The medical device manufacturing industry is dependent upon a number of factors to be successful to provide critical life-preserving and life-saving equipment to healthcare professionals. One key element that may be more significant than many others on the list, however, is the relationship between the medical device OEM and services provider.
Since this link is so important, it’s vital the foundation for such an agreement between these two entities is built on firm ground. That requires a number of aspects to be determined and resolved before any business can go forward. Only a contract that’s deemed fair and equitable by both sides can pave the road toward a mutually beneficial arrangement. Without balance, the business arrangement is likely to sour.
To address the dynamics of this relationship, Merritt Williams, chief commercial officer at Westfall Technik, responded to a number of questions in the following Q&A. He speaks to the contract details that need to be considered, IP ownership, supply chain management, and other factors that play an important role in the agreement.
Sean Fenske: Before a relationship can even be established between an OEM and supplier, what are your recommendations for determining if each party is the right fit for the task required?
Merritt Williams: Great question! For me, it’s all about the questions asked. Too often, an organization will run headfirst into a capabilities presentation and then ask “Do you have any opportunities for me?” The true “task,” as you referred to it, must be to gather information, analyze, and diagnose, and that’s not just with regard to what the OEM is seeking. For almost every deal, there are a myriad of stakeholders, strategies, goals, and outcomes that must be considered; alignment is critical, which takes work.
Without the right questions and follow-up dialogue, one will not be able to answer whether or not the “fit” is right. We know a relationship is only built over time, so the questions will vary. There are going to be different questions posed between an OEM and supplier with a longstanding relationship versus those asked when an OEM has a new supplier trying to break in to add value and solve problems.
Fenske: What elements are critical to include in the contract to ensure a fair agreement to both sides?
Williams: It feels like I’ve seen five-page contracts all the way through to 50-page contracts. At the end of the day, it’s about balancing the risk between parties for the value and work a supplier is providing. As an example, a single-component supplier and OEM customer should examine an agreement through a different lens than an arrangement involving full device assembly, packaging, and management of the design history file, sterilization, and/or delivery.
With that said, you must spend time and attention in areas of IP (infringement or third party implications), indemnification (both parties), warranties, payment terms, and term/termination. I find most of our time is spent working with the OEM to get these sections balanced as the risk exists within these sections. Then, it becomes a matter of being in full agreement on how you will operate the business—forecasting, capital, material, and cost improvement initiatives.
Since both sides tend to bring baggage from previous agreements or have to balance corporate mandates, it is the responsibility of both parties to be open to the process. Both sides need to arrive at an equitable arrangement as efficiently as possible so the partnership can begin and generate revenue for each party.
Fenske: Glad you mentioned risk. While OEMs are often seeking to unload risk onto supply or manufacturing partners, how can this be altered to enable more of a true partnership approach?
Williams: This is certainly a challenge, as I was just saying. And while I believe it always has been, it feels like it’s been magnified in today’s environment. The word “partner” is used very generically at times versus that of “vendor” or “supplier.” I may be Pollyanna in my thought process, but I believe a partnership is one that is earned based on bringing value over time. This is where the supplier will earn “preferred” or “strategic” status based on factors such as total spend, unique capabilities, global footprint, metrics, etc., but until it works both ways, you can’t really label it a “partnership” and that’s the goal.
Altering this, as you asked, takes work and openness from both sides through the contract and agreement process, again through the specific lens of the work or value one is bringing. No one wants to be in a marriage because they have to be, and there may be times you must shake hands and walk away because the risks are too high for your organization. (Believe me, I fully understand that’s easier said than done.) To grow, you will have to take risks, but they need to be measured and you need to be comfortable with the arrangement should those risks end up going in the wrong direction.
Fenske: What about IP ownership? When new technologies are being created, either on the fabrication side or the end product side, how should ownership be handled?
Williams: This is another factor that must be negotiated upfront. Are you being contracted for engineering services? If so, the IP developed will likely be owned by the OEM as they are paying you along the way. Are you bringing a proprietary process to the table? If you are, you will need to negotiate compensation for this in whatever form that takes (e.g., cash, long-term manufacturing rights, licensing, or some other construct).
When it comes to IP in this space, we need to delineate whether it is truly IP (product or process) or if it is just “know how.” Further, we need to determine how specific it is to a device, for example; is it general in nature or is it critical to the design or manufacturing process? Based on these determinations, the parties need to agree upon a value equation that will be deemed equitable to both sides.
Fenske: Are OEMs selecting other supply chain partners in such a relationship or are they relying on the services partner for the management of that too? How is that best handled?
Williams: This varies and can work in either scenario. If we are working with legacy devices or transfer opportunities, the supply chain is likely already developed and you will inherit what the OEM established. For critical processes, it would be unusual to make a change unless a better technology is available or significant cost improvements can be realized. If you are the service partner, you want to use trusted suppliers that enable you to meet the initiatives of both the OEM and your organization. In this instance, you need to have open discussions with the OEM who ultimately owns the product as they will likely want to have a voice—in many cases contractually or via some form of notification.
With a new product, there is more flexibility and time to establish the supply chain to deliver the desired outcomes, but the earlier in the development process you can insert yourself or get brought in by the OEM, the better position you have to influence supplier selection where applicable. Regardless of the scenario, however, it’s best handled by having a robust process for evaluating and onboarding supply chain partners that encompasses financial, quality, and capabilities considerations.
Fenske: Given the challenges with logistics in recent years, how does geography play a role in the equation? Is it more important to be closer to each other in terms of actual physical locations?
Williams: Geography certainly can and does play a role and it can vary depending on the services one is providing. For example, if the OEM desires the supply to be In Market/For Market, then the answer is clear as it relates to the mandate. This is certainly a consideration for OUS initiatives an OEM may have. In a perfect world, an OEM would want to have as many suppliers and capabilities as possible on a specific project/opportunity close to the final assembly or point of consumption, or at least a critical process such as filling or coating be nearby. During a development project, the engineering teams would want contractors as close to them as possible for collaboration. These factors come into play when things are perceived as “all things being equal…”
However, I have found this is not necessarily the case in many instances. The OEM is seeking the best total fit for the initiative and will evaluate supplier status, specific capabilities, supplier risk (bandwidth, footprint, quality, capacity, etc.), current relationships installed and total cost above needing to find a vendor close to their facilities.
Fenske: Do you have any additional comments you’d like to share based on any of the topics we discussed or something you’d like to tell medical device manufacturers?
Williams: First, I can really appreciate the topics you asked about as we live in them daily as a services provider to the medical device industry. I have been involved in this sector for quite a while and would say these topics have been magnified in the last three years given the challenges of the pandemic which has had a cascading effect in other areas.
At the end of the day, we all want to do great work for great companies and make an impact. People change, organizations evolve, and everyone responds to the topics discussed from their individual roles as stakeholders, whether the services provider or the OEM.
On the surface, the elements required are simple, but they are far from easy. Being a service provider in the outsourcing space can be exhilarating and also gut wrenching at the same time. I would challenge everyone to do the work on the front end, from customer profile to opportunity evaluation to deep contract work, to the best of their ability as this will enable a much smoother road traveled. I’m cheering for the success of my peers and hope they can continue to make a positive impact for their customers and ultimately (and most importantly) for the patients depending upon all of us in the medical product outsourcing industry.