I have seen a lot of tenured ortho sales people leave the comfort of “Big Ortho” and take on the role of Distributor or rep for much smaller start-ups. I want to deconstruct the forces driving this change and the dynamics between all the players. Then, we will explore what drives the variability in results of this new model. Finally, I will leave you with some ideas on how you can become a high caliber distributor prepared to thrive in a new role.
Big Ortho vs The Rep
As pricing pressures continue to push profits down, manufacturers are looking for more ways to improve their bottom line. As referenced in my previous article The Unsung Hero of the Orthopedic Industry – The Rep, the distributors and reps bear the brunt of much of the pricing compression. It seems as though the easy target for the squeezing is the one furthest from the boardroom – the Sales Reps and Distributors.
We have seen large companies’ commission rates fall well below 20%. At the same time, ASP’s (Average Selling Prices) continue to fall with corporate negotiated hospital or GPO contracts. The result is an inverse relationship where reps have to do more cases to make the same amount of money as last year. Increasing business 20-30% is a more difficult challenge than ever before due to increased consolidation and competition in the marketplace.
We are left with a dynamic where Small Ortho can capitalize on the inverse relationship Big Ortho reps face. By offering significantly higher commission and the ability to be their own boss, small ortho is attracting experienced representation that can leverage established relationships and navigate familiar approval processes.
“The days of only courting your surgeons and hospitals is passing away along with paper-only records and whiteboard logistics.The Ortho Startup & The Rep”
The orthopedic start up market continues to attract venture and private equity funding as forecasts like, “OrthoBiologics market to reach $6.06B by 2022” present fertile ground. Additionally, as Big Ortho seems more comfortable investing in M&A rather than R&D, start-ups have a clear exit strategy.
As the device market matures and patents expire, new doors open for clever copycats. This phenomenon presents opportunity for smaller, more nimble competitors to gain a strategic advantage and capture business that was once securely owned by Big Ortho. Innovative technology or even just novel improvements to antiquated systems can lead to profitable acquisitions.
This is not to say it is an easy endeavor for start-ups to break into orthopedic implants. R&D, Regulatory affairs, and the rapidly evolving landscapes of hospitals and GPO requirements present evermore complex and time-consuming barriers for small companies. As with any new venture, more time translates into more money and that unknown timeline can be very detrimental to a small company. Finding representatives and distributors capable of steering through this “mine field” is a critical driver of their success.
The challenge for many smaller orthopedic companies is that the caliber of distributor that they are able to attract tend to be limited to a Sales Rep who decided to bail out of a larger company for the reasons described above. They require very little support or training and they can hit the ground running to achieve some success fairly quickly. But, for what these reps bring in strong relationships and technical know-how, they often lack in infrastructure and leadership experience. As a result, what the company ends up with is little more than what we call a “Super Rep” who’s sales plateau sooner than expected.
The reason most plateau quickly is that they don’t have any of the infrastructure that a seasoned distributor typically does. No one can blame them since they are essentially a rep who now enjoys the full distributor commission rather than a split. Rather than owning a business, they effectively only own a job and want to keep overhead low and profits high. This is a short-sighted solution and the distributors who are in this category are quite vulnerable. Without a team and support infrastructure, they are little more than the sum value of the surgeon relationships.
For the manufacturer, this poses a problem of scalability. If these Super Reps don’t begin to take on the responsibilities of a true distributor or agent, they will struggle to capture more geography and build a valuable and sustainable business. While it may satisfy some, manufacturers don’t see these players as long-term partners. The success of Big Ortho came from having strong, long-term partnerships with distributors and agents who invested in their businesses and built sustainable enterprises that were able to scale.
Where many of these new distributors are failing is in building a foundation of scalability and making the necessary investments into their company’s future sustainability. Setting the right foundation for success early in the scaling process is paramount. It’s not necessary to make large capital investments, but setting up the right foundation is paramount to prolonged success.
“As margins continue to tighten, operational efficiencies achieved through smarter distribution and sales will separate winners from losers.”
Where does one start? First, start with the basics: as a distributor, you need to have a legitimate company website if you want to be seen and prospected by companies looking for new distributors. You and I both know the surgeons and hospitals don’t give much thought to that. But, if you’re successful, M&A will eventually impact the lines you carry. Continually prospecting and being visible to companies with new technologies is a key part of remaining relevant and positioning yourself for success in your local market. Having a website enables you to project the image that you take your business seriously and are taking steps to be professional. Manufacturers want to see that you work ON your business and not merely in it.
Having a website also enables you to use an email address with your company’s name on it rather than a gmail, or worse: your AOL address. Nothing says “mom & pop” like a distributor using a internet service provider’s email address. The quality of your website is also important as it projects the image of your company. If it is too “1990’s,” people will draw the conclusion that you are still back in the dark ages and not availing yourself of the latest technologies. This can be an impediment to attracting some of the companies with newer innovations that are seeking representation. A website can be done very inexpensively and deliver the right message and image.
Another inexpensive way to differentiate your distributorship is by leveraging technology to manage your business. Using a whiteboard, Google Calendar and group text messages to manage inventory presents you as a risky proposition when it comes to companies allocating valuable assets to you. As margins continue to tighten, operational efficiencies achieved through smarter distribution and sales will separate winners from losers. Technology should impact your business in several ways: coordinate your team’s schedules, quickly schedule cases, manage day to day sales activities, track your inventory from multiple manufacturers, consolidate your manufacturer’s invoices and open PO’s. In other words, run your business in the 21st century.
While I am biased in believing our platform, Surg.io, is the best solution for reps and distributors, any electronic system is better than none. Keep in mind that manufacturers entrust a great deal of money into your hands by way of implant and instrument inventories. Your existing and future partners want to see that your utilization brings about a healthy return on investment. Nothing is more compelling than efficient infrastructure and solid data to support your request for additional inventory or even, data to support keeping the inventory you currently have. Equally, nothing more undermines your partnership with a manufacturer than inefficient use and tracking of their inventory.
Implementing one of these platforms doesn’t need to be onerous. While there is always a bit of a learning curve when starting up, once you get through the on-boarding process and everyone is using it, it will be a lifesaver. In addition to better organization and inventory utilization, using Surg.io, or a similar platform, helps you create margin in your day for more selling by streamlining all your processes. It enables you to better communicate as well as ensure that everyone is singing from the same sheet of music. If all you’re using is Google Calendar, you’re missing a whole host of features and analytics that can take your business to the next level.
As challenges continue to mount and the odds continue to stack against orthopedic distributors, only those who embrace technology and figure out how to leverage it will be able to thrive through the next 10 years of the evolution of the industry. Doing more with less will continue to be the pressure and will require a strategic approach to supply chain management. Projecting a “no tech” business to manufacturers poses a profound risk to distributors and with how easy and inexpensive as it is, seems to be a very risky proposition. The days of only courting your surgeons and hospitals is passing away along with paper-only records and whiteboard logistics.
To learn more about Surg.io and how to leverage it for growth and scalability, visit www.Surg.io and request a demo.