Outsourcing “Other” Day-to-Day Functions

Consider the cost- and time-saving benefits achieved when outsourcing operations such as customer service, order processing/fulfillment, inventory management and others.

Damon Peary, Summit Corporate Services, Inc.

Assume for a moment that you are the CEO of an up-and-coming medical device startup firm and that you have just spent the past 24 months developing and refining your new product line. You have done everything possible to protect your intellectual property and now find your company either facing the complex task of completing a clinical trial or preparing to deliver your products to market. Up until now, your staff has consisted of a few key executives who have been instrumental in raising money and defining the business strategy, along with a couple of regulatory and quality assurance specialists and engineers. Your goal now is to beat your competitors to the market. But how will you achieve this, and how will you make the best use of your resources? What factors of your business are key to establishing your company as a leader in the market, and what will sideline you and detract from your progress? 

In the highly competitive medical device field, your success will, in part, be contingent on making the best decisions and focusing on the things that will help you produce better products, generate revenue, establish distribution and reach new customers. The other day-to-day business functions, although extremely important because of the impact they will have on your overall success, may be better left to specialized outsource providers.

Wikipedia defines outsourcing as:

“Subcontracting a process, such as product design or manufacturing, to a third-party company. The decision to outsource is often made in the interest of lowering firm costs, redirecting or conserving energy directed at the competencies of a particular business, or to make more efficient use of land, labor, capital, [information] technology and resources.” 

Most of us are aware of the more commonly outsourced services—product development, manufacturing, testing, packaging and sterilization—and recognize the benefits that they provide. But fewer people have considered the benefits made possible by outsourcing some of the general “day-to-day” business operations, such as customer service; order processing and fulfillment; inventory management; distribution; logistics; field support; accounts receivable processing; and collections. Outsourcing providers of these types of functions can offer assistance with launching medical devices in both the United States and abroad, are able to help you navigate through the entire distribution and logistics cycle and can ensure your products are handled according to FDA regulations (current Good Manufacturing Practices and Quality System Regulations, etc.).

The arguments for why it’s becoming more acceptable to outsource these basic business services sometimes are grounded in hypothetical and subjective data. However, when one looks closely at the costs associated with establishing an in-house customer service, order processing and distribution facility, the financial benefits of outsourcing become very clear.    

The Cost of In-House Order Processing and Distribution

The table below outlines the basic costs of implementing an in-house order processing and distribution facility. Let’s assume that you’ll start with two customer service representatives (to ensure coverage in the event of vacations, sick days and breaks), an inventory distribution specialist and a manager to oversee the operations. The table does not reflect the additional costs involved with setting up and maintaining standard operating procedures, quality systems or the numerous other day-to-day expenses incurred with processing orders, storing and shipping inventory.

Description	Estimated Yearly Expense
Office lease – call center and clean storage, 1,500 sq. ft. @ $16/sq. ft.	$24,000
T1/DSL/Internet	$3,600
Fax line	$360
Payroll: manager/director of operations*	$105,483
Payroll: customer service representative 1*	$34,107
Payroll: customer service representative 2*	$34,107
Payroll: distribution manager/inventory specialist	$86,263
Employee benefits  (medical, dental, 401k)	$20,000
Employment taxes (estimated at 30% of salary)	$77,988
Inventory management/order processing software – licensing and services	$50,000
Equipment – computers, telephones, fax, printers, server, network	$15,000
IT services	$2,400
Utilities (water, gas, electric, security)	$14,400
Office supplies	$3,600
	$471,308  TOTAL

*Payroll figures are based on the average salaries in Atlanta, GA; Denver, CO; and Minneapolis, MN, as provided in the US Bureau of Labor’s Maya 2007 Occupational Employment Statistics.

Medical devices typically aren’t stored in an unfinished warehouse environment; thus, the price per square foot for clean and secure storage is going to cost more than it would in a standard unfinished warehouse. Office lease rates vary from one location to the next, but they range from an average of $12-$22 per square foot depending on your market. Also included in the figures are the basic line charges for a T1 internet connection and fax line, which are needed for order processing and to facilitate communications with your customers.

The cost of the employee benefits was calculated by looking at current Blue Cross/
Blue Shield rates for four different age groups and is based on an 80% company contribution. Employment taxes include Social Security/ FICA, unemployment/FUTA, Medicare and workers’ compensation. These taxes can add an additional 30% cost to the employee’s base salary. In a Boston Business Journal article (“How Much Does an Employee Cost?”), Joe Hadzima, senior lecturer at MIT Sloan School of Management and chair of MIT Enterprise Forum, Inc., stated:

“The costs to this point (basic salary, employment taxes and benefits) are typically in the 1.25 to 1.4 times bases salary range—eg, the cost range for a $50,000/year employee might run $62,500 to $70,000.”

Expenditures for software were determined by considering some of the more popular systems currently available for small businesses (SAP Business One, for example). The estimated software cost includes licensing, customization, setup and implementation assistance. It is important to choose the right software that will allow you to track your products by lot numbers and/or serial numbers and find one that can grow as your business does. This software cost is a conservative estimate, and the higher-end packages can run into the hundreds of thousands of dollars.

The remaining expenses cover IT services, utilities and general office supplies for the first year.

In total, the initial cost for setting up an in-house customer service, inventory management and distribution facility for the first year approaches a half-million dollars.  If you crunch the numbers on your own, most likely you would come close to the same figure. You also would find that attempting to lower costs by skimping on efficiencies—made possible only by using the best software or downsizing and making due with less-qualified or fewer staff—would end up costing you many sleepless nights, negatively affect your reliability and slow your company’s growth.

The Case for Outsourcing These Functions

There are several reasons to outsource these day-to-day operations. First, you can achieve cost savings. Running your business through a reputable outsourcing firm should provide a substantial savings, possibly saving as much as 50%-75% compared with the example scenario, because an outsourcing provider is able to operate more efficiently than you can. These firms can spread the costs of their staff, facility and systems over a number of clients, thereby reducing per-client costs. Outsourcing firms typically contract with clients to be compensated based on sales, hourly rates or per-unit fees, etc., and there typically is a minimum monthly fee involved to cover expenses while your business ramps up. The fees are based on the services you choose, your forecasted sales volume, storage requirements and the number of staff needed to provide the services.

Another reason is that outsourcing is seamless and can extend an increased level of professionalism and credibility to your company. The best outsourcing providers will operate as an extension of your business, whereby your customers always feel as though they’re speaking and interacting directly with your organization. A good partner will ensure that all greetings, voice mails, paging systems, packing slips, invoices and delivery tickets are  “personalized” and customized with your company’s information.

Outsourcing also provides a turnkey solution that can be operational overnight, eliminating lost time due to software setup, training, turnover, and creation and implementation of standard operating procedures. Outsourcing also frees you from the obligation of managing your customer service, inventory and distribution departments—allowing you to remain focused on the more critical aspects of your business, including product development, establishing sales networks and physician training. These are the areas that generally are going to help you differentiate your products from those of your competitors.

Finally, outsourcing firms are specialists that focus on doing a few things extremely well—whether it’s customer service or inventory management, or something else. These specialty firms can provide an effective solution for managing multi-location inventory sites, including hospital consignments and trunk stock locations. This can be extremely beneficial for companies running multi-site clinical trials, as the outsourcing firms are accustomed to maintaining and monitoring off-site inventory locations and can help ensure that all products are properly tracked. Missing inventory can result in substantial financial loss and severely impact the profitability of a startup that doesn’t properly monitor its consignments and sales representative inventories.

Finding an Ideal Solutions Provider

What should you look for in an outsourcing partner? First, find one with experience. If the provider can’t help you avoid the obvious pitfalls, keep looking. Finding a provider that knows your industry can save you valuable time and energy.

In addition, make sure that your potential partner has a system in place for keeping you informed about your critical business data, including financial reports on current accounts receivables, sales, customer balances and inventory levels.  Some of the more advanced software packages now allow providers to give clients access to their critical business data, through a remote distribution dashboard, allowing them to view their information in real time and run extensive reports on demand. These advanced systems make it possible for clients to remain informed and in control and can allow them to interact with their customer service, inventory management and distribution departments as they would if these functions were in-house.

You also should consider how you would like to track and monitor customer feedback. A good outsourcing firm can help you stay informed about customer trends and issues to help you better meet the needs of your customers.

Finally, it’s critical that you choose an outsourcing partner that is FDA registered and 21CFR compliant, with current Good Manufacturing Practices and quality systems in place.

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In the medical field, it’s fair to expect that your customers—hospitals, physicians and patients—will have the highest expectations for quality and reliability from both your products and services. Anything less than perfect can adversely affect the quality of patient care and hurt your company’s reputation and hinder its success. Therefore, it is essential that you be committed to investing whatever necessary, not only in the development of your product line, but also in the infrastructure and systems needed to consistently ensure that the right products are shipped to the correct customers—on time and at the proper contracted prices—or plan on hiring a specialty outsourcing provider who can do so for you. 

The availability of these newer specialized outsourcing services are enabling companies to better meet the needs of their customers, improve their overall reliability, lower their costs and simplify their day-to-day operations. If you are considering setting up an in-house operation, give outsourcing a look first. The benefits may not only improve your bottom line, they also may help you sleep better. 

Damon Peary is the founder and president/CEO of Summit Corporate Services, Inc., a leading outsource provider of customizable customer service, order processing, inventory management, distribution, logistics, field support and order-fulfillment solutions for the medical device and biotech industries. You can learn more about Summit by visiting www.summitcorporate.com or by contacting Summit at (406) 556-3270.