Build vs Buy- Your Future is at Risk

Introduction

I can’t help but wonder… Why is it that so many executives make the wrong choice, ultimately putting their company at major risk while simultaneously racking up additional expenses over time?

Modern companies, across all industries, are feeling increasing pressure to stay innovative by constantly adding value where they can. We have seen this pressure directly when working with our clients in a variety of industries- medical device developers, surgical tool providers, food manufacturers, and retail stores are all frantically searching for ways to gain a clear competitive advantage to avoid becoming another “me too” company.

Situation 1- Old market leader

Here is a familiar story. A company has a software product with a loyal customer base that has been around for years, but their market share is steadily declining. Customers love the company, but their product no longer provides the same value as before, and it is more cumbersome than some of their competition’s products. The leadership team knows the direction that they need to take the product, and they know that if they do not begin steering towards this direction today that the firm will fail. Now there is one more crucial decision remaining before leadership can reinvigorate the company. Should they build the new product in-house or buy/lease/adopt a Consumer Off The Shelf (COTS) or open source product and customize it for their needs?

Situation 2- New market entrant

A company decides to break into a new market or a start-up venture has an idea that will revolutionize an industry. The leadership team is well-funded and motivated to begin executing their exciting vision. Now there is one more crucial decision. Should they build the new product in-house or buy/lease/adopt a COTS or open source product and customize it for their needs?

Off the Shelf – Is there such a thing?

When purchasing a COTS solution or using an open source solution, the company will find that there is no such thing as off the shelf. At the very least, they will become an integrator or have to hire an integration firm (often the product vendor) to get the product working correctly in their environment. Even then, the product may not interact with other in-house products the way that the firm had initially envisioned until they spend thousands of dollars on integration.  This is often a costly and time-consuming process, as this integration has to occur over multiple service visits.  The process also requires multiple resources from the company working closely with the product integrators.  This ultimately causes an unnecessary distraction for the workers involved, who could be focused on revolutionizing the firm’s respective industry.

Vision – 20/20 or 20/200?

An often-overlooked consideration in build vs buy is understanding how closely the vision of the product you are considering integrating in your environment aligns with your firm’s vision.  Generally, a COTS or open source product doesn’t do exactly what you need to do (more on this) but gets relatively close for the time being. However, an important question to ask yourself before purchasing a COTS or open source product is how closely will the vendor’s product align with your vision in 6 months or one year from now if it is already slightly off from your vision today?

Companies who invest heavily in a vendor continue to find over time that the product does not support their vision: requiring either 1) more and more customization or 2) additional COTS or open source products to support their vision, which is ultimately a costly decision.

Total Cost of Ownership

This figure can be calculated by evaluating “as-is” conditions of resources and materials to build, or the cost of COTS to buy.  Total cost of ownership factors in all of the related costs, as it serves as a tool for leadership to make the decision.  Ultimately, this is the final figure that leadership looks at before making their decision.

The Postmortem

Build or buy?  This question can keep entire firms awake at night.  The answer to this question can simultaneously tank or establish a business, and interestingly enough, the answer is entirely different for each firm even if they are in the same industry.  Clearly, both making and buying a solution comes with their own pros and cons.  Therefore, this is a decision that must be made after you have had the opportunity to gather all of the relevant facts and have reviewed the total cost of ownership.  For example, it would definitely be beneficial to know how a COTS or open source solution would integrate with the rest of the technology in the office, and if there would be subsequent expenses prior to purchasing.  When contemplating building the solution internally, you must account for the cost of the raw materials used in production, talent acquisition or training, as well as the time employees will spend on it, and what those employees are not working on while creating the solution.  Once all of the relevant facts have been gathered and analyzed, a successful CEO or CIO will make the decision that not only fits the best for his company, but also the solution that costs the firm the least in the long run.

Success – Be in the Minority

Successful firms take the time to come to a conclusion regarding a solution that will ultimately save the firm money in the long run.  They must first collect all of the data in order to make an informed decision.  Sometimes, the answer is clearly to build the product yourself, while other times the answer may be to buy a product off the shelf and customize it. Successful leaders will make an informed decision.

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