Performance improvement in the medical technology sector

Paul Cichocki: Healthcare is now acting more like the rest of the global economy. You can count very few industries that have experienced real price increases for the amount of time that healthcare has.

One of the paradigms that the healthcare industry tends to bring is what I call the false tradeoff between efficiency and effectiveness. Within the healthcare industry, I tend to see thinking that says, 'I can be efficient or I can be effective at what I do, but I can’t be both.'

The leaders in the healthcare industry have started to look outside of their own industry—into industries like automobiles and semi-conductors—and they’ve realized that efficiency and effectiveness can go hand in hand. I can get a higher quality vehicle at a lower cost. I can get higher computing technology that's more reliable at a lower cost.

Healthcare is starting to embrace and understand that, but it’s a mindset change, and it requires looking outside the industry.

There’s a medtech company that we’ve studied that did something very interesting. As they looked to their peers, they realized their peers leveraged offshore emerging market talent from India and China and outsourced talent about as much as they did. So one conclusion they could have drawn was: "We’re at best practice in the industry; we’re as good as anyone else."

But, in fact, they looked outside the industry and they said, “Are there other industries that have been forced by market discipline to be more creative?"

What they found was the aerospace industry, which turns out to have a lot of analogous characteristics to the medtech industry in terms of hardware challenges, software challenges, firmware challenges, metals and engineering challenges and the types of tolerances required. And so at the end of the day, they concluded that in fact, the underlying talents existed [offshore]. They were just currently serving a different industry. And reality has born that hypothesis out: These third-party providers in India and China have been able to supply engineering talent that’s very adept at meeting their needs at a much lower cost on a much faster timeline.

Changing business model

So healthcare companies are making massive changes to their business model. They are moving beyond incremental, clinical innovation and really helping their customers—the providers—drive a more effective cost of care and lower the total cost of therapy. That’s where the game is now being played.

Another way that healthcare companies are looking to reduce costs is by reducing the cost of the device. This is becoming increasingly important because the sources of growth for a lot of medtech companies is in emerging markets where that good-enough product is really what dominates the market.

Those price points and those products that serve that good-enough segment in emerging markets are starting to become the place where the future of healthcare will play out for manufacturers in developed markets like Europe and the US. Good-enough products are now being exported out of emerging markets into those developed markets.

There is one company operating in the emerging markets that is not only licensing their product in the US, they’re also buying a US company to increase their global footprint. So the trend has begun.

Another way healthcare companies are reducing costs is actually far from the customers: back-office spend. General and administrative expenses, finance, HR, IT, even purchase services—those are attractive areas to go after for leading healthcare companies.

Healthcare companies—say, a medtech manufacturer—might spend one-and-a-quarter or one-and-a-half percent of their sales on finance activities. When you look outside of healthcare, the norm is more like half-a-percent or three-quarters of a percent—something like half of what they spend.

And you ask, why do you spend as much as you do in finance? I personally believe the healthcare companies—medtech companies, pharma companies—spend as much as they do because they can afford to. They haven’t had the market discipline to push down better and better practices the way an industrial company that makes a five percent return on sales has been forced to do.

Healthcare companies are using those savings to either ride the price curve down effectively without hampering their profit margins, or they’re using that as a way to reinvest in their business model to help fund this seismic transformation.

What will it take to win?

Healthcare companies have enjoyed decades of real positive price increases, which have now effectively come to an end. They’ve got entire organizations that have grown up over this time period in that type of environment. The challenge is to get those employees to understand that they’ve got to be more effective and more efficient, basically doing more with less, much like the rest of the economy. The companies that figure that out, and win the hearts and minds of their employees first, will thrive and beat their competitors.