Outsourcing Your Way Out of Recession

Maybe the “Great Recession” isn’t so bad for business after all.

Economic downturns are notorious for driving up unemployment, slowing consumer spending and draining business budgets. In some instances though, they can be a catalyst for growth by forcing companies to consider alternative ways of reducing costs.

In the medical device sector, such forced cost-cutting can be beneficial to contract manufacturers and suppliers that provide outsourcing services to large OEMs. “Recessions cause OEMs to rethink their business models and supply chains and force them to look for ways to reduce cost,” said Benjamin Dunn, managing director at Covington Associates LLC, a Boston, Mass.-based investment bank.“Outsourcing provides a unique way to do that. OEMs are under pressure—they want to get their [profit] margins up and they have to find ways to reduce costs.”

Dunn’s assessment of outsourcing opportunities during the “Great Recession” was part of a 45-minute presentation he gave on Oct. 28 to medical device industry representatives at the Medical Product Outsourcing Symposium in Waltham, Mass. Dunn’s presentation focused on the device sector’s overall health during the recession, and the impact of market variances on manufacturers.

Overall, the medical device market has fared well in the last year, Dunn said, but there are pockets of the industry that have severely been impacted by the economic downturn. Revenue in the dental and aesthetic segments, for example, fell significantly in the first half of 2009, as patients became more selective about the medical procedures they felt were necessary. Women’s health revenues, on the other hand, skyrocketed 114 percent, due mostly to mushrooming profits at Hologic Inc., a Bedford, Mass.-based manufacturer of diagnostic, surgical and medical imaging equipment.

Besides making outsourcing more attractive to OEMs, the recession has helped reduce production costs, Dunn said. Lower prices of certain kinds of materials and flat wage rates have helped manufacturing firms keep production costs down, though the savings in certain instances has been offset by volatility in foreign and domestic currency and huge fluctuations in commodity fees.

“We are in an age of volatility,” Dunn noted. “Unemployment will remain high for some time, commodity prices will continue to swing, the value of the dollar may remain low, and tax and user fees will increase. The era we are moving into will have a lot of these external forces buffeting the industry and putting a lot of pressure on the manufacturing process. This means that there will be an increased focus on manufacturing costs. Product margins will be under pressure. You have to be flexible. Changes are going to occur more rapidly and you have to be able to respond just as quickly.”