Make or Buy? How to Make a Strategic Decision For Your Project
Make or buy? At first sight, this short statement doesn't appear to be such a complex question. However, purchasing project management, consulting, software, or other services from an external supplier or providing/producing them yourself is a choice with strategic implications.
Indeed, there are several key factors to consider when making the make-or-buy decision. But what has the biggest impact for your decision?
Buy vs Make Decision Factors
Feasibility
Costs
Impact
Many Make vs Buy calculators are available online. However, most are expensive to download. Get my free calculator which has input fields and automatic calculations set up to help you see financial impact. In addition there are placeholders to document assumptions and the assessment considerations so you can track the hard and soft decision points. If you need to create the base calculations for comparison go to my PM toolkit to get the Staff and Expense calculation tool here.
The factors to a make vs buy decision
Feasibility
When deciding whether to produce or purchase a good or service, you must consider the feasibility of each option. For instance, choosing to make means you'll retain control over the quality, security, delivery deadlines, and cost.
On the other hand, buying lets, you access specialist skills and knowledge. It also provides flexibility and economies of scale for purchasing large quantities.
Some or all of these factors could render either the make or buy option unfeasible. For instance, you might not have the in-house skills for production. Alternatively, you may be unable to find the required product quality from an external supplier.
Costs
Assessing the relevant costs of each option will help accelerate your decision on whether to make or buy. You should not merely consider the obvious costs such as purchase price or cost of materials and labor.
You need to include the hidden costs in your assessment. For instance, what is the cost of developing skills and expertise in-house rather than outsourcing?
Below is a snapshot of the costs of making v buying:
Impact
The third factor to consider is your make-or-buy decision's impact on your firm's resources and operations. For instance, will making a new product or service disrupt your current production? How will it impact your operational costs? Does it require new or reallocated staff and training?
As mentioned above, in-house production gives you more control over quality and security. However, outsourcing could save time and negate investing in training and machinery costs. Consequently, either option can have a significant impact on your business.
An example of how you might assess and minimize the impact of a make-or-buy decision is to follow the principles recommended by Ravi Venkatesan (Chairman of the Global Energy Alliance for People and Planet). He developed his principles for making sourcing decisions relating to developing engineered products. He considered manufacturing in 1992 as being as much about "how not to make things" as it was about production.
His approach encapsulated this in three simple principles:
Focus your production efforts on critical product components which you have expertise in producing.
Buy components where other suppliers have more expertise or a clear comparative advantage, such as cost, performance, lifespan, etc.
Leverage outsourcing to generate employee loyalty and commitment to improving performance.
Managing the Risk of a Make-Or-Buy Decision
Your first consideration for managing the risk of a make-or-buy decision is whether you have the internal resources and skills for internal production. Even if you possess these, you risk something going wrong during production, leading to a loss of sales or reputation.
Of course, just because you decide to outsource, it doesn't mean your risk disappears. Your supplier could encounter similar production issues, delays, or failure to meet your quality standards.
Considering these risks will help you make the most appropriate decision for your business.
Risk Factors to Consider
When assessing the risks associated with a make-or-buy decision, you should consider the following factors:
Product Cost
Time
Quality
Sales
Expertise
Product Cost
Your financial risk is likely to be your most pressing concern. As such, you should calculate the short and long-term costs of making and buying the product or service. Consider the possibility of material and labor costs fluctuating during the product's lifetime. What may have appeared achievable initially could soon become infeasible as costs rise.
Time
If you choose to outsource, you must be confident that the supplier can meet your deadlines. However, you have no control over factors affecting your supplier that could disrupt production, meaning you don't get your products on time. Such setbacks can lead to increased production costs or reputational damage due to late delivery.
When a product is required immediately, the situation might sway you towards producing it in-house. Doing so could give you greater control over delivery. However, outsourcing may be best if you factor delays into your deadline.
Quality
If your product is unique or high-quality, you might consider making it in-house. Of course, there is always the appeal of outsourcing to achieve cost savings. However, you might have to accept the risk of your product falling below your quality standards.
This risk is inherent with all external suppliers. When working with overseas companies, the risk is heightened as you could be dealing with suppliers who speak a different language or operate in different time zones. Both of these can make communications more challenging leading to quality control issues. Perhaps this explains the relative equality across the major outsourcing regions, as seen below.
Source: KPMG
Sales
When launching a new product or service, you risk it will not sell as well as anticipated. In such circumstances, your best option may be to buy rather than make.
Of course, the reverse is true, also. If your product's demand exceeds what a supplier can produce, you could face product shortages, leading to reputational damage. In this case, in-house production may be best.
Expertise
This risk is relatively more straightforward. Should you risk taking on the production if you don't possess the expertise? Probably not.
Consulting Services and Software
The decision to buy or produce a software product is a good example of considering the various factors and risks associated with such decisions. For instance, your company may have devised an idea for the latest "killer app," meaning that IP security and quality are likely to be your highest priorities. As such, you could be steered towards in-house development.
However, IT evolves quickly, so you may not want to upskill your staff to remain current continuously. Also, as with any new app, sales are unpredictable. Therefore, this uncertainty could steer you towards a supplied solution.
Consulting services or technology, such as Project Management or SAAS models, present similar challenges for your make-or-buy decision. The advice you get from having a niche professional consultant on your payroll will be instant and totally dedicated to your needs. Both are arguments for in-house provision. However, such advice is unlikely to be needed all the time, so you might not get full value from this asset.
Your business will unlikely face such straightforward scenarios, but you will no doubt have similar challenges regardless of your industry.
Conclusion
There are pros and cons to making and buying, with risks associated with both courses. When deciding whether to produce in-house or outsource, you should consider all the above factors and any circumstances specific to your business. Hopefully, this article will help you with the strategic business decision of whether to make or buy.
