http://www.hcltech.com/medical-devices/overview~ More on Medical Devices The U.S. market for medical devices is expected to reach $89 billion this year. But with this promising opportunity comes the 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 see outsourcing 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 medical device firms indicate that a particular set of best practices may make success more likely. Excerpts from the Paper An aging world. Fast-growing markets. New life-extending technology developing at an incredible pace. It sounds like the recipe for a booming industry, and in fact, medical device manufacturing is one of healthcare’s fastest growing segments. But medical device manufacturers also face huge challenges in trying to manage that growth. Competition is tough. Infrastructure and clinical practice may differ considerably from market to market. Device development costs are high. Margins are shrinking. To complicate matters, the fastest-growing markets are going to be accessible only to companies that learn to make the same equipment for a fraction of the cost and at the same time launch new, cutting-edge products faster than their competition.

1. Envisioning the Medical Device Company of the future
Abstract
The U.S. market for medical devices is expected to reach $89 billion this year. But with this promising opportunity comes
the 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 see
outsourcing 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 medical
device firms indicate that a particular set of best practices may make success more likely.

2. Table of Contents
Weighing the Risks and Benefits
of Outsourcing ..................................................................................3
From Cost Saving to Partnering ..................................................................................3
Survey : Outsourcing Risk & Realities ..................................................................................4
Structuring Alliances ..................................................................................4
Communicating Clearly - Inside and Out ..................................................................................5
Moving Forward: All Eyes on the Goal ..................................................................................6
Annexure ..................................................................................8
2

3. A n aging world. Fast-growing markets.
New life-extending technology developing
From Cost Savings to Partnering
Seven years ago, when HCL Technologies
A 2006 survey of 1,000 CEOs by IBM
found that nearly 40% get their best ideas
at an incredible pace. It sounds like the began offering outsourcing services to U.S. from business partners. One study by
recipe for a booming industry, and in fact, medical device manufacturers, most of the NASSCOM, the Indian software alliance,
medical device manufacturing is one of executives with whom Pradep Nair spoke and Booz Allen Hamilton, the
healthcare’s fastest growing segments. viewed outsourcing as strictly a matter of management consultancy, forecasts that
cost savings. 70% of global R&D will be conducted in
But medical device manufacturers also face emerging markets by 2010. “Given the
huge challenges in trying to manage that In the beginning, clients turned to HCL for amount of innovation that goes on in the
growth. Competition is tough. Infrastructure cheaper programmers, according to Nair, world, it’s very hard to not take advantage
and clinical practice may differ considerably Head of HCL’s Global Lifesciences & of outsourcing,” says Saikat Chaudhuri, a
from market to market. Device development Healthcare Practice. Today, he says, they are professor of management at Wharton who
costs are high. Margins are shrinking. To looking for solutions to more complex studies outsourcing management.
complicate matters, the fastest-growing technical problems and business issues.
markets are going to be accessible only to “Four years ago, I was a vendor to a Faster speed to market - The medical
=
companies that learn to make the same customer,” says the Florham Park, New device manufacturing sector is very
equipment for a fraction of the cost and at the Jersey-based executive. “Today, that innovation-driven. When a substantially
same time launch new, cutting-edge relationship is changing to a partnership.” better device enters the market, physicians
products faster than their competition. and hospitals begin to prescribe it. Over
One indication of this shift is that the time, such shifts can be quite painful for
To learn how medical device manufacturers financial 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 the
are responding to new opportunities as they beyond cost-plus transactions for services market in 1994, and by 2007, they had
develop, Knowledge@Wharton and HCL on an hourly basis to agreements based on largely taken over the market: Between
Technologies conducted an online survey of fixed-bids or even simple profit-sharing -- 2002 and 2007, demand for the traditional
medical 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 pay In that kind of situation, speed to market
2007. The survey generated a total of 264 me only once I am delivering your product, can be extremely important -- perhaps
responses; of these, 39% indicated that they or you pay me once the product is launched even more important than cost.
were involved in medical device and into the market,” he explains.
manufacturing or sales, and 35% in
consulting or research. A variety of company
“
sizes were represented as well: 51% were
from companies with less than $500 million
in annual revenues, and 49% over $500
million, with a little more than half of that
“at thebiggestprice point.to build medical equipment
The
right
learning :
number (26% of the total) from companies
of more than $5 billion. General managers of
– Pradep Nair, HCL
these 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 of Today, the market for medical devices is
along with roughly equal representation
potential benefits some companies have growing in the U.S. and Europe at a rate of
from 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 reach
The picture that emerges from the survey is
outsourcing boom began purely as a matter that market, though, will require some
of an industry struggling with profound
of labor-cost arbitrage, and that is still seen substantial changes in product design, user
change in every respect -- from the way it is
as an important benefit. A 2006 study by interface and cost structure. The biggest
organized, to the way it operates, to whom it
the Conference Board estimated the unit one: learning to build medical equipment
serves. The respondents indicated that they
labor cost of manufacturing in India and at the right price point. In the U.S., a
see strong potential in outsourcing or
China as roughly 20% lower than in the dialysis machine might cost $1,400, Nair
collaborating with outside experts as part of
U.S., even after adjusting for higher says, whereas in India, the market will only
the solution to these challenges, and yet they
productivity in the U.S. In engineering bear a machine priced below $600. In such
are well aware that this new set of tools
services, the differential can be as much as a case, Nair argues that an offshore partner
brings with it new risks. Although the best
50%, according to some estimates.
1 is really the only game in town. “Who else
ways to mitigate those risks may seem
can help you?” he asks.
unclear -- not surprising, given the relative
nascence of outsourcing in this market -- Increased ROI on R&D - In some
=
industries, outsourced relationships extend Deerfield, Illinois-based Baxter International
interviews with experts from Wharton, HCL
the reach of the company and accelerate Inc. reached a similar conclusion when it
and medical device firms indicate that
the speed to market for new features. decided to develop a new product targeted for
following a particular set of best practices
Outsourcing can also be a tremendous spur emerging markets. “To do that for an
may make success more likely.
for innovation: emerging market, we must understand their
needs and realities intimately, and that is
1
“Innovators without Borders,” Booz Allen Hamilton presentation, July 2007
http://www.strategy-business.com/media/file/Innovators_Without_Borders-webinar.pdf
3

4. difficult to do if all the thinking is centered in (Question 19).Time zones, said one. “[M]ost outsourcing partners are simply
a developed market such as the U.S.,” says Communication was also difficult, said order takers -- no end-to-end creative
Rohit Vishnoi, the company’s vice president another, partly because of low English skills thought processes [are] available,” one
for technology resources. Similar to the among vendor employees, and partly respondent wrote.
$2,500 “Nano” automobile that Tata Motors because of glitches in telecommunications.
just rolled out in India, which lacks air “People overestimate the value of global IT Nor were clients totally free from blame.
conditioning and other features common to teleconferencing and communications. “They lack initiative in innovation,
most cars in the U.S., the device Baxter is Often, these systems do not work nearly as especially in emerging markets,” one
working on now might not be conceived well as advertised,” said one respondent. respondent complained. Others said that
effectively in the context of a developed Occasionally, cultural idiosyncrasies can many of the problems were due to the client
market.
Survey: Outsourcing Risks and Realities
A surprising number of the 264 industry
respondents to the Knowledge@Wharton-
HCL online survey were enthusiastic about
“question is, what wouldtothey doawith it? In most
Yes, they may be able steal circuit, but the
outsourcing despite having relatively little
experience with outsourcing relationships.
cases, the key IP is already filed, and it takes
Although 72% indicated they have never
much more than a circuit to bring a product to
outsourced any product development work
(Question 12), their perception appears to be
life. Device manufacturers own the surgeon
extremely positive. Many see relatively high relationships that are key to developing the right
potential benefits from outsourcing,
particularly in manufacturing (51%) and IT product 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 difficult
potential for the highest returns (41%), but
other areas of high potential are seen as well to replicate.
in verification and validation (IQ, OQ and – Ronnie Toddywala, Johnson & Johnson
PQ) (38%) and manufacturing execution
systems (also 38%) (Question 8). Many are also get in the way. company not being specific enough about
also quite enthusiastic about the potential for what it wanted from a program.
better outsourcing ROI on R&D and the Other times, a vendor might misunderstand
potential for designing and developing what a client company requires at a more Structuring Alliances
Despite those cautionary tales, most of the
individuals surveyed were optimistic about
“complex productthe development of device is
To begin with,
such as a medical
a highly “ the capabilities of outsourcing partners or
outside collaborators. In fact, 84% agreed
with the statement that “an outsourcing
partner can appreciate the complexity ofyour
often not easy to divide into distinct modules. varied supply chain and support you through
the 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 didn’t
(Question 11). understand our needs,” a respondent noted. One reason for this positive attitude,
A general lack of communication between perhaps, is that medical device
Such gains, however, are not all easily vendors and clients was also cited: “Most manufacturers’ fears of intellectual
harnessed.Unlike the best-known problems have to do with the ability to spec property loss seem to be relatively low.
outsourcing projects, such as contact centers the problem correctly, get a realistic time Ronnie Toddywala, vice president and
or business-process outsourcing, medical schedule and meeting agreed-to cost and leader 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 highly New Jersey, believes those fears are often
complex product such as a medical device is Failure by the vendor to produce a product just an excuse to not move forward. The
often not easy to divide into distinct that met critical performance specifications design of a product is only one of a number
modules, Wharton’s Chaudhuri notes. earned the ire of one respondent, while of steps between product conception and its
another complained that the vendor had used introduction to the market, he says. “Yes,
In the survey, over a third of the participants inferior 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? In
outsourcing project had not worked out lack of expertise affects production, others most cases, the key IP is already filed, and
it takes much more than a circuit to bring a
4

5. product to life. Device manufacturers own device firms suggest that there are specific Cultural differences can also exacerbate
the surgeon relationships that are key to practices that can help companies make the communication problems. Although only
developing the right product with the right most of outsourcing partnerships. 19% of respondents said that “cultural
clinical and economic evidence. That part of synchronization” was an extremely
development 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), a
This may be especially true, paradoxically, are very strong. A number of survey number of respondents said that their
when the product in question is being respondents said their attempts to outsource outsourcing projects have foundered
designed for the outsourcing shop’s own failed in large part because of because of cultural differences. For
home market. In that case, Vishnoi says that miscommunications -- specifications that example, one executive noted that a Chinese
a potential pirate would face a variety of were not clear enough, or that were outsourcing relationship went wrong
challenges before he could bring the product misunderstood by the vendor. because the two companies were unable to
to market, including finding local suppliers
and contract manufacturers, and “
shepherding the product through local
clinical trials. “We’re blazing a brand new
trail in terms of how to do all this, including
how to set up the service infrastructure,” he
“communication.always come down to
The challenges
explains. – Jim Fidacaro, Datascope Corp
W h a r t o n ’s C h a u d h u r i s h a r e s t h e
respondents’ underlying optimism that “The challenges always come down to understand each other. “Chinese culture
global outsourcing can work for medical communication,” says Jim Fidacaro, vice encourages them to say ‘yes’ even when they
devices. It’s already being done in other president of R&D and director of business are not sure they can comply. They don't
industries that produce complex products, development for Datascope Corp., a think it's fair to be bound to contracts
he says, such as consumer electronics and Mahwah, New Jersey, company that began because they often feel they are unfairly
automobiles. The challenge is no longer outsourcing many years ago and now pushed to accept unrealistic terms,”
really keeping up quality levels or finding a outsources an increasing amount of its work. explained another respondent.
vendor with sufficient expertise, he adds.
“The question is more, how are you going to But 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 other’s culture through
Perhaps the first step, in Chaudhuri’s view, round, in a geographic sense. This distance classes or seminars that cover customs or
is for the company to recognize that between partners can make timely behaviors that might be easily
complex, high-technology design or communication difficult. In response, many misunderstood -- even simple things, like
manufacturing can’t be outsourced on a clients and vendors seem to be evolving a set the South Indian practice of nodding from
casual 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 service
function. “You have to treat it much more example, are adjusted to ensure that there are providers might find that some cultural
like 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 L
The structure of such alliances seems to Venkatesan, associate vice president of Lifesciences & Healthcare, argues that there
vary. At the organizational level, he says, embedded systems for HCL Technologies in are positive differences in working with an
several models are now popular. The first is Chennai. Clients also receive frequent offshore engineering outsourcer that
putting groups of staff from the vendor reports on what progress has been made for Western executives sometimes don’t
onsite. This makes a close working particular milestones. In fact, the distance sufficiently 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 best
outsource mostly offsite. The third is to use Venkatesan notes that outsourcing design, practices that they might bring to a problem.
an offshore subsidiary that can work with the for example, can actually speed design
outsourcing vendor. No one is sure yet production cycles because work can More generally, Chamaria argues that the
which model works best, or if one would be continue around the clock at a near 24/7 particular experience of a country like India
particularly suited to a certain kind of pace. where many people have had to struggle
outsourcing. “It’s an ongoing experiment,”
Chaudhuri says. “We see all three of these,
and it’s not yet evident what is working or
what is the optimal model.”
“speed design production cycles because work can
Outsourcing design, for example, can actually “
Communicating Clearly - Inside and Out
There 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, HCL
5

6. the arrangement. For medical device
“ Indians bring to the table what is called ‘jugaad’ in
Hindi - an ability to find their way to a solution, “
companies moving forward with plans to
outsource, experts from Wharton and HCL
recommend the following:
even when the straight path is blocked. The whole = specific goals for the outsourcing
Set
initiative. Chaudhuri and others note that
Indian psyche is geared toward innovation. it is helpful to look beyond labor-cost
– Apurva Chamaria, HCL arbitrage toward more strategic reasons
for outsourcing, such as access to a new
market or the ability to ramp-up a research
against adversity, has served to make its experience several years ago. project quickly. “I think when you’re
engineers more innovative. “People have starting to outsource the higher end like
had to innovate just to live,” he says. While communicating the details about a this, it shouldn’t be done just for cost
“Indians bring to the table what is called device it needed designed, Toddywala’s purposes,” he says.
‘jugaad’ in Hindi -- an ability to find their firm forgot to convey to the outsourcing
way to a solution, even when the straight team a critical specification: the device Part of that evaluation also involves a
path is blocked. The whole Indian psyche is needed to fit into a human bladder. “We got careful consideration of the problems that
geared toward innovation.” a nice-looking square chip,” he recalls, can come into play in outsourcing
“[only] there was absolutely no way I arrangements. “It’s very important to
Along with bridging any cultural divides, could fold that up and put it into a bladder.” analyze the risk and bring all the risks to
the medical device industry executives the table,” Venkatesan says.
interviewed for this report emphasize the Articulate team structures and roles.
=
following practices to ensure productive It’s often important for the manufacturer to Maintain realistic expectations.
=
communication in outsourcing partnerships: understand exactly how the outsourcing Understanding the capabilities of the
provider plans to work, according to outsourcing service firm is important.
= sure to schedule ‘face time.’ In-
Be Fidacaro. Since most firms operate on a Often, for example, the experience level in
person meetings -- especially during the matrixed structure, many times the senior the hiring organization is much higher than
early stages of a relationship -- are members of a team will be called away for in the vendor -- say, engineers with 15 to
important, advises Toddywala. For his last another project. For best results, he 20 years of experience at one company
outsourcing project, he says, suggests making sure that at least some compared to an outsourcing firm where
representatives from his company and members of the outsourcing firm work on even senior engineers will typically have
their outsourcer met at a halfway point, in the project 100%. “Have a core set that is only 6 to 7 years of experience, according
London, to discuss their project. “It’s very committed to your work,” he suggests. to Venkatesan. These issues tend to sort
important, especially in the beginning, to themselves out over time, once the
set up these things. Otherwise, you’re just Having someone from the outsourcing younger engineers have proven their
talking to a voice.” firm who can stay in the company’s 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 aren’t going right.” = the goals of vendor and client. It’s
Align
handed off. To be effective, we need to important in these relationships for
leverage the expertise that exists on both =
Plan beyond the project. Technical vendors and clients to share common
sides,” echoes Vishnoi of Baxter. “We support 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 an working on a project that is complex and
involved and we have a local presence in agreement, according to Fidacaro. It’s may evolve over time. Part of that, says
all the developing and emerging useful to arrange to have all the designs Chaudhuri, is choosing the right vendors
marketplaces.” transferred after a project is completed, he and 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, work
project specifications. “Clear upfront with more than a few vendors, and
requirements are really the trick,” Moving Forward: All Eyes on the Goal management could become unwieldy.
Fidacaro says. Clarity in these
communications 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 the Venkatesan notes that in order for these
apparent with an outsourced project. manufacturer hopes to accomplish through
“When a company develops something
“involved andnumber of local presence thisallside
internally, it’s not always easy to see the
impact that changing the scope of the
project or its feature set has on costs.
We have a people from “
Internally, it’s a sunk cost … on the we have a in the
outside, you see the dollars,” he says.
developing and emerging marketplaces.
J&J’s Toddywala came to a similar
realization after a bad outsourcing – Rohit Vishnoi, Baxter International Inc.
6

7. partnerships to truly succeed, outsourcing
firms in the medical devices space need to
“
“all the risks to the table the risk and bring
share the same underlying value their
customers place on the importance of the
work they do. “More than the effort we put
It’s very important to analyze
there, more than the costs of X dollars or
whatever we are going to charge … if you – M.Venkatesan, HCL
are working on a life-critical development, if
there is a problem in what we do, in the
ultimate deliverables, it can cost human
life,” he says.
7

8. Annexure - Survey Questions & Responses
Under which category does your organization fall? What is your organization’s size in terms of revenues?
18%
25% 22%
Medical Device OEM 8% Less than USD$500 million
Medical Device Supplier/Vendor 51% $500 million - $1 billion
EMS Vendor 6% $1 billion - $2 billion
17%
Research Organization 8% $2 billion - $5 billion
24% Consulting Firm $5 billion - $10 billion
11% 9% More than $10 billion
Other please specify
1%
What is your business function? What are the top challenges facing your business enterprise?
(Select all the apply)
20% 9%
23% General Management
6% Finance 35% Increase Costs & Time to Market
3% 10% Marketing Long Product Life Cycle
R&D 30%
Adopting Technology Innovation
12% Sales & Marketing
13% HR Security & HR issues
13% Manufacturing/Production 13% Regulatory Compliance
9%
Other, please specify 4% Other please specify
How much of your product development work does your firm In which business areas do you think outsourcing can give your firm
outsource/offsource? maximum potential benefits? (Select all the apply)
140
4% 8% 120
13% 100
Axis Title
Less than 20% 80
75% 21% - 40%
41% - 60% 60
More than 60%
40
20
0
Regulatory Sales & IT Other
R&D Manufacturing Compliance Marketing Organization please specify
Response 75 132 46 44 120 28
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)
140 100
90
120
80
100 70
Axis Title
Axis Title
80 60
50
60
40
40 30
20 20
10
0
0
Hardware
Product
Engineering Other Manufacturing Verification Manufacturing Enterprise Manufacturing Other
Software
Clinical Trials Verification
(Mechanical & please specify Informatics & Validation Execution Plant Test – Jigs & please specify
& Validation Solution (IQ, OQ & PQ) Systems Integration Fixtures
Electrical) Response 69 91 99 56 97 25
Response 99 101 94 133 22
What 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)
120 140
120
100
100
80
80
Axis Title
Axis Title
60 60
40
40
20
20
0 Vendor
CAPA Design SOPs Other
Qualification
0 Submission Management Protocols and please specify
Sales Force Downstream Campaign Other Third Party
CDI/MDM Solutions Reports
Automation Visibility Management please specify audits
Response 104 32 64 103 22 Response 73 40 129 91 19
Do 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 products software, mechanical, embedded and other systems. Have you tried
meant for emerging markets? outsourcing any of these functions to a partner?
26%
28%
Yes No
Yes
72% No
74%
9

10. Please rate the following criteria for getting into an outsourcing/offsourcing Please rate the following criteria for vendor selection:
relationship:
180 200
180
160
160
140
Not Important 140 Not Important
120
Least Important 120 Least Important
100
Important 100 Important
80
Some what 80 Some what
Important Important
60
60 Most Important
Most Important
40 40
N/A N/A
20 20
0 0
Cultural Technical Transition Plan Client Time Zone Cultural Technical Transition Plan Client Time Zone
Synchronization Competency & Governance Referrals Difference Synchronization Competency & Governance Referrals Difference
& Quality Structure & Quality Structure
Systems Systems
Do you think an outsourcing partner can appreciate the complexity
of your varied supply chain and support you through the consulting
and executing piece alike?
16.33%
Yes
If not why?
83.67%
lifesciences@hcl.in
10