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‘Buy or build’ – why has it fallen by the wayside?

Summary: 3 tests on whether the service is really required; and 9 criteria on whether you ‘buy’ or ‘build’

Content: 20 years ago, when outsourcing became a mainstream business tool, there was much comment and guidance on determining whether a business should ‘buy or build’ its inputs.  The same debate took place again ten years ago, as businesses and organisations started to fully explore outsourcing both business processes and ICT services.  Somehow, in the following years this debate has apparently dried up and observers rarely see informed and objective debate on making the ‘buy or build’ decision.

‘Buy or build’ is not an easy decision.  It can be clouded with emotion and politics.  Exploring the feasibility and options to a level that an objective business case will stand up is challenging – and then there is the question: ‘Where might the optimal buy/build commercial boundary lie?’

As global competition and the truly connected world imposes itself upon us, so more and more opportunities are emerging where commercial creativity will bring additional value, e.g. shared services, joint ventures.  Businesses and government organisation must take advantage of these opportunities to make a difference to the bottom line or to enhance service effectiveness and efficiency.  One would think there would be a plethora of guidance and leadership to ensure the right ‘buy or build’ decision.  Not so; is it that this has become the exclusive responsibility of the strategic consultant and undertaken behind closed doors or that it is an intuitive decision make by executives?  Guess we shall never know!

The time has come to resurrect and to empower the sourcing and procurement professional, encouraging them to explore strategic ‘value add’ opportunities though the ‘buy or build’ decision.  As professionals, we are constantly scanning the market; we spot new entrants and opportunities.  Our inquisitive nature means we are keen to work with stakeholders to explore options and to flag up possibilities.  It is this which makes outsourcing and shared services so interesting.

Never before has it been so important for businesses and organisations to focus on their core business.  It is a challenge at times to realise core is actually quiet small and precise and that action needs to be taken to keep that core efficient and profitable.  For example: can a successful luxury car manufacturer also be a world class provider of its own facilities management services?  It might consider its R&D function to be something it would retain as a core component of its business but maintaining buildings and replacing light bulbs might be better left to experts who can drive out inefficiencies and ineffectiveness.  In times of recession, cost cutting and a globalised economy, the ‘buy or build’ decision is once again a critical piece of business strategy.  Sourcing and procurement professionals, working alongside COOs and CFOs, have an important responsibility to bring commercial assurance and integrity to any ‘buy or build’ decision making process and ultimately to go on and lead a contracting process which will deliver the business outcomes required.  It is always worth asking the question when exploring an outsourcing option, ‘is the service still required at all or should it be abolished?’  Sometimes services and functions are presumed to be necessary to a business or Government function.  Being able to confirm the service is required is a pre-requisite to the ‘buy or build’ review. 

Here are three key tests:
  • Is the service or activity necessary to fulfil the strategic objectives of the business?
  • Is there sufficient demand from customers both internal and external?
  • What would be the costs and other effects of not providing the service?

 

Presuming the service is required, there are nine criteria against which the ‘buy or build’ decision can be made.  These need to be applied to all subservices in scope.  In doing so, the optimal boundary between that which is bought or built will emerge.  The criteria are framed within the following questions – will outsourcing: 

  • Reduce and/or increase control of operating costs?
  • Increase effectiveness through access to world-class capabilities?
  • Improve focus on the core business?
  • Free internal resources to focus on the core business? 
  • Accelerate and deliver change?
  • Bring control and direction to an area not delivering optimal value?
  • Make capital funds available?
  • Transfer risk to others who are better able to manage it?
  • Bring a distinct commercial boundary which is easily managed?

 

Both the ‘abolish’ question and the ‘buy or build’ decision, when explored in a structured and disciplined way, creates the opportunity for stakeholder scrutiny and generates the high level business outcomes which any outsourcing deal must secure.  Collectively the 12 criteria are a catalyst for driving out the critical business outcomes to be achieved by an outsourcing deal.  These criteria become the framework for the more detailed requirements for use in the contracting process.

This blog was commissioned by SSON and can be found at
http://www.ssonetwork.com/topic_detail.aspx?id=10860&ekfrm=8