A Prescriptive Process for ‘Make vs. Buy’ Decisions
You are about to develop a new product (or service, or process). However, your company may not have the skills or intellectual property to develop a part of it, so you are faced with the classic ‘Make vs. Buy’ decision. Do you have your own people develop that part, or do you use an external company for that?
The first thing you must know is that ‘Make vs. Buy’ is actually a spectrum with much more than those two options. There are, in fact, 7 general alternatives, and there are 10 factors that should affect your decision. The decision should be made for every part of the overall project , independently.
7 ‘Make vs. Buy’ options
- Develop Internally (‘Make’) – you will not need any significant external relationship to complete the development of that part, which will be entirely developed in-house.
- Acquire – completely acquire another company that may have the skills, technology, processes, or any other asset that is central to the successful development of the part.
- Partner – each company will offer their respective part in a coordinated marketing and selling effort, but will retain all rights to its part.
- Outsource (your people, my way) – a contractual relationship in which people and talent are contracted on a temporary basis, to develop the part. Your company still determines the scope and specifications for that part.
- Contract (your people, your way) – a different contractual relationship, but one in which you will provide specifications for the component that needs to be developed, but leave the ‘how’ it will be done to the other company to determine and deliver a final component.
- License – you will use your own people, but license intellectual property that was already developed (and typically protected) by the other company.
- Reference – you will reference products or services developed by other companies, but refer the customer to purchase those to complete the product, rather that incorporate them yourself.
10 factors affecting choice
- Centrality to the whole product – how central is that part to the whole product (or service, or process)? Can the whole product be sold without it?
- Critical to performance – how critical is that part to the performance of the whole product? (for example, the CPU speed to the performance of the computer)
- Unique 3rd party capabilities – how important is the competency of the other company to the development of that part, and does it give them a high bargaining power over you?
- Development independence – how independent can the development of that part be from the development of the rest of the whole product?
- Internal competency alignment – how aligned is the development of that part with the core competence and skills of your employees?
- Confidentiality – how confidential is the development of the whole product? How much damage could be caused by the other company leaking details about it?
- Complementor availability – how many different parts would you consider externally, and how many different possible companies can deliver those?
- Customer ownership – will this part be interacting with the user of the product or service? Will the company developing it “own” the customer relationship?
- Price sensitivity – how sensitive is the price of the whole product or service? How critical is the cost of the part to the whole product?
- Time to Market – how important is getting the product to the market sooner rather than later?
Using the tool
- For each factor, give a score of 1 (low) to 3 (high). For example, if the project is very confidential, give it a score of 3 at the sixth row. If the part that needs to be developed is not critical to the overall product (or service, or process) performance, give it a score of 1 in the second row. If the part that needs to be developed is moderately aligned with the company’s internal competencies, give it a score of 2 in the fifth row.
- Multiply the score for each row by the number at that factor (row) for each of the development alternatives (columns), and add those numbers up for each column. In the example below, for the “Make” column, you would multiple 3 by +2, add to it 2 by +2, subtract 3 by -2, and so on. The total for this column would be 3. Do the same for all columns.
- The highest score is the one that would be most recommended “Make vs. Buy” option. In the example below, this would be Acquisition (with a total score of 21), followed by internal development (“Make” with a total score of 9). Note that all other options got much lower scores. If two scores are relatively close, apply some additional criteria to make your final decision.
This tool is not the “be all, end all” for making decisions, and should never replace your judgment, as other factors may come into play. However, it can help in narrowing down the space of options.
image credit: Yoram Solomon; business record.com
For more detail about this ‘Make vs. Buy’ tool, check out Bowling with a Crystal Ball, 2nd Edition.
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Dr. Yoram Solomon is an inventor, creativity researcher, coach, consultant, and trainer to large companies and employees. His Ph.D. examines why people are more creative in startup companies than in mature ones. Yoram was a professor of Technology and Industry Forecasting at the Institute for Innovation and Entrepreneurship, UT Dallas School of Management; is active in regional innovation and tech transfer; and is also a speaker and author on predicting technology future and identifying opportunities for market disruption. Follow @yoram
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