April 1, 2020 · 3 min read
The New York Times reports on how the federal government tried and failed to increase the stockpile of ventilators. Some are reading this as a story about the private sector, the profit motive, or “greed”. I think it’s a story about incompetent project management.
The story in brief: The Department of Health and Human Services (HHS) identified the ventilator shortage, and contracted with a small company, Newport, to make them. Newport got acquired by big company, Covidien. Contract was not important to Covidien and they canceled it. HHS found another supplier, but now it’s too late.
The big question that the story does not answer: For a critical strategic resource, why did the HHS rely on a single, small supplier?
To anyone familiar with business, the story of how this contract went is not surprising. Small companies get acquired all the time. Priorities always change in an acquisition. It’s not at all unusual for projects and contracts to get canceled. This risk was totally foreseeable.
Even if the company hadn’t been acquired, all kinds of things could have happened to it. Small companies go out of business all the time. Projects fail all the time. “Supplier risk” should be a standard checkbox on anyone’s contingency planning efforts.
This is even more so when you deliberately push the price down to 30% of the market rate. Newport did not even necessarily expect to be profitable on the contract:
Ventilators at the time typically went for about $10,000 each, and getting the price down to $3,000 would be tough. But Newport’s executives bet they would be able to make up for any losses by selling the ventilators around the world.
“It would be very prestigious to be recognized as a supplier to the federal government,” said Richard Crawford, who was Newport’s head of research and development at the time. “We thought the international market would be strong, and there is where Newport would have a good profit on the product.”
Why did the HHS put all their eggs in one basket? Did they have any risk management or contingency plan? Did they have any provisions in the contract, such as penalties for failure to deliver?
Why did the HHS take so long to realize that things were off track, and to react? They had clues immediately after the acquisition that Covidien was not happy with the contract. When did they start looking for a second supplier?
Covidien tried to renegotiate the contract almost immediately after the acquisition in 2012. But the story gives no indication that HHS did anything about the risk until two years later, in 2014, when Covidien said they wanted to cancel the contract.
When a key vendor doesn’t come through with a crucial resource, you do not get to blame the vendor for the failure of your project. It was on the HHS to make sure the ventilators got made, one way or another. First rule of leadership: everything is your fault.
The story suggests that Covidien bought Newport in order to take out a competitor with a lower-priced product. But there’s a hole in that story: If this lower-priced product was such a threat, then once Covidien owned it, why not use it to take out all their competitors?
A much more plausible answer to my mind is that the project was unprofitable owing to an artificially low price point, and it just wasn’t worth the focus and resources. This kind of thing happens all the time, and again, anyone with business experience would not be surprised. I mean, this is like Starbucks acquiring La Boulange and then shutting them down. It’s not some sinister ploy to “take out a competitor”, it’s just a project that got deprioritized.
And don’t even get me started on the FDA, who apparently had to approve all these devices. How much did they add to the timeline? And to the R&D expenses, which get baked into the cost of the product? Also, what about all the other regulatory capture that favors large companies in medtech and drives consolidation in the industry?
Many people look at this and conclude the problem was “outsourcing to the private sector” or “corporate greed.” I think it’s the opposite: we “outsourced” emergency preparedness to a centralized institution that is a single point of failure.
Copyright © Jason Crawford. Some rights reserved: CC BY-ND 4.0