Product innovation is no longer enough to make you stand out from the crowd. Medtech manufacturers increasingly recognise that becoming a services and solutions provider is the way to gain a competitive advantage.
J&M Management Consulting recently conducted a pair of studies to determine the level of service excellence in the European medical technology industry. In the first study by J&M and the Karlsruhe Institute of Technology, 120 leading manufacturers across all industry sectors participated in an online survey designed to assess their progress from product manufacturers to solution providers by means of a maturity grid. The second study, carried out by J&M and German high-tech industry association Spectaris, took an in-depth look at the level of service excellence achieved in the medical technology industry today. Through expert interviews with executives at medtech companies as well as technology and purchasing officers at hospitals, we were able to identify the status quo and industry-specific drivers of the business model’s ongoing transformation.
Transforming the medtech business model
The medical technology market is experiencing radical change. Technical advances, increasingly complex customer requirements and the demand for comprehensive solutions pose challenges to manufacturers. Cost and price pressures caused by ever-increasing international competition are additional burdens that are driving change.
From the hospital perspective, the privatisation of healthcare and pressure to contain operating costs dominate the management agenda. Hospitals are forced to scrutinise capital expenditures and aim for efficient maintenance, repair and overhaul of their medical equipment. In addition to the initial cost of purchase, the allocation of resources to sustain the product’s life cycle has become a more prominent factor in decision making. When procuring new equipment, 95% of our interview partners at hospitals consider the total cost of ownership as today’s overriding criterion.
Combined, these factors have elevated service to a major building block of sustainable medical technology business models. A customer-centric mindset is an important element of these models, as the successful pursuit of excellence in this regard depends on a detailed understanding of the customer’s end-to-end processes. By enabling lean hospital processes through innovative services and solutions, medical technology companies can set themselves apart. In practice, the leading initiators of this type of business model have experienced a boost in customer retention, turnover and profitability.
As products with comparable features compete to get the attention of buyers, service has evolved into an undisputed key differentiator. For many years, companies concentrated on consecutive cost optimisation programmes; we now see their focus shift towards previously underestimated potential sources of revenue.
| Figure 1: Plotting the transformation from a pure product provider to a services and solutions provider.
Still, the development and market launch of services and solutions are lacking a structured approach and many medtech companies are hesitant to move forward, despite the model’s proven concepts and evident potential. The hospitals participating in our study assert that manufacturers rarely offer innovative service models. One interviewee, a purchasing officer at a group of private Swiss hospitals, stated that he was unaware of any truly innovative services or solutions.
Most manufacturers still seem to perceive product innovation as a sufficient driver of sales.
When asked about their transformation scenario, medical technology companies saw themselves about halfway en route from pure product manufacturers to complete service and solution providers. Through 2015, the transformation is expected to make considerable progress. Our interview partners anticipate an upward shift of 42% (Figure 1).
Configuring service business models
Leading manufacturers benefit from service strategies that name and specify critical adjustments to their current business model. Our research indicates, however, that the majority of companies lack the means to seize current opportunities and balance risks. For example, a maker of laboratory instruments offered services to clients exclusively as a means of sales support. The full potential of its innovative remote access technology was not realised until the strategic groundwork had been laid. Once the technology features had been aligned with an evolving services and solutions portfolio, customers perceived the added value, bringing the company a competitive advantage. Configuring powerful service-driven business models relates to basic parameters. This will ensure that the objectives presented in management literature are achieved in practice, notably:
| Figure 2: Supply and demand trends, as articulated in a 2012 study by J&M Research.
Click here for a larger version.
As a starting point, the products and services mix must be defined in relation to the overall sales proposition. Comparing hospital demands with the supply of services, we were able to identify deficits in process consulting, electronic data interchange, operating models and multivendor offerings. The last two items, in particular, are expected to become a dynamic competition stimulus into 2015 (Figure 2).
By adjusting their pipeline for customer-based innovation, companies are better able to meet their customer’s actual, latent and future service demands. Product portfolio inconsistencies, even if the products and services are leading edge and precisely tied to the customer’s process interface, present an obstacle to achieving the desired benefits In a sample of 120 leading manufacturing companies, only 29% professed to have aligned the development of products and services.
We also found that service processes and organisations are comparatively immature. Many firms have yet to establish a structured preventive maintenance programme, to cite one example. Related manufacturing sectors are typically used as points of comparison, since comparable standards have not yet been established for medical technology equipment. As Figure 3 shows, the perceived level of collaboration among departments is quite positive (with 1 being excellent and 6 being nonexistent). Especially highly rated is the mutual support between the service and sales departments with 1.9 for field sales and 2.0 for inside sales.
Figure 3: Level of collaboration among service departments (J&M Research 2012).
The use of deliberate key performance indicators is an additional prerequisite of performance-based services and operating models. A transparent equipment utilisation rate can achieve significant efficiency gains as the need for maintenance can be precisely diagnosed. In addition, our research shows that comprehensive service performance management is an amplifier of continuous improvement programmes. Not all of the medical technology companies that we interviewed have established service performance indicators; approximately three-quarters of them use key performance indicators to develop and steer services, while only half use the numbers in client reports.
In their pursuit of end-to-end services and solutions, medical technology companies depend on integrated information management, with IT playing a key role. On average, IT provides the managers we interviewed with only 60% of the required information. The share of IT in medical technology equipment is rising, triggering demand for connectivity and remote services. The challenge faced by many manufacturers is that historically distinct IT architectures limit rather than enable service and solution innovation. Given present IT architectures and data privacy standards in healthcare, establishing seamless end-to-end integration is a challenging task. Aligning strategy with IT is the first step that management boards at many companies have yet to take.
Through online communication with their interconnected products, leading manufacturers plan maintenance activities on the basis of actual hours of operation, procedures completed and incoming alerts. Spare parts planning gains in accuracy, ultimately reducing the amount of working capital. More generally, medical technology companies benefit as their improved understanding of how products are used and handled allows them to tailor products, services and solutions in the development pipeline.
To stimulate their transformation, medical technology companies have begun to adjust their skill set. A cultivated service mentality is setting industry leaders apart. Even as product know-how remains a top priority for service personnel, other skills add significant value. Comparing to-be and as-is skills, we identified gaps in the process know-how, social skills and project management areas that need to be closed. Process know-how is given a high priority by our interview partners. Services and solutions add maximum value if they are engineered and delivered with a thorough understanding of the customer’s processes and value chain. Industry leaders share this know-how through training programmes rather than segregating it among a few experts. They recognise change management as a catalyst for their companies’ transformation to end-to-end solution providers and demonstrate that commitment from the top.
Service excellence sets industry leaders apart
As services and solutions add promising options to the configuration of business models, manufacturers have begun to adapt. Despite best practises from related industries and the prospect for profitable growth, few have yet mastered the transition to a mature, margin-oriented provider of a service and solution portfolio. Service excellence entails re-engineered business models that take an integrated view of the industry’s value chain. Leading companies outpace their competitors partly by having a thorough understanding of their clients’ process interfaces and challenges. By converting this understanding into services and solutions that add clear value, these companies have altered their selling proposition and shown that the transformation, if managed systematically, can be accomplished within a reasonable period of time.
*Adrian Reisch, PhD,
is Manager, Medical Technology Area, and
is Senior Consultant, at J&M Management Consulting AG, Willy-Brandt-Platz 5, D-68161 Mannheim, Germany
tel. +49 6211 247 690
*to whom all correspondence should be addressed