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The Strategic Risk of Engineering Talent Turnover

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Do You Have Contingencies in Place to Counter Disruption from the Coming Talent Wars?

It’s a topic that’s been front and center since our recovery from the Great Recession: How will companies that depend on knowledge workers for value creation react to the inevitable talent wars? Due to the growing complexity and sophistication of our products, perhaps no other segment is more vulnerable to disruption than the medical device industry. And perhaps no place is more vulnerable to the growing shortage of medical device engineering talent than California. A quick review of the current market dynamics reveals some early indicators medical device executives may wish to consider.

According to the Bureau of Labor Statistics, demand for professional mechanical and electrical engineers is projected to increase 9% through 2026, indicating competition for these knowledge workers will continue to grow. In key California medical device epicenters, highly experienced mechanical, materials and electrical engineers can easily cost employers north of $220,000 per year, fully burdened (including family health insurance, FICA, retirement contributions, vacation pay, etc.).

Other factors worthy of consideration include the current unemployment rates in San Diego County (3.5%), Orange County (3.1%) and the counties encompassing the San Francisco Bay Area (a staggeringly low 2.5%). The Federal Reserve considers the base unemployment rate, which is considered “full employment”, to be between 5.0% to 5.2%. Rates that fall below full employment give rise to inflationary pay rates and labor shortages. Under such conditions, employers have no alternative other than attempting to poach talent from their local competitors or looking to relocate talent from other parts of the country to maintain their development and innovation strategies.

Relocation of talent may no longer be a highly viable option for California’s more than 1,100 device companies employing 11 or more associates. With unemployment at 4.1% nationwide, the entire country is teetering towards inflationary employment costs and is already struggling with knowledge worker shortages.

California’s cost of living doesn’t help either. A report published in February by the Council for Community and Economic Research identified the cost of living in San Francisco is 62.6% higher than the U.S. average and housing is nearly three times more expensive than in other U.S. cities. According to rental listing site, average rent on a two bedroom apartment in San Francisco is $4,650, more than $1,000 more than New York City and $2,000 more than the rest of the largest cities in the U.S. I won’t even bring up the astronomical cost of buying a home in the Bay Area. While San Francisco may be the worst case scenario in terms of comparative cost of living, Southern California isn’t far behind.

The growing complexity of medical devices demands a broader mix of engineering skill sets as well. The use of advanced materials, increasing miniaturization, sophisticated, highly targeted interventions, and the rapid growth of drug/device combination products means engineering teams will need to grow in order to stay ahead of the innovation curve and competitive forces in the marketplace. The loss of one or two key engineering skill sets within your team risks not only slowing development, but if it takes several months to backfill those positions, it could also disrupt targeted launch windows, impacting future revenues and company valuation.

All of these factors come together to potentially create a perfect storm of disruption. Forward thinking executives will be well served to anticipate these risk factors and develop contingencies to avoid disrupting mission critical development and innovation strategies.