In recent years, medtech companies have started to diversify outside of their core device offerings in an effort to meet the evolving needs of their customers and to open up new revenue streams. 

 

Investments in software have been a large part of this strategy. When the device remains the nexus of where revenues will originate, companies often have little need to change. A device with basic operating software may not require changes to the business. However, some companies are launching standalone software, and device-connected software is moving to another level. New products are leveraging the array of data that the devices generate, embedding artificial intelligence and connecting to other systems to bring additional insights and new customer benefits. These benefits—outcomes-driven treatment planning, workflow improvements and remote patient monitoring—have value that can be monetized. To unlock this value requires pivoting the company away from a pure device focus.  

 

That pivot has been a minefield for many players. Here are three main challenges:

  1. The current operating model probably doesn’t work. As Vijay Govindarajan and Chris Trimble discuss in their book, “The Other Side of Innovation,” companies struggle to execute innovations when they bolt innovations onto the “performance engine”—the part of the organization attuned to driving consistent and predictable revenues. Launching new models requires constant learning and experimentation and is therefore inherently less predictable. The slower path to revenues and differences in margins may lead a performance engine to starve the innovation of the resources needed for success in favor of shorter-term investments that help meet quarterly revenue targets.For software, medtech companies may find themselves asking someone who has experienced a successful career in selling capital equipment or devices to drive a software business that operates quite differently. Unfamiliar with what it takes to succeed in software, these executives often struggle. Product release schedules, cloud options, subscription pricing and cybersecurity are not issues that leaders should be learning on the job.Companies should strongly consider bringing in outsiders with experience in building successful software businesses, but this alone is insufficient. Unless the performance engine is separated from the innovation engine organizationally, these individuals will be frustrated by cultural differences and an inability to get requisite resources via compensation models that aren’t aligned with their risk requirements. It may be hard to lure these leaders from Silicon Valley riches and even harder to retain them. To unlock the revenue potential in the software business, many organizations will need to create new divisions dedicated to software, provide the new leadership team sufficient autonomy, and measure their success with metrics that focus on learning and adapting rather than simple revenue production.
  2.  The selling process is unfamiliar. When companies are selling capital equipment or implantables and software is just a feature, there’s typically little change in the selling processes. But when software purchases and subscriptions are required, oftentimes a whole new set of decision makers—including IT leaders—may be involved. Even if the call points are the same, the skills required to influence decision makers may be different, and existing sales teams may lack these capabilities. And even if the capabilities are there, there’s often inertia to be overcome so that teams don’t simply continue to sell the way they have in the past. This is particularly difficult to overcome when software revenues—and the incentives associated with them—are small.The first thing that a company venturing into this space must do is ensure that they have a deep understanding of the buying process. Who are the decision makers, what are their constraints, what options do they have and what criteria do they use to select from these options? The answers should inform the sales structure, as well as incentives and skill gaps that need to be addressed.
  3. Transitions will be awkward. Imagine that you bought a new Audi a few years ago and you’ve paid it off. Suddenly they send you a notice that you are now going to be charged a monthly fee to keep the onboard computer up to date. This is the challenge that medtech companies face when transitioning customers to a new model where software is a subscription. What is the right value proposition that unlocks a customer’s willingness to pay? Where is the additional budget going to come from? What happens if customers don’t want to subscribe? Do they wind up with an Audi that doesn’t drive or do you continue to support older software versions? What are the implications on pricing?

Overcoming these challenges and moving away from a purely device-focused operating model requires strategic thinking and solid customer insights. In our next blog post, we will address these challenges in more detail and offer suggestions for getting started.