1. Envisioning the Medical Device Company of the futureAbstractThe U.S. market for medical devices is expected to reach $89 billion this year. But with this promising opportunity comesthe added pressure for medical device companies to stay ahead of the competition through innovation at a reduced cost.According to an online survey conducted by Knowledge@Wharton and HCL Technologies, industry respondents seeoutsourcing as a potential solution to this challenge, and yet they are aware that this new set of tools brings with it new risks.Although the best ways to mitigate those risks may seem unclear, interviews with experts from Wharton, HCL and medicaldevice firms indicate that a particular set of best practices may make success more likely.

2. Table of ContentsWeighing the Risks and Benefitsof Outsourcing ..................................................................................3From Cost Saving to Partnering ..................................................................................3Survey : Outsourcing Risk & Realities..................................................................................4Structuring Alliances..................................................................................4Communicating Clearly - Inside and Out ..................................................................................5Moving Forward: All Eyes on the Goal ..................................................................................6Annexure ..................................................................................82 3. An aging world. Fast-growing markets.New life-extending technology developing From Cost Savings to Partnering Seven years ago, when HCL TechnologiesA 2006 survey of 1,000 CEOs by IBMfound that nearly 40% get their best ideasat an incredible pace. It sounds like thebegan offering outsourcing services to U.S.from business partners. One study byrecipe for a booming industry, and in fact,medical device manufacturers, most of theNASSCOM, the Indian software alliance,medical device manufacturing is one of executives with whom Pradep Nair spoke and Booz Allen Hamilton, thehealthcares fastest growing segments. viewed outsourcing as strictly a matter of management consultancy, forecasts that cost savings.70% of global R&D will be conducted inBut medical device manufacturers also faceemerging markets by 2010. Given thehuge challenges in trying to manage that In the beginning, clients turned to HCL foramount of innovation that goes on in thegrowth. Competition is tough. Infrastructure cheaper programmers, according to Nair,world, its very hard to not take advantageand clinical practice may differ considerablyHead of HCLs Global Lifesciences &of outsourcing, says Saikat Chaudhuri, afrom market to market. Device developmentHealthcare Practice. Today, he says, they areprofessor of management at Wharton whocosts are high. Margins are shrinking. Tolooking for solutions to more complexstudies outsourcing management.complicate matters, the fastest-growingtechnical problems and business issues.markets are going to be accessible only to Four years ago, I was a vendor to aFaster speed to market - The medical =companies that learn to make the samecustomer, says the Florham Park, New device manufacturing sector is veryequipment for a fraction of the cost and at theJersey-based executive. Today, thatinnovation-driven. When a substantiallysame time launch new, cutting-edge relationship is changing to a partnership. better device enters the market, physiciansproducts faster than their competition.and hospitals begin to prescribe it. Over One indication of this shift is that thetime, such shifts can be quite painful forTo learn how medical device manufacturersfinancial structure of these relationships is unprepared companies. For instance, drug-are reacting to these changes and how they changing, according to Nair, moving eluting cardiology stents came on theare responding to new opportunities as theybeyond cost-plus transactions for servicesmarket in 1994, and by 2007, they haddevelop, Knowledge@Wharton and HCL on an hourly basis to agreements based on largely taken over the market: BetweenTechnologies conducted an online survey of fixed-bids or even simple profit-sharing -- 2002 and 2007, demand for the traditionalmedical equipment manufacturers, vendors the kinds of structures that partners tend to metal-only stents dwindled by nearly 90%.and other industry experts in November share. Today, it is moving towards: You payIn that kind of situation, speed to market2007. The survey generated a total of 264me only once I am delivering your product,can be extremely important -- perhapsresponses; of these, 39% indicated that they or you pay me once the product is launchedeven more important than cost.were involved in medical deviceand into the market, he explains.manufacturing or sales, and 35% inconsulting or research. A variety of company sizes were represented as well: 51% werefrom companies with less than $500 millionin annual revenues, and 49% over $500million, with a little more than half of that at thebiggestprice point.to build medical equipmentThe rightlearning :number (26% of the total) from companiesof more than $5 billion. General managers of Pradep Nair, HCLthese companies had the highest The rapid growth of outsourcing in this Easier entry into emerging markets - =representation among respondents (23%), space may have to do with the range ofToday, the market for medical devices isalong with roughly equal representation potential benefits some companies havegrowing in the U.S. and Europe at a rate offrom finance (10%), marketing (13%), R&D reportedly found: roughly 7% to 8% a year, according to(13%) and sales (12%). Nair. At the same time, the India and China Reduced margin pressure - The Asian = market is growing at 25% a year. To reachThe picture that emerges from the survey is outsourcing boom began purely as a matter that market, though, will require someof an industry struggling with profound of labor-cost arbitrage, and that is still seen substantial changes in product design, userchange in every respect -- from the way it is as an important benefit. A 2006 study byinterface and cost structure. The biggestorganized, to the way it operates, to whom it the Conference Board estimated the unit one: learning to build medical equipmentserves. The respondents indicated that they labor cost of manufacturing in India andat the right price point. In the U.S., asee strong potential in outsourcing or China as roughly 20% lower than in thedialysis machine might cost $1,400, Naircollaborating with outside experts as part of U.S., even after adjusting for higher says, whereas in India, the market will onlythe solution to these challenges, and yet they productivity in the U.S. In engineering bear a machine priced below $600. In suchare well aware that this new set of tools services, the differential can be as much asa case, Nair argues that an offshore partnerbrings with it new risks. Although the best 50%, according to some estimates.1is really the only game in town. Who elseways to mitigate those risks may seem can help you? he asks.unclear -- not surprising, given the relativenascence of outsourcing in this market --Increased ROI on R&D - In some = industries, outsourced relationships extend Deerfield, Illinois-based Baxter Internationalinterviews with experts from Wharton, HCL the reach of the company and accelerate Inc. reached a similar conclusion when itand medical device firms indicate that the speed to market for new features. decided to develop a new product targeted forfollowing a particular set of best practices Outsourcing can also be a tremendous spur emerging markets. To do that for anmay make success more likely. for innovation: emerging market, we must understand their needs and realities intimately, and that is1Innovators without Borders, Booz Allen Hamilton presentation, July 2007http://www.strategy-business.com/media/file/Innovators_Without_Borders-webinar.pdf3 4. difficult to do if all the thinking is centered in (Question 19).Time zones, said one.[M]ost outsourcing partners are simplya developed market such as the U.S., says Communication was also difficult, said order takers -- no end-to-end creativeRohit Vishnoi, the companys vice presidentanother, partly because of low English skillsthought processes [are] available, onefor technology resources. Similar to the among vendor employees, and partly respondent wrote.$2,500 Nano automobile that Tata Motorsbecause of glitches in telecommunications.just rolled out in India, which lacks airPeople overestimate the value of global ITNor were clients totally free from blame.conditioning and other features common toteleconferencing and communications. They lack initiative in innovation,most cars in the U.S., the device Baxter isOften, these systems do not work nearly as especially in emerging markets, oneworking on now might not be conceivedwell as advertised, said one respondent.respondent complained. Others said thateffectively in the context of a developedOccasionally, cultural idiosyncrasies canmany of the problems were due to the clientmarket.Survey: Outsourcing Risks and RealitiesA surprising number of the 264 industryrespondents to the Knowledge@Wharton-HCL online survey were enthusiastic about question is, what wouldtothey doawith it? In mostYes, they may be able steal circuit, but theoutsourcing despite having relatively littleexperience with outsourcing relationships.cases, the key IP is already filed, and it takesAlthough 72% indicated they have nevermuch more than a circuit to bring a product tooutsourced any product development work(Question 12), their perception appears to belife. Device manufacturers own the surgeonextremely positive. Many see relatively highrelationships that are key to developing the rightpotential benefits from outsourcing,particularly in manufacturing (51%) and ITproduct with the right clinical and economic(46%) (Question 6). Within manufacturing,test jigs and fixtures are believed to have the evidence. That part of development is difficultpotential for the highest returns (41%), butother areas of high potential are seen as wellto replicate.in verification and validation (IQ, OQ and Ronnie Toddywala, Johnson & JohnsonPQ) (38%) and manufacturing executionsystems (also 38%) (Question 8). Many arealso get in the way. company not being specific enough aboutalso quite enthusiastic about the potential for what it wanted from a program.better outsourcing ROI on R&D and theOther times, a vendor might misunderstandpotential for designing and developing what a client company requires at a more Structuring AlliancesDespite those cautionary tales, most of theindividuals surveyed were optimistic aboutcomplex productthe development of device is To begin with,such as a medicala highly the capabilities of outsourcing partners oroutside collaborators. In fact, 84% agreedwith the statement that an outsourcingpartner can appreciate the complexity ofyouroften not easy to divide into distinct modules. varied supply chain and support you throughthe consulting and execution piece alike(Question 17), and 78% said they do not Saikat Chaudhuri, The Wharton School intend to restrict R&D to their home country(Question 20).products in emerging markets (74%) strategic level: One vendor simply didnt(Question 11). understand our needs, a respondent noted. One reason for this positive attitude, A general lack of communication betweenperhaps, is that medical deviceSuch gains, however, are not all easilyvendors and clients was also cited: Mostmanufacturers fears of intellectualharnessed.Unlike the best-knownproblems have to do with the ability to spec property loss seem to be relatively low.outsourcing projects, such as contact centersthe problem correctly, get a realistic timeRonnie Toddywala, vice president andor business-process outsourcing, medical schedule and meeting agreed-to cost andleader of an internally funded Johnson &device development is extremely complex. quality standards, one participant said.Johnson start-up based in Sommerville,To begin with, the development of a highlyNew Jersey, believes those fears are oftencomplex product such as a medical device isFailure by the vendor to produce a product just an excuse to not move forward. Theoften not easy to divide into distinct that met critical performance specifications design of a product is only one of a numbermodules, Whartons Chaudhuri notes.earned the ire of one respondent, whileof steps between product conception and its another complained that the vendor had usedintroduction to the market, he says. Yes,In the survey, over a third of the participantsinferior materials. High staff turnover in the they may be able to steal a circuit, but the-- 106 -- offered comments on why a past contractors firm causes problems, and a question is, what would they do with it? Inoutsourcing project had not worked out lack of expertise affects production, others most cases, the key IP is already filed, andit takes much more than a circuit to bring a4 5. product to life. Device manufacturers owndevice firms suggest that there are specificCultural differences can also exacerbatethe surgeon relationships that are key topractices that can help companies make thecommunication problems. Although onlydeveloping the right product with the rightmost of outsourcing partnerships. 19% of respondents said that culturalclinical and economic evidence. That part of synchronization was an extremelydevelopment is difficult to replicate.The most important of these seems to be important factor in the decision to enter into making sure that the lines of communication an outsourcing relationship (Question 13), aThis may be especially true, paradoxically,are very strong. A number of survey number of respondents said that theirwhen the product in question is beingrespondents said their attempts to outsourceoutsourcing projects have foundereddesigned for the outsourcing shops ownfailed in large part because of because of cultural differences. Forhome market. In that case, Vishnoi says that miscommunications -- specifications thatexample, one executive noted that a Chinesea potential pirate would face a variety of were not clear enough, or that were outsourcing relationship went wrongchallenges before he could bring the product misunderstood by the vendor.because the two companies were unable toto market, including finding local suppliersand contract manufacturers, andshepherding the product through localclinical trials. Were blazing a brand newtrail in terms of how to do all this, includinghow to set up the service infrastructure, hecommunication.always come down to The challengesexplains. Jim Fidacaro, Datascope CorpW h a r t o n s C h a u d h u r i s h a r e s t h erespondents underlying optimism thatThe challenges always come down to understand each other. Chinese cultureglobal outsourcing can work for medicalcommunication, says Jim Fidacaro, vice encourages them to say yes even when theydevices. Its already being done in otherpresident of R&D and director of business are not sure they can comply. They dontindustries that produce complex products,development for Datascope Corp., athink its fair to be bound to contractshe says, such as consumer electronics andMahwah, New Jersey, company that beganbecause they often feel they are unfairlyautomobiles. The challenge is no longeroutsourcing many years ago and nowpushed to accept unrealistic terms,really keeping up quality levels or finding aoutsources an increasing amount of its work.explained another respondent.vendor with sufficient expertise, he adds.The question is more, how are you going toBut what are the factors that get in the way? To overcome those kinds of shortcomings,handle all the organizational issues? One problem companies that outsource face experts say it can be helpful for each side to is the fact that the earth remains stubbornly learn about the others culture throughPerhaps the first step, in Chaudhuris view, round, in a geographic sense. This distance classes or seminars that cover customs oris for the company to recognize that between partners can make timelybehaviors that might be easilycomplex, high-technology design or communication difficult. In response, manymisunderstood -- even simple things, likemanufacturing cant be outsourced on a clients and vendors seem to be evolving a set the South Indian practice of nodding fromcasual basis, the way it might be when of practices to help mitigate the impact of the side to side to mean no. Along the way,outsourcing a less complex, less strategic differences in time zones. Shifts at HCL, for executives working with offshore servicefunction. You have to treat it much moreexample, are adjusted to ensure that there areproviders might find that some culturallike an alliance, he says.typically three or four hours of overlap with differences can be a boon. Apurva Western clients every day, according to M.C h a m a r i a , G r o u p M a n a g e r, H C LThe structure of such alliances seems to Venkatesan, associate vice president of Lifesciences & Healthcare, argues that therevary. At the organizational level, he says,embedded systems for HCL Technologies inare positive differences in working with anseveral models are now popular. The first is Chennai. Clients also receive frequentoffshore engineering outsourcer thatputting groups of staff from the vendorreports on what progress has been made forWestern executives sometimes dontonsite. This makes a close working particular milestones. In fact, the distancesufficiently appreciate. For one thing,relationship easier, but it also reduces the between companies can be seen as an engineers often work in multiple verticals,potential cost savings. The second is to opportunity rather than a hindrance.giving them knowledge of a wider set of bestoutsource mostly offsite. The third is to useVenkatesan notes that outsourcing design, practices that they might bring to a problem.an offshore subsidiary that can work with thefor example, can actually speed designoutsourcing vendor. No one is sure yet production cycles because work canMore generally, Chamaria argues that thewhich model works best, or if one would be continue around the clock at a near 24/7particular experience of a country like Indiaparticularly suited to a certain kind of pace. where many people have had to struggleoutsourcing. Its an ongoing experiment,Chaudhuri says. We see all three of these,and its not yet evident what is working orwhat is the optimal model. speed design production cycles because work canOutsourcing design, for example, can actuallyCommunicating Clearly - Inside and OutThere may well prove to be no best structure,continue around the clock at a near 24/7 pace.but experts at Wharton, HCL and medical M.Venkatesan, HCL5 6. the arrangement. For medical device Indians bring to the table what is called jugaad inHindi - an ability to find their way to a solution, companies moving forward with plans tooutsource, experts from Wharton and HCLrecommend the following:even when the straight path is blocked. The whole = specific goals for the outsourcingSetinitiative. Chaudhuri and others note thatIndian psyche is geared toward innovation.it is helpful to look beyond labor-cost Apurva Chamaria, HCL arbitrage toward more strategic reasonsfor outsourcing, such as access to a newmarket or the ability to ramp-up a researchagainst adversity, has served to make itsexperience several years ago.project quickly. I think when youreengineers more innovative. People have starting to outsource the higher end likehad to innovate just to live, he says.While communicating the details about athis, it shouldnt be done just for costIndians bring to the table what is called device it needed designed, Toddywalas purposes, he says.jugaad in Hindi -- an ability to find theirfirm forgot to convey to the outsourcingway to a solution, even when the straightteam a critical specification: the device Part of that evaluation also involves apath is blocked. The whole Indian psyche isneeded to fit into a human bladder. We got careful consideration of the problems thatgeared toward innovation. a nice-looking square chip, he recalls,can come into play in outsourcing [only] there was absolutely no way I arrangements. Its very important toAlong with bridging any cultural divides,could fold that up and put it into a bladder.analyze the risk and bring all the risks tothe medical device industry executives the table, Venkatesan says.interviewed for this report emphasize the Articulate team structures and roles.=following practices to ensure productiveIts often important for the manufacturer toMaintain realistic expectations.=communication in outsourcing partnerships:understand exactly how the outsourcingUnderstanding the capabilities of theprovider plans to work, according tooutsourcing service firm is important.= sure to schedule face time. In-BeFidacaro. Since most firms operate on a Often, for example, the experience level inperson meetings -- especially during thematrixed structure, many times the senior the hiring organization is much higher thanearly stages of a relationship -- are members of a team will be called away for in the vendor -- say, engineers with 15 toimportant, advises Toddywala. For his lastanother project. For best results, he 20 years of experience at one companyoutsourcing project, he says, suggests making sure that at least some compared to an outsourcing firm whererepresentatives from his company andmembers of the outsourcing firm work on even senior engineers will typically havetheir outsourcer met at a halfway point, in the project 100%. Have a core set that isonly 6 to 7 years of experience, accordingLondon, to discuss their project. Its verycommitted to your work, he suggests. to Venkatesan. These issues tend to sortimportant, especially in the beginning, tothemselves out over time, once theset up these things. Otherwise, youre just Having someone from the outsourcing younger engineers have proven theirtalking to a voice.firm who can stay in the companys office mettle to the client.can also be helpful, he adds - somebody This is not just a distinct project that is [to turn to] if things arent going right. = the goals of vendor and client. ItsAlign handed off. To be effective, we need toimportant in these relationships for leverage the expertise that exists on both =Plan beyond the project. Technicalvendors and clients to share common sides, echoes Vishnoi of Baxter. Wesupport after the project is completed is goals, experts say, particularly while have a number of people from this side another important element to clarify in anworking on a project that is complex and involved and we have a local presence in agreement, according to Fidacaro. Itsmay evolve over time. Part of that, says all the developing and emerginguseful to arrange to have all the designs Chaudhuri, is choosing the right vendors marketplaces. transferred after a project is completed, heand the right number of vendors.says, and in some cases even to arrange for Outsource too little work, and it might not=Develop a clear and complete set of ongoing support for the life of the product.be worthwhile. On the other hand, workproject specifications. Clear upfrontwith more than a few vendors, andrequirements are really the trick, Moving Forward: All Eyes on the Goalmanagement could become unwieldy.Fidacaro says. Clarity in thesecommunications is important, in part, Outsourcing partnerships require careful, Beyond aligning goals on the project level,because the costs of indirection are more upfront thought about what theVenkatesan notes that in order for theseapparent with an outsourced project.manufacturer hopes to accomplish throughWhen a company develops something involved andnumber of local presence thisallsideinternally, its not always easy to see theimpact that changing the scope of theproject or its feature set has on costs.We have apeople from Internally, its a sunk cost on thewe have a in theoutside, you see the dollars, he says.developing and emerging marketplaces. J&Js Toddywala came to a similar realization after a bad outsourcing Rohit Vishnoi, Baxter International Inc.6 7. partnerships to truly succeed, outsourcingfirms in the medical devices space need to all the risks to the table the risk and bringshare the same underlying value theircustomers place on the importance of thework they do. More than the effort we putIts very important to analyzethere, more than the costs of X dollars orwhatever we are going to charge if you M.Venkatesan, HCLare working on a life-critical development, ifthere is a problem in what we do, in theultimate deliverables, it can cost humanlife, he says. 7 8. Annexure - Survey Questions & ResponsesUnder which category does your organization fall? What is your organizations size in terms of revenues? 18% 25% 22%Medical Device OEM8% Less than USD$500 millionMedical Device Supplier/Vendor 51% $500 million - $1 billionEMS Vendor6% $1 billion - $2 billion17%Research Organization8%$2 billion - $5 billion 24%Consulting Firm$5 billion - $10 billion 11%9% More than $10 billionOther please specify1%What is your business function? What are the top challenges facing your business enterprise?(Select all the apply) 20%9% 23%General Management6%Finance35% Increase Costs & Time to Market3%10% MarketingLong Product Life CycleR&D30% Adopting Technology Innovation 12%Sales & Marketing 13%HR Security & HR issues 13%Manufacturing/Production 13% Regulatory Compliance 9%Other, please specify4%Other please specifyHow much of your product development work does your firmIn which business areas do you think outsourcing can give your firmoutsource/offsource?maximum potential benefits? (Select all the apply)140 4%8% 120 13%100 Axis TitleLess than 20%8075% 21% - 40%41% - 60%60More than 60% 40 200 Regulatory Sales &IT OtherR&DManufacturing ComplianceMarketing Organization please specifyResponse75 1324644 12028 8 9. What are the areas within R&D process that outsourcing can help?What are areas within the Manufacturing process that outsourcing can help? (Select all that apply) (Select all that apply)1401009012080100 70Axis TitleAxis Title 80 6050 6040 40 30 20 20100 0 HardwareProductEngineeringOther Manufacturing Verification Manufacturing Enterprise ManufacturingOtherSoftwareClinical Trials Verification (Mechanical & please specify Informatics & Validation Execution PlantTest Jigs & please specify& ValidationSolution(IQ, OQ & PQ) Systems Integration Fixtures Electrical)Response 69 91 9956 9725 Response 9910194 13322What are the areas within the Sales and Marketing process that What are the areas within the Regulatory process that outsourcing can help?outsourcing can help? (Select all that apply)(Select all that apply) 120140120 10010080 80 Axis Title Axis Title60 60 4040 20200Vendor CAPA Design SOPsOther Qualification 0Submission Management Protocols andplease specifySales Force Downstream CampaignOther Third PartyCDI/MDM SolutionsReportsAutomation Visibility Management please specifyaudits Response1043264 103 22Response 7340129 91 19Do you think you can use offshore product development for better Full product development implies outsourcing work around hardware,ROI on R&D and potentially for designing and development productssoftware, mechanical, embedded and other systems. Have you triedmeant for emerging markets?outsourcing any of these functions to a partner? 26% 28% YesNoYes 72%No 74%9 10. Please rate the following criteria for getting into an outsourcing/offsourcingPlease rate the following criteria for vendor selection:relationship:180200 180160 160140 Not Important 140 Not Important120 Least Important 120 Least Important100 Important 100 Important80 Some what 80Some what Important Important60 60Most Important Most Important40 40N/AN/A20 20 00CulturalTechnical Transition PlanClient Time Zone CulturalTechnical Transition PlanClient Time Zone Synchronization Competency & GovernanceReferrals Difference Synchronization Competency & GovernanceReferrals Difference& QualityStructure& QualityStructureSystems SystemsDo you think an outsourcing partner can appreciate the complexityof your varied supply chain and support you through the consultingand executing piece alike?16.33% Yes If not why? 83.67%lifesciences@hcl.in10