James A. Dunning , QPC Services07.20.16
A lot has been going on across the pond since the United Kingdom (U.K.) asked its citizens to determine its future with the European Union (EU). Many, including myself, were surprised by Britain’s choice to leave the EU. The referendum vote, however, is not the motivation for this column. Rather, it is the disturbing number of small medical device companies who seek CE mark approval without really understanding their return on investment.
Why do medical device companies acquire the CE mark? In my experience, it is for one or more of the following reasons:
I expect that readers of this column have a very good idea of the regulatory requirements for the CE mark, and a clear understanding of the cost associated with acquiring such approval. Therefore, I will focus on the return on investment that accompanies CE mark approval. To help me better explain the benefits, I sought the help of two colleagues.
The first person I contacted was William (Bill) Casey, because he works with small companies to help determine corporate valuations and develop growth plans as well as exit strategies. I have known Bill for years, and I truly trust him. I asked him (via email) how he would value the financial effect on an American medtech firm that pursues CE mark approval for a product. Here’s what he said:
“Basically, you want to quantify the future profit that the CE mark will generate—the gross margin that will be generated by having a CE mark less the expenses required to acquire the CE mark. I would start by laying out the incremental revenue, the incremental gross margin dollars, and the CE acquisition/maintenance costs by year across three to five years. Is it attractive and profitable, or a cash drain with no real return? If the revenue side is really murky, working the cost side and then applying some general margin information should generate a ‘sense of revenue scale’ needed to make the process worthwhile or not. Simply seeing the ballpark area of revenue needed to break even and then applying judgement may provide an easy assessment as to whether the process is incredibly attractive; just so-so; or a dog. All sorts of other bells and whistles can be put into the analysis such as time, value of money, etc. And, if a future sale of the company is being contemplated, then some additional considerations may also be appropriate, especially as it applies to the nature of specific strategic buyers.”
The next person I contacted was William (Bill) Stamm, the business development manager of software at General Digital Corporation, a South Windsor, Conn.-based developer and provider of standard and custom flat panel display products, optical display enhancements, and software testing solutions. My company and General Digital Corporation are working together to better serve common clients. I asked Bill whether he thought the pursuit of CE mark approval impacts the quality of software development and testing performed by his clients. He responded to my question in writing with a single page position paper, which included several good points. Space constraints prevent me from publishing Bill’s entire position paper, but I’d like to highlight two of the more intriguing excerpts:
“…medical devices with embedded software requires a level of rigor, validation, and adherence to best practices in order for the process to go smoothly and efficiently. The collection of objective evidence helps ensure a base level of quality and standards.”
“Independence is key—it is fairly well known that software developers are poor testers of their own code. CE [mark] or any other certification process should be looked at as a chance to create code with the highest quality. Writing software is mostly a cerebral activity. Software engineers read the requirements and then write the code to meet those requirements based on the certification authority such as CE.”
What I take away from those two excerpts is that the process of pursuing the CE mark puts additional focus on quality as well as the fact that the CE mark has definite value. In addition, it shows that the return on investment is a variable that should be calculated and considered.
From personal experience, I’ve noticed that pursuing the CE mark affects corporate culture in a positive way that is difficult to quantify. Small medical device companies change when they pursue and acquire the CE mark. In my experience, the staff typically becomes more empowered and even more proud of the work they do, and of their company’s products. I believe that this cultural change is of great importance, and positions the companies for additional growth.
The inputs from Bill Casey and Bill Stamm, as well as my own observation regarding company culture, indicate that the value of the CE mark is both quantitative and qualitative. If your design and development process improves because your company is pursuing the CE mark, then the cost of quality (or as many prefer, the cost of poor quality) should certainly improve (lessen), as will the company’s reputation, over time. If your company’s management team objectively evaluates the potential financial benefits as well as the quality improvement and improved company culture gained from the process of acquiring CE mark approval, and determines that the return is appealing, then executives will be more likely to support pursuing the CE mark. Consequently, if management determines that the return on investment is not financially beneficial to the firm, they may not pursue the CE mark, thus saving time, money, and effort on a process that does not yield an adequate return on investment.
I am a regulatory professional, and it is probably in my DNA to value regulatory accomplishments such as acquisition of the CE mark (i.e., to think of the CE mark as inherently good for a company). Having said this, however, I must note that pursuit of the CE mark should be a carefully weighed decision for small medical device companies. It is costly, and requires some significant effort. Return on investment should be a key consideration.
I would be remiss if I did not specify that consideration of the value of the CE mark provides a great opportunity for collaboration among a company’s regulatory/quality and finance/accounting personnel. The return on investment from this collaboration, in my professional opinion, is almost always noteworthy.
In closing, I’d like to emphasize that the CE mark makes most of us feel better about a product and the company that makes the product. Those of us in the regulatory and/or quality field should work on our ability to communicate the value of independent certifications such as the CE mark to the companies we serve. In my opinion, one of the best ways to do that is to speak in financial terms such as return on investment. Quality makes business sense, and therefore, regulatory and quality professionals should be able to express quality business terms, and by “business terms,” I really mean “financial terms” like return on investment. The value of the CE mark and whether or not to pursue it is a business decision. If your company has not evaluated the value of the CE mark, I highly recommend doing so, because the assessment process, regardless of the resulting decision, will add to the clarity of the company’s vision.
James A. “Jim” Dunning’s consulting career began in 2001. He has provided quality and regulatory consulting services for various companies ranging from Fortune 500 medical device firms to startups. Dunning’s passion, however, lies with startups and small companies, especially those in regulatory distress. He has amassed significant experience in preparing 510(k) applications, developing complete Quality Management Systems, providing Quality System Training, and advising on quality, business, and leadership issues. Dunning is a senior member of the American Society for Quality (ASQ) and a member of the Regulatory Affairs Professional Society (RAPS). He can be reached at jdunning@qpcservices.com.
Why do medical device companies acquire the CE mark? In my experience, it is for one or more of the following reasons:
- To gain access to the European market
- To help gain greater acceptance from other international markets
- To help improve the company and product image, resulting in increased sales
- To help increase the value of the medical device company
- To serve more patients, resulting in a bigger contribution to public health and safety
I expect that readers of this column have a very good idea of the regulatory requirements for the CE mark, and a clear understanding of the cost associated with acquiring such approval. Therefore, I will focus on the return on investment that accompanies CE mark approval. To help me better explain the benefits, I sought the help of two colleagues.
The first person I contacted was William (Bill) Casey, because he works with small companies to help determine corporate valuations and develop growth plans as well as exit strategies. I have known Bill for years, and I truly trust him. I asked him (via email) how he would value the financial effect on an American medtech firm that pursues CE mark approval for a product. Here’s what he said:
“Basically, you want to quantify the future profit that the CE mark will generate—the gross margin that will be generated by having a CE mark less the expenses required to acquire the CE mark. I would start by laying out the incremental revenue, the incremental gross margin dollars, and the CE acquisition/maintenance costs by year across three to five years. Is it attractive and profitable, or a cash drain with no real return? If the revenue side is really murky, working the cost side and then applying some general margin information should generate a ‘sense of revenue scale’ needed to make the process worthwhile or not. Simply seeing the ballpark area of revenue needed to break even and then applying judgement may provide an easy assessment as to whether the process is incredibly attractive; just so-so; or a dog. All sorts of other bells and whistles can be put into the analysis such as time, value of money, etc. And, if a future sale of the company is being contemplated, then some additional considerations may also be appropriate, especially as it applies to the nature of specific strategic buyers.”
The next person I contacted was William (Bill) Stamm, the business development manager of software at General Digital Corporation, a South Windsor, Conn.-based developer and provider of standard and custom flat panel display products, optical display enhancements, and software testing solutions. My company and General Digital Corporation are working together to better serve common clients. I asked Bill whether he thought the pursuit of CE mark approval impacts the quality of software development and testing performed by his clients. He responded to my question in writing with a single page position paper, which included several good points. Space constraints prevent me from publishing Bill’s entire position paper, but I’d like to highlight two of the more intriguing excerpts:
“…medical devices with embedded software requires a level of rigor, validation, and adherence to best practices in order for the process to go smoothly and efficiently. The collection of objective evidence helps ensure a base level of quality and standards.”
“Independence is key—it is fairly well known that software developers are poor testers of their own code. CE [mark] or any other certification process should be looked at as a chance to create code with the highest quality. Writing software is mostly a cerebral activity. Software engineers read the requirements and then write the code to meet those requirements based on the certification authority such as CE.”
What I take away from those two excerpts is that the process of pursuing the CE mark puts additional focus on quality as well as the fact that the CE mark has definite value. In addition, it shows that the return on investment is a variable that should be calculated and considered.
From personal experience, I’ve noticed that pursuing the CE mark affects corporate culture in a positive way that is difficult to quantify. Small medical device companies change when they pursue and acquire the CE mark. In my experience, the staff typically becomes more empowered and even more proud of the work they do, and of their company’s products. I believe that this cultural change is of great importance, and positions the companies for additional growth.
The inputs from Bill Casey and Bill Stamm, as well as my own observation regarding company culture, indicate that the value of the CE mark is both quantitative and qualitative. If your design and development process improves because your company is pursuing the CE mark, then the cost of quality (or as many prefer, the cost of poor quality) should certainly improve (lessen), as will the company’s reputation, over time. If your company’s management team objectively evaluates the potential financial benefits as well as the quality improvement and improved company culture gained from the process of acquiring CE mark approval, and determines that the return is appealing, then executives will be more likely to support pursuing the CE mark. Consequently, if management determines that the return on investment is not financially beneficial to the firm, they may not pursue the CE mark, thus saving time, money, and effort on a process that does not yield an adequate return on investment.
I am a regulatory professional, and it is probably in my DNA to value regulatory accomplishments such as acquisition of the CE mark (i.e., to think of the CE mark as inherently good for a company). Having said this, however, I must note that pursuit of the CE mark should be a carefully weighed decision for small medical device companies. It is costly, and requires some significant effort. Return on investment should be a key consideration.
I would be remiss if I did not specify that consideration of the value of the CE mark provides a great opportunity for collaboration among a company’s regulatory/quality and finance/accounting personnel. The return on investment from this collaboration, in my professional opinion, is almost always noteworthy.
In closing, I’d like to emphasize that the CE mark makes most of us feel better about a product and the company that makes the product. Those of us in the regulatory and/or quality field should work on our ability to communicate the value of independent certifications such as the CE mark to the companies we serve. In my opinion, one of the best ways to do that is to speak in financial terms such as return on investment. Quality makes business sense, and therefore, regulatory and quality professionals should be able to express quality business terms, and by “business terms,” I really mean “financial terms” like return on investment. The value of the CE mark and whether or not to pursue it is a business decision. If your company has not evaluated the value of the CE mark, I highly recommend doing so, because the assessment process, regardless of the resulting decision, will add to the clarity of the company’s vision.
James A. “Jim” Dunning’s consulting career began in 2001. He has provided quality and regulatory consulting services for various companies ranging from Fortune 500 medical device firms to startups. Dunning’s passion, however, lies with startups and small companies, especially those in regulatory distress. He has amassed significant experience in preparing 510(k) applications, developing complete Quality Management Systems, providing Quality System Training, and advising on quality, business, and leadership issues. Dunning is a senior member of the American Society for Quality (ASQ) and a member of the Regulatory Affairs Professional Society (RAPS). He can be reached at jdunning@qpcservices.com.
