MANAGING PROJECTS

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The Make or Buy Decision

1. INTRODUCTION

The leverage of companies' core skills and resources is a fashionable management objective. This strategic approach is aimed at:

• concentrating internal resources on a set of "core competencies" where achievable, definable and sustainable preeminence can be delivered thereby providing unique value to customers

• outsourcing other activities, including many traditionally considered integral to any company for which there is neither a critical strategic need or special capabilities.

One such area on which this strategy can be employed is in the choice of making, (developing systems in-house,) or buying, (either products or services).

Not surprisingly, the "make or buy" decision can be contentious as it will inevitably bring into play the personal agendas of the staff involved.

Some may see it as an opportunity to move forward in building "state-of-the-art" skills, others might see it as a misguided sense of loyalty to the business's in-house team.

Criteria enabling objective decision making are elusive or difficult to apply and every case is different but the trend towards a reduction in bespoke work is accelerating. There is even a National Numerical Algorithms Library of generic, tested and validated software routines which are available for use as building blocks in modular solutions.

Key questions which tend to dominate the make or buy decision process are:

• which people with which skills and knowledge need to be available to both the purchaser and the supplier to ensure the success of the procurement?

• will it be necessary to bring in resources and, if so, from where will these be obtained.

• Will this external resource requirement affect the project lifecycle and timescales and what are the cost implications?

2. STANDARD SOLUTIONS

Most companies should give serious consideration to a "standard" package solution unless:

• they know that there is nothing currently available on the market which can meet the majority of their needs, the option to change their requirement is not available, (or BPR is not appropriate), they can justify the high cost/risk of in-house development.

• they are looking for strategic market advantage which requires an innovative approach

"Off-the-shelf" packages reduce the risk of failure, can usually be implemented faster, (delivering benefits sooner,) and cost less than the alternatives but generally do not deliver "strategic competitive advantage."

3. CUSTOMISED SOLUTIONS

Customisation of a standard "off-the-shelf" package can be a way to get the best of both worlds but it can also produce the worst. Costs of customisation can escalate, (nothing is ever as simple as it looks,) it may not deliver what you eventually realise you need and the resulting "non-standard" application will probably be more costly to maintain or upgrade.

4. BESPOKE SOLUTIONS

The best safeguard of competitiveness is technological differentiation which offers clear value advantages to the customer.

Companies need to determine whether there are new opportunities or whether traditional sources of differentiation are still valid. However, a technological advantage may not be sustainable or may be too short-lived to justify the investment.

Two key questions can help determine whether a bespoke development is necessary/justifiable:

• will the system or a component of it have a decisive influence on the performance of the company?

If it will, it is a matter of survival in a competitive environment but perhaps not all of the system need be developed in-house. In this case the relevant design expertise must be retained and influence over your suppliers deliverable must be exerted without over-specification.

• are there competitive advantages to be won from a technological innovation?

Bespoke development should only be considered if its cost and advantage can be defined over time. If this is to be undertaken in-house then, ideally you should consider setting up the project as a separate profit centre which can operate in the market and maybe even commercialise its product.

5. OUTSOURCING (AND FACILITIES MANAGEMENT)

Outsourcing encompasses the whole gamut of the supply chain from:

• packaged software supplier
   
• bespoke software supplier
   
• value added reseller
   
• systems integrator
   
• applications management service provider
   
• facilities manager

Too often companies look at outsourcing as a means to lower only short-term direct costs. Through strategic outsourcing, companies can also lower their long-term capital investments and force unwanted risks and management problems onto their suppliers (the "flow-down" principle).

MCI, (the largest telecomms operator,) states:

"We do about 60% of our software development in-house, but we manage the other 40% in contractors' hands. We do all the specification and testing. We control the process. Then we let others do what they do best"

5.1 What is Facilities Management?

FM is a subset of outsourcing. The CCTA's definition of Facilities Management is

"An agreement with a contractor covering management and technical responsibility for the provision of computer and/or communications based operations and, where applicable, associated resources and locations".

Facilities management is the fastest growing sector of the IT industry with projections of 20 - 30% pa predicted. The current UK market is estimated to be worth about £50M per year or about one tenth of its potential. The reasons for this growth and general client interest are many and varied, sometimes logical, but often the result of a blind following of fashion.

5.2 What are the alternatives?

FM is only one answer, other options to consider are:

• Re-Financing
   
• Downsizing
   
• Improving the efficiency or widening the skills of your existing IT dept
   
• Selling spare capacity
   
• Making the IT dept a profit as opposed to a cost centre

5.3 The risks

As with marriages, even the best and most stable relationships can break up. Terminating an FM/outsourcing agreement is not going to be as simple as signing the initial contract. Perhaps the major risk is the potential decline in service provision during the break-up period. The customer may no longer have access to the hardware or staff necessary to continue trading and the supplier may find he has too many staff and resources sitting idle.

Contractual prearrangements are usually necessary to ensure that critical personnel are available when needed. (See WP3 Model Forms of Contract). A much more highly trained and professional purchasing and contracts management group than has been the case in the past is now required.

6. COSTS

Having resolved some of the high level issues of technological differentiation, "off-the-shelf", customisation, bespoke developments, or outsourcing, costs need to be measured.

Often this is simply a case of comparing quoted prices against in-house marginal costs but this is too simplistic.

The real cost difference between in-house and external supply fall into four areas:

• Factor costs

Suppliers personnel costs are typically 30/40% lower. For countries with low labour costs it may be even higher and the rise in visibility, competitiveness and competence of suppliers within countries such as India make them particularly attractive.

• Economies of scale

Suppliers tend to have a much higher unit output and scale economies may also include material costs. They are also able to negotiate bulk purchase of components and labour. Taking advantage of their previous investments, innovations and specialised professional capabilities is likely to result in lower overall costs.

• Productivity

In-house developers usually lag way behind suppliers in productivity by a factor of 30%. This is particularly important if your planned time to implementation is restricted. One key aim in implementing systems should be to deliver benefits quickly and an external source may enable this more readily.

• Design to cost potential

This potential is only available to an organisation with experience of both systems optimisation and the best knowledge of the business requirements. Few suppliers or customers have both, therefore a "partnership" between supplier and customer is required. Good tools and methods are required, (see Complex Projects WP6).

7. CORE COMPANY COMPETENCIES

What is really "core"? And why?

You need to consider which of your company's activities really do, or could, create unique value and which could be more effectively bought from outside suppliers. We suggest that core competencies include:

• Skill or knowledge sets, not products or functions

Systems do not produce competitive advantage, people do. Systems, as with products, can be back-engineered, duplicated or replaced with substitutes. Nor is a competency a function such as engineering or sales. Competencies tend to be skill sets which cut across traditional functions.

• Flexible, long-term platforms - capable of evolution

The challenge is to consciously build dominating skills in areas which the customer will continue to value over time.

• Concentration

You should target a maximum of two or three activities in the value chain most critical to future success. Each associated skill set requires intensity and management dedication which does not tollerate dilution.

8. DECISION MAKING PROCESS

The make or buy decision is not a discrete activity. It should be seen as one element in a series of iterative reviews. It is taken in parallel with:

• developing the business and procurement strategy
   
• capturing the requirements
   
• understanding the supply chain and developing vendor relationships
   
• assessing both internal and external systems development capabilities
   
• reviewing the options for outsourcing, applications management or facilities management services

Your ultimate decision will be based on global level input, (see previous sections,) together with collection and evaluation of this ongoing data. The time for your final decision should be just before the ITT production and issue deadline.

9. CONTRACTS

There are many variations in the type of contractual relationship you will form, (with either external or in-house providers). The key influences which will shape this relationship are:

• Supplier Role (vendor, supplier or service provider)
   
• Supplier Relationships (exisitng, new)
   
• Supplier Organisation (single, Prime Contractor or Integrator)
   
• System life cycle (Big Bang, Incremental or Evolutionary)
   
• Contract terms and regulations (Services or Supplies)
   
• Supply type (fixed price, time & materials, hybrid)

10. SUMMARY

As with most business decisions, a careful balancing act is required which can best be illustrated as follows:

Risks, costs and benefits exist on both sides of the make or buy decision. They are different but all can be overcome, (to a greater or lesser degree.) Following a strategic analysis framework, considering a variety of sources of supply and using appropriate of tools and methods will help.

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