A Good Bet
Medical Product Outsourcing recently chatted with Marc Tanowitz,
principal at Vienna, Va.-based Pace Harmon, a consulting and
advisory services firm that supports companies with critical outsourcing, technology sourcing and transformation programs.
Tanowitz and colleagues have authored articles for MPO. He provided his perspective on the current health of medtech outsourcing and prospects for the future.
How has outsourcing changed with fluctuations in world financial markets? Does a down market make outsourcing more attractive? What are the pros and cons of the outsourcing equation?
Marc Tanowitz: Garnering savings is always critical to businesses,
but even more so during a down market. And, with it being an especially tough economic environment for raising capital, companies
are also very interested in operating flexibly. While outsourcing isn’t
a panacea for these elements, it can be a good fit in the right situations. For example, outsourcing can provide access to key technologies that may not be otherwise available without a significant
investment. Also, as credit markets tighten, outsourcing can help
companies avoid taking on up front capital expenses, as many outsourcing providers will approach the deal as a strategic partnership
by providing assets for distribution, logistics, etc., while capitalizing
the cost over the life of the deal. Another major benefit of outsourcing is labor arbitrage, as outsourcing providers can often secure
cheaper labor in different onshore or offshore locations.
As far as whether a down market makes outsourcing more attractive,
the outsourcing market is currently experiencing growth, but the down
economy has helped to further additional outsourcing engagements.
The pros and cons apply to both a good and bad economy.
I mentioned the positive aspects above. Regarding cons, buyers
must realize that the outsourcing provider will need to realize some
return on their investment. This can include minimum commitments and/or significant costs for termination. When dealing with
a provider that had laid out capital, companies should ensure that
the underlying cost of capital is not excessively high and is therefore inherently unattractive. Additionally, they should monitor
deals that involve capital outlay, gain-sharing agreements, or
a form of commitment over time to ensure the deal remains mar-ket-correct for the duration of the contract. For these situations,
a mechanism like benchmarking is necessary for re-normalizing
the deals to reflect the current market rate, as variables such as the
economy, currency fluctuations, cost-of-living adjustments and
others, can wreak havoc on a deal’s value over time.
What kind of supply chain issues do companies that pursue a
full-service outsourcing option contend with?
Tanowitz: Companies seeking successful long-term vendor relationships must invest the time and energy to ensure that their
supply chain partners are integrated into the overall planning and
forecasting process. This helps to protect against the possibility of
short-term unplanned events permeating the physical supply chain,
e.g., excess inventory, as there is a risk that the supply chain may not
have the short-term flexibility to respond without significant cost
ramifications. For example, if a company’s warehouse gets an unexpected surplus of parts, it can make the decision to put products in
hallways or even store them in a trailer outside. Conversely, in an outsourced environment, the provider cannot assume risks involved with
placing inventory anywhere outside of agreed upon parameters due
to contractual obligations to adhere to physical security liabilities and
avoid risk. By involving the distribution and logistics provider in planning and forecasting, this issue can be significantly alleviated.
Outsourcing relationships, like many other relationships, evolve
over time. How do medical device companies and their manufacturing partners ensure that their business remains effective,
innovative and productive?
Tanowitz: The first step is to plan for a relationship built on these elements by evaluating the relationship’s long-term implications and
articulating them during the sourcing and contracting phase of the
transaction life cycle. Then be sure to hardwire it into the contact. There
are many ways to“future proof” your contract to ensure it remains viable over time—this can include cost correction mechanisms to ensure
the deal remains market correct and continuous improvement commitments to keep providers focused on continually optimizing operations for the buyer’s benefit. Furthermore, buyers must realize that
provider governance and management is a retained responsibility and
that a meaningful mechanism to communicate, collaborate and provide both encouraging and developmental feedback to the provider is
vital to the provider’s ability to understand, react to, and hopefully meet
(if not exceed) the client’s needs and expectations.
When a medtech firm evaluates a supplier partner, what are
the primary considerations?
Tanowitz: Primary considerations include regulatory compliance,
scale and scalability, technology platform and integration capability, reporting/visibility, risk and cost.
How do both sides of an outsourcing relationship best
Tanowitz: Buyers need to spend the requisite time before entering
the relationship to define and align internal objectives and requirements with stakeholders and articulate these to their potential providers. SLAs (service-level agreements) then need to be
developed to align the provider’s focus with the buyer’s priorities.
The buyer should also determine how it will govern the vendor relationship long before the contract is executed. Once engaged in
an outsourcing relationship, each side must invest the time required
to communicate openly and clearly to ensure needs are met and
challenges can be collaboratively overcome. —C.D.