Regulatory should be a revenue function

By
Michael Peach
-
November 15, 2022
Regulatory should be a revenue function

“Regulatory has a seat at the table.” This quote, while seeming innocuous, is actually quite meaningful. The context is a discussion about regulatory digital transformation. At RegUP Boston, one of our customers was discussing the organizational conditions that led to a large-scale digital transformation initiative across regulatory affairs for an enterprise medical device manufacturer. The change was precipitated by a clear awareness of the impact that regulatory affairs has on both the top and bottom lines of the business. As a result, the regulatory team was given a voice in business strategy, and an opportunity to invest in growth.  

The challenges of ‘cost-center’ thinking

At some level, this would seem obvious. Of course regulatory affairs is strategic in a highly-regulated industry. Yet despite this, most RA teams are treated primarily as a cost center—a function that doesn’t directly contribute to revenue or profit. This means that the business is continually looking to minimize the cost incurred by regulatory activities, but more importantly, it leads to significant friction between teams. Rather than a go-to-market partner, regulatory is viewed as an operational impediment to revenue generation by sales and marketing teams.  

Cost-center thinking also manifests itself in poor measurement and objectives for regulatory teams. Often regulatory teams are assessed by volume-based metrics: number of submissions completed, speed of submission completion, and percentage completed ‘on-time’. While these are decent measures of output, they don’t have a direct correlation with revenue. Submissions or renewals that can be completed quickly aren’t necessarily associated with the highest-value products or markets.

Staffing levels also aren’t well optimized in a cost-center mindset. Apart from attempting to minimize full-time regulatory staff, many companies allocate regulatory headcount based on device risk classes or number of markets served. Again, these are good benchmarks for ongoing work volume, but they don’t necessarily align with future go-to-market plans or revenue targets for different product lines. This approach can leave RA teams under-resourced, and force businesses to rely on consultants when regulatory staffing levels “unexpectedly” don’t match got-to-market needs.

Regulatory is a key contributor to revenue and profit

Treating regulatory affairs as a cost center misses an important reality: regulatory clearance is an essential aspect of revenue generation in the medtech industry. It’s a prerequisite for growth, as any new product or geographic expansion of an existing product requires a new market submission and approval from health authorities before it can be sold. Regulatory affairs also has direct responsibility for sustaining revenue. The regulatory lifecycle of a product doesn’t end after market clearance. RA teams ensure the continued revenue stream from a product by keeping track of license expirations, relevant regulatory and standards changes, and managing post-market surveillance activities.

Unlike (necessary and valuable) support functions like accounting or IT, there’s a direct line between regulatory activities and revenue for the business. This means that RA functions are obviously important, but also that alignment between sales, marketing, and regulatory affairs is necessary for go-to-market success.

An analogy: sales & marketing alignment

There is a similar dynamic at almost any B2B business between sales and marketing teams. Nobody would question that both sales and marketing have responsibility for revenue generation, but that doesn’t always mean they are closely aligned. If teams don’t have an agreed-upon revenue target (X% of sales should be driven by marketing activities), marketing teams can end up measuring themselves on things that have less direct business impact such as website traffic or re-shares of social media posts. This leads to conflict between teams as different activities are prioritized, and sales teams perceive that marketing isn’t an active, helpful partner.

It’s not that marketing teams aren’t executing in the outlined scenario, it’s that the measures and priorities aren’t aligned. When sales and marketing share a defined revenue goal, upstream measurements like new lead and pipeline generation guide marketing activity prioritization. Marketing reports on results that are relevant to sales goals, and sales teams have clarity into how marketing is contributing. The result is an aligned and productive, rather than adversarial, go-to-market motion.  

What does revenue-aligned regulatory affairs look like?

Note that this is not an accounting discussion. Alignment here is not about how medtech companies should account for expenses associated with regulatory compliance. Rather it’s about how regulatory objectives and investments should be structured. Changing those structures to be revenue aligned produces two beneficial outcomes.

The first is in regulatory planning. When marketing activities are derived from revenue goals (like pipeline generation) the result is that activities that have the highest revenue impact are prioritized. If regulatory affairs teams carry a revenue target, the projects that are prioritized are those with the highest revenue impact. This simple criterion drives closer alignment between regulatory, marketing, and sales teams, and prevents priorities from being determined by the “loudest” voices in the room, or project length/complexity—which can happen when RA teams are measured on activity alone.

The second outcome is a shift in investment strategy. In a cost-center mindset, all investments are designed to minimize costs. In a revenue mindset, investments are driven based on expected returns. When regulatory projects are prioritized according to revenue impact, it’s easier to allocate headcount based on the anticipated workload as a return on each additional hire can be easily estimated. The same goes for investments in technology and tools. With a direct line between work product and revenue, it’s easier to make the business case for investment. In the same way that marketing campaigns require investment to generate sales opportunities, regulatory projects require investment to create revenue for the business.

Revenue alignment improves organization and focus for regulatory affairs teams. It allows them to effectively prioritize activities, and plan to adequately staff them. It reduces a focus on activity for activity’s sake and instead strengthens alignment across all go-to-market teams. It also makes it easier to justify investments in improving regulatory processes. From new tools to end-to-end digital transformation, regulatory affairs can be optimized to deliver on revenue projections.

Why give regulatory a “seat at the table”?

Medical device and in vitro diagnostic companies simply won’t have a choice. The current approach to managing regulatory affairs isn’t keeping up with the pace of change in the industry. The MDR and IVR rollout in the EU is expected to leave 50% to 76% of the products currently on the market behind. RA teams that are measured on work volume (as much as possible), at the lowest possible cost aren’t effective in this environment, and the organizational friction between them and other go-to-market teams will only further hinder execution.

Companies that succeed in today’s environment are those that take a different approach to regulatory affairs. By treating regulatory as a revenue function and aligning regulatory activities to financial goals, companies can more strategically plan for regulatory workload. They can prioritize projects that have the largest impact on the business while reducing churn and repetitive administrative work within the team. They can justify investments in productivity and process improvement by tying them to expected return for the business. And they create tight alignment across marketing, sales, and regulatory affairs in an integrated go-to-market motion for the business.

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