Key takeaways
- Medtech companies face mounting pressure to improve margins as growing portfolio and operational complexity makes profitable growth harder to achieve.
- Traditional measures of financial performance often obscure the full costs of complexity, making it difficult to identify where value is created or eroded.
- Leaders can unlock profitable growth by understanding the full costs of complexity and making coordinated decisions about where to simplify and invest.
Medtech companies are under mounting pressure to improve margins while repositioning their portfolios toward higher-growth opportunities. But even as companies reshape product lines and operating models, the complexity embedded in these businesses continues to make profitable growth elusive.
Large portfolios magnify operational and regulatory demands, while decades of M&A have brought very different businesses under one roof. Innovation productivity has slowed as R&D has grown more expensive. Rising input costs and persistent supply-chain disruptions squeeze margins.
At the same time, simplifying these businesses can be difficult and costly. Changes to products and manufacturing often require regulatory approvals and validation, while the costs and decisions involved span multiple businesses and functions.
For medtech leaders, the challenge is moving beyond obvious opportunities for simplification to identify changes that will drive profitable growth. That requires understanding where the costs of complexity are being absorbed and which products, customers, markets, and capabilities are truly creating value.
In this article, we discuss how leaders can look beyond traditional measures of profitability to uncover the true costs of complexity and make better choices about where to simplify and invest for growth.
How growth creates complexity
We define complexity as the web of interconnections that builds as a company adds products, customers, geographies, systems, and processes. Each new element interacts with what came before it, creating new costs and requirements across the business. Some of that complexity supports growth; some can ultimately make growth less profitable. This is the growth paradox: the same choices companies make that create value also introduce costs that erode it.
Figure 1: Complexity costs growth
Medtech is particularly susceptible to this dynamic because product breadth has traditionally been a source of competitive advantage. Companies pursue growth by selling more products through existing customer relationships and tailoring offerings to strategic customers. They also enter new geographies and acquire businesses to expand their reach. Meanwhile, legacy SKUs are retained to protect revenue, while country-specific variants are maintained to preserve market access. Acquired processes remain in place to minimize operational disruption. Companies also add suppliers to improve supply-chain resilience.
These choices create real value. The challenge is understanding whether that value justifies the complexity that is added. Benefits are often visible and immediate, while costs are absorbed elsewhere and obscured by traditional measures of profitability such as gross profit and contribution margin. A decision that looks manageable in isolation triggers costs that are rarely understood. Even relatively simple devices can depend on multiple components with separate raw-material and manufacturing requirements. This adds demand across supply chain, quality, and compliance and creates bottlenecks for critical product launches.
The operating models that evolved within companies can compound complexity. Medtech portfolios and product development are typically managed within business units, while manufacturing and supply-chain operations are shared across them. Companies have centralized key operations to gain scale, making the economics of any one business difficult to disentangle from the shared organization supporting it. These interdependencies require coordination across stakeholder groups, making it harder to execute changes.
That can limit the ability to capture the full value of growth and performance improvement initiatives. Simplifying a portfolio or streamlining the network for one business optimizes one point in the system while leaving overhead and stranded costs elsewhere in the organization. Capturing those savings requires changes beyond the business or function where the initiative began.
How complexity diminishes performance
The challenge, then, is recognizing when complexity stops paying for itself. As layers of process, portfolio and governance expand, their costs begin to outweigh their benefits, often in ways that are difficult to diagnose. While the full economic impact may be hidden, there are common symptoms across the business:
- In management and finance, complexity is seen when working capital and SG&A grow faster than sales. Complex operating models also make execution more difficult by increasing collaboration costs and muddying accountability for performance across the P&L.
- In product development, complexity hinders innovation by delaying product launches when bottlenecks arise in support functions such as supply chain and quality.
- In quality and compliance, complexity makes work difficult to execute as regulatory requirements multiply and sometimes conflict. The result is more documentation, technical file maintenance, labeling variation, process validation requirements, and CAPA or deviation workload.
- In supply chain, complexity often appears as high inventory but poor availability. Planners spend more time managing exceptions than improving the system, while forecast accuracy weakens for long-tail SKUs and obsolete inventory grows. Suppliers multiply faster than the organization can effectively manage them.
- In customer management, complexity fragments the customer relationship as more functions become involved in serving the same account. Disconnected systems and information make it harder for those teams to develop a shared view of the customer and respond to its broader needs.
These symptoms are often visible even when their full financial impact is not. A fixed-versus-variable cost lens does not fully capture the way variety drives cost. As products, services, and customers multiply, the additional work they create becomes absorbed in shared costs such as SG&A and manufacturing overhead rather than attributed back to what created them. Traditional costing therefore obscures one of the biggest factors determining profitability.
All of this creates a dangerous financial illusion. Product-level gross margin may look acceptable, while true cost-to-serve tells a different story. Once the full burden of planning, inventory, quality, regulatory maintenance, manufacturing disruption, and service is included, parts of the portfolio may consume more enterprise value than they create. This is the profit concentration effect: a minority of products, services, or customers often generates most of the profit, while the rest erodes value.
This also makes portfolio rationalization harder than it appears. For instance, leaders may know they need to reduce SKUs but traditional measures of profitability can obscure which ones are creating value and which are eroding it.
Figure 2: Signs of accumulating complexity
For medtech leaders, this should raise a hard question: Which products, customers, configurations, and markets are truly profitable after accounting for the complexity they create?
What medtech leaders can do differently right now
Complexity is a systemic issue, not something companies can fix through disconnected, occasional incremental improvements. Leaders need to proactively manage it as they grow the business.
1. Look beyond gross margin to understand true profitability. Leaders need a fact base that shows complexity-adjusted profitability by SKU, product family, customer, market, manufacturing route, and service model. That requires accounting for costs that can be obscured in traditional measures of profitability, including changeovers, inventory, obsolescence, supplier management, regulatory maintenance, labeling, quality documentation, service, planning effort, and customer-specific fulfillment.
With that visibility, leaders can see where value is being created or lost, combining the financial lens with an understanding of market and customer needs to make better decisions about where to simplify and where to invest.
2. Distinguish value-creating complexity from value-eroding complexity. The challenge is not to eliminate complexity entirely but to understand where it is worth the investment. Some complexity is necessary to meet safety and regulatory requirements, preserve market access, differentiate a product, or serve a strategic customer. For example, supply-chain resilience often requires additional inventory or redundancy, creating an economic trade-off between efficiency and resilience. But complexity accumulates as an unintended consequence of earlier decisions made for good reasons.
Leaders need to account for the ongoing maintenance costs those decisions create across processes, technologies, products, and organizational structures. As business conditions change, leaders should continually weigh those costs against the value the complexity creates.
3. Connect decisions across the business. Complexity often appears downstream but starts upstream. A supply chain team cannot fully solve a problem created by portfolio strategy, commercial commitments, regulatory architecture, or acquisition history. Value levers are deeply interconnected across functions, so decisions that add complexity need to account for their effects beyond the business or function making them. Assessing and modeling those effects can clarify where the resulting costs will be absorbed.
Leaders need to align the functions affected by upstream choices around the value at stake and the actions required to capture it.
4. Make meaningful reductions in complexity. Incremental cleanup often does not move the needle. Portfolio rationalization, for example, may remove products without removing the processes and other requirements that created the complexity in the first place. Capturing the full value means taking out associated work and costs across the business. That can involve rationalizing product families, consolidating platforms, reducing kit variation, standardizing packaging and labeling, harmonizing manufacturing routings, consolidating suppliers, or integrating acquired quality systems and ERPs.
Leaders also need to reshape the organization to support these changes. Portfolio rationalization can create opportunities to combine sales teams that now serve the same customers, while broader transformations may require realigning functions such as supply chain and R&D and giving business leaders clearer end-to-end ownership.
Medtech companies will only become more complex. Globalization and changing regulatory requirements present new challenges, while innovation, digital products, more resilient supply chains, and evolving customer needs place new demands on how companies operate.
In this environment, it is imperative that companies actively manage the complexity that comes with growth, understanding where to accept it and where to remove it. That requires treating complexity like capital: calculating its full cost, investing in it where it creates differentiated value and profitable growth, and taking it out where it does not.
Companies that develop this discipline can do more than improve efficiency. They can free resources to invest in innovation and growth while building an operating model capable of supporting that growth profitably.