat however: - whatever fix you make to improve gas mileage by looking under the hood requires that they work smoothly with the other systems in the car. Similarly R&D must function as integrated system within the overall product lifecycle.
[Photo Credit: iStockphoto.com user tumpikuja]
--By James S. Varelis, Principal, PwC Health Industries, Pharmaceutical & Life Sciences sector