Copyright©July
2000 IMDA
LAS VEGAS--It’s no secret why most early-stage medical technology companies hire their own sales forces. It’s all about control. But it’s not necessarily the prudent move.
Speaking at the recent Mid-Year Workshop of IMDA, Rick Davies, Managing Partner of Vector Resources, L.C., Midvale, UT, demonstrated how start-up companies think, and how IMDA members should respond.
Prior to founding Vector Resources, Davies spent
more than 25 years in the medical device industry, including more than 15 years
with Kendall Healthcare Products. He also held senior general management and
business development positions in medical device start-up companies, such as
Cardiopulmonics (now InnerDyne) and Cogent Light Technologies. Today, he and his
partner work with start-ups on the commercialization of new technologies,
establishment of domestic and international distribution, and the management of
merger, acquisition and strategic partnering transactions.
Opening his presentation by posing as the CEO of start-up firm DG [Darn Good] Medical Device Co., Davies appealed to his “board of directors” to allow him to bring on his own direct sales force.
“I want to hand pick each salesperson,” he told the board. Acknowledging the time it would take, Davies – as DG’s chief executive officer -- said that he nevertheless wanted to talk to and train each one of them. “All that feeds into control,” he said.
“We’ll tell them their call patterns, get reports once or maybe twice a day. And if we don’t get action, we’ll take names. We’ll run a tight ship.”
Davies said that by selling direct, he would get to personally know each and every one of DG’s customers, even if the number grew to 800 or 1,000. “I don’t want anyone getting between me and my customers,” he said.
Having your own sales force means you get the salespeople 100% of the time, said Davies, still in character as the CEO of DG Medical. True, you do pay them to make the “concept sell,” even if it doesn’t result in an immediate sale. “But you gotta do it,” he reiterated to the board.
Now, all this won’t come cheap, he warned the board. Figure 20 salespeople at $110,000 apiece annually, two regional managers @ $140,000. That’s an ongoing expense of $2.48 million – including benefits, bonus and expenses. Then there are the startup costs -- recruiters at 15% of the sales force’s salary; relocation costs of $50,000 or so (for approximately five reps); training costs (travel, meetings, etc.) of perhaps $75,000. That adds up to a total startup cost of $375,000. Throw in a sales administrator, and your cost of getting the product to market equals about $2.9 million.
Of course, the board and its investors shouldn’t
expect much in the way of sales for six to nine months, said the Darn Good CEO,
given the time it will take to recruit, hire, train and have the sales people
establish the right customer contacts. But the time delay – and the associated
cost – are all justified, he said, “because we need highly trained
salespeople who can do concept selling, who are productive and whom we can
control.”
Stepping out of his role as DG’s CEO, Davies told the IMDA members that investors in new-technology firms usually expect their managers to have a direct sales force, for the reasons listed above. In light of that, independent specialty distributors have to ask themselves if they truly can be an effective sales vehicle for new technology/startup companies, he said.
Speaking to IMDA members, Davies asserted that independent specialty distributors can be effective sales vehicles for manufacturers. “And more so today than yesterday, and even more tomorrow.”
Investors won’t argue that independents do bring key customer relationships (with doctors, clinical coordinators, hospital administrators, etc.) to new-product companies. And they know that independents must have strong selling skills, because without them, they would starve. Plus, they know that independents can provide the necessary logistics of order entry, shipping, billing, local service and accounts receivable.
But can independent distributors concept-sell? Can they pass valuable market information upstream? Can they be responsive to the needs of manufacturers of high-tech products?
“Of course you CAN,” said Davies, pointing out that many independent reps come from, and excelled in, the same direct-selling organizations that they now compete against.
Convincing investors and venture capitalists of this fact may be difficult enough, Davies pointed out. But structuring a fair deal – one that reflects these realities -- with them may be even tougher.
For example, investors and company executives who advocate direct sales forces accept that manufacturers will have to pay their salespeople while they ramp up, get to know the key customers, and the product or service, and do the concept selling that precedes actual sales of new technologies.
But in most cases, these same folks hold independent reps to a different standard, and cling to the notion that distributors should only get paid when they make a sale. That may be the traditional approach, but it means that distributors get paid nothing to educate the market on new technologies and to do the concept selling that is so important to establishing a new technology. This is the same concept selling that these companies eagerly pay their direct sales force to do.
“There’s a disconnect between
what the company wants and needs, and what the independent distributor gets for
delivering it,” Davies said. And, he added, speaking from the manufacturer’s
point of view, “Did I forget to mention that if your guy [the independent
distributor’s salesperson] does a great job launching and selling my new
product in St. Louis, I’m bringing in my own direct guy there?”
The fact is, distributors should be compensated for the concept sell. They should be compensated for passing market information back to manufacturers. “These are incredibly important contributions, and there should be compensation for contribution,” Davies said.
But for that to happen, both the manufacturer and distributor must rethink their relationship.
Distributors should be thinking in terms of getting equity participation in the new-technology firm. Yes, equity is an emotional issue for venture capitalists and start-up companies, and it is extremely hard to get. Still, it can be – and has been – negotiated.
How about territory earnouts? In these arrangements, the distributor and manufacturer agree upfront that if the distributor performs so well that the manufacturer replaces him with a direct salesperson, or if the manufacturer is bought out by a big company with a direct sales force, the distributor will get a percentage of sales made in that territory for a specified period of time. This way, rather than the distributor bringing in a competitive product to stymie the product line that just went direct, the distributor is incentivized to act as “sales trainer” for the new guy, and has a vested interest in seeing all of the business stay in-place. A much better situation for both manufacturer and distributor.
What about a market development fee? Here, the manufacturer agrees to pay the distributor a flat monthly fee (and small commission or margin) while the distributor is educating the market on a new technology. After a specified period of time – say a few months – the flat fee goes down a bit, but the commission/margin goes up. In a few more months, the flat fee goes down still further while the commission/margin climbs. And so it continues until the relationship progresses to a straight margin arrangement, and a traditional manufacturer/distributor relationship.
Here’s another value-added that specialty distributors can offer their manufacturers (and charge for), said Davies. Many new-technology companies get their first dose of commercial reality when they take their products to market. Prior to that, they may have solicited input from a small group of clinician “friends,” but such input isn’t always the most objective.
If the sales force who brings the technology to potential customers discover that it is flawed, the manufacturer who has taken on a direct force must continue to pay those salespeople even while the product is being reworked. Why not have a selected group of specialty distributors quickly take the new product out into a few selected markets and confirm market acceptance – or identify the flaws? said Davies.
Perhaps the biggest difference between direct salespeople and independent reps is that direct salespeople represent their company to their customers, while independent medical distributors represent their customers to the company. In the end, the independent distributors’ primary allegiance is to his customer, because while manufacturers may come and go, that distributor has to live with his customers.
Some manufacturers are threatened by this, Davies said. “You care more about your customers than about me,” they tell their distributors. But their status as “customer representatives” is in fact the independents’ greatest strength, and one they should leverage. “Bring your unique understanding of the market and your customers to [manufacturers] and you’ll bring them something very valuable,” he said. “It will spell success for both of you.”
“If you’re a manufacturer going to go to war in the medical device industry, would you want an army of foot soldiers or an alliance of nations?” Davies asked. “Working with independents is like having an alliance of nations.”
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