Blogging AllianceDave GordonDecision-MakingProject Portfolio Management

Make or Buy: The Blacksmith and the Toothpick

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Under the spreading chestnut tree, the village blacksmith and I stand talking after lunch. “Man, that was great! I’ve never had forge-roasted corn before. Say, do you have a toothpick?”

Smitty grinned. “Glad you liked it. I’ve got some scrap metal here, and the forge is still hot. Give me a minute and I’ll make you one.”

I did a double take. “I don’t think a steel toothpick would be good for my teeth. Do you have a wooden one?”

Smitty rubbed his jaw. “I can make a small dowel jig, to shape a chunk of wood into a toothpick. It should be ready in time for dinner.”

I shook my head. “No, I just want a simple toothpick. Don’t you have a box of toothpicks in your kitchen? They sell ‘em at Safeway for $1.29 a box.”

Smitty jeered, “Why the hell would I buy toothpicks, when they’re so easy to make?”

“Birds fly, fish swim, and even during sharp downturns in housing, builders keep building.”

Tom LaRocque, The Denver Post, 2008

The Make-or-Buy Decision

The make-or-buy decision is an economic analysis, comparing different product life cycles and their financial implications. It considers capital costs, development expenses, maintenance costs, licenses, Time to value, evolving product requirements, and—of course—risks. For some proposed solutions, simply collecting all the information required for a comprehensive analysis can be a project by itself. Many proof-of-concept projects have been initiated just to help clarify the issues for a make-or-buy recommendation. However, for those who make, buying is simply being irrational. There is nothing on the market they cannot find fault with. Given enough time, they could make something better. Just ask them. But do not ask them for any estimates. After all, they are on a voyage of discovery.

The larger business issue is simple—time is money. There are opportunity costs associated with delay. Even if a completely custom-made product could be made as cheaply as it could be bought, Time to value should be the driver in make-or-buy decisions.

Make, Buy, or Subscribe?

Nearly all organizations are moving to (or at least considering) software-as-a-service (SaaS) applications to minimize Time to value. It does not matter if the applications do not offer as many capabilities as a licensed application that needs to be installed in the data center. Never mind the extensive feature set, does it meet our minimum requirements? How quickly can we get to production? What is the incremental value of a shortened adoption cycle? What is the cost of operations and maintenance, including updates, once in production? How difficult will it be to integrate this solution into the rest of your product portfolio?

If you talk to a lot of decision-makers, you start to hear certain patterns—a predictable operating cost is more interesting than possible savings, and a quick path to value is more interesting than features they will not use right away. Of course, the folks who sell software licenses want to talk about their exotic features, pointing out all the things the SaaS offering will not do. It keeps them from having to admit that they have no way of knowing how many of their customers even use that exotic capability. Keep the sales folks focused on the features that represent most of the value for your organization. Additionally, be sure to identify the details of the cost of support while in production, as well as the transition price from your legacy system to the new target system.

Meanwhile, internal software development managers will make a case built on leveraging their current capabilities and processes, while glossing over the fact that those represent reduced costs. They may also avoid discussing their current utilization and what it will take for their team to absorb another development project as well as a second software application once moved to production. Remind them that those things need to be assessed and made part of the decision.

Getting to a Good Decision

A comprehensive make-or-buy analysis requires inputs from the parties in interest in each alternative. The challenge is qualifying the information received. Those who make things want to make them; that is their livelihood. The same goes for those who sell. Recognizing their interests and respecting their inputs, while scrutinizing their predictions, are where the portfolio manager and project manager apply their professional experience and good judgment. Generally, you can build a good case for make, buy, or subscribe. The challenge is to make the best case for the organization and the overall project and product portfolio.

 

For more brilliant insights, check out Dave’s blog: The Practicing IT Project Manager

Are you involved in a data conversion project? Then check out Dave’s indispensable book: The Data Conversion Cycle

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