For an Innovative Industry, Medtech is Behind on Outsourcing

Medical device makers love to tout the fact that their industry is built on innovation. But when it comes to outsourcing, medtech hasn’t exactly been on the cutting edge.

July 29, 2013

3 Min Read
For an Innovative Industry, Medtech is Behind on Outsourcing

Medical device makers love to tout the fact that their industry is built on innovation. But when it comes to outsourcing, medtech hasn’t exactly been on the cutting edge.

Image courtesy of STUART MILES/FreeDigitalPhotos.net

“The medical device industry has clearly lagged,” says Vicki Phelan, a solution relationship director with KPMG’s shared services and outsourcing practice. “I think that they pretty much are four to five years behind pharma, which has been all encompassing in its outsourcing strategy. Medtech has been much more conservative.” That was the case for outsourcing of production, but it’s also true for business process outsourcing, a trend that pharmaceutical companies picked up on in the early 2000s.

There are a number of potential reasons why pharmaceutical companies have been first out of the gate in the race to outsource, including the fact that pharma is a more homogenous business than medtech, says Bob Cecil, a principal in KPMG’s shared services and outsourcing practice. Patent expirations also helped drive pharmaceutical manufacturers’ early adoption of outsourcing, Phelan posits, but medtech firms haven’t really felt that kind of pinch. “Medical device has always been a fairly profitable industry, and in the past they’ve never felt the crunch to have to really watch their costs to the degree that pharma did,” she says.

That is, until now. With the current glacial pace of the regulatory process for devices and the 2.3% excise tax on medical devices in the United States, medtech companies, too, are feeling the pressure to reduce costs, and they’re turning to outsourcing—and increasingly business process outsourcing­—for help.

Early this year, KPMG released the results of a survey of 94 respondents in the medical device and service provider industries. It found that cost reduction is one of the main reasons why medtech firms are turning to outsourcing.
Medical device companies appear to have tested the business process outsourcing waters with IT. A majority of the firms KPMG surveyed either have already outsourced their IT services or are in the process of doing so. Close to one-third of the firms have outsourced or plan to outsource customer care and R&D functions. More than one-quarter of the firms surveyed have sent human resources to outside vendors or say they plan to.

Still, there are some functions device makers continue to hold closer to their chests. Only 14% of the firms surveyed have outsourced or plan to outsource finance and accounting, and less than 10% say the same for procurement. In addition, more than one-third say they don’t plan to send these processes out of house.

Those firms that aren’t considering outsourcing functions in these and other areas could be missing valuable opportunities. In some cases, dedicated service providers might be able perform a task better than your company can and at a lower cost.

Take an example Cecil uses from another industry. A home improvement company turned its inventory accounting over to an outside vendor. As part of its service offering, the company also provides information and analytics support, including tracking weather patterns on the client’s behalf. “If a hurricane is going to hit Florida, they know that the home improvement store needs a greater number of water, generators, and batteries,” Cecil says. “Because [the vendor] has that collection of information in their hands, they can help [the client] make those decisions faster.”

Encouragingly, medical device firms do seem to be opening their minds more to business process outsourcing. Around one-third say they may consider outsourcing or shared services for procurement and real estate and facilities management, and nearly one-quarter are open to outsourcing finance and accounting and R&D functions.

Perhaps if medtech companies let the professionals take over some of these operations, device makers can focus on what they do best: innovation.

—by Jamie Hartford, managing editor, MD+DI
[email protected]

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