Posted by: kevinliebl | March 15, 2010

Building, Buying and Outsourcing – Which Makes the Most Sense?

Social Media Under ConstructionOver the past few weeks, I have had a number of conversations with colleagues about “outsourcing”, and the classic “build-vs.-buy” decision.  In this economy, more than ever, this seems to be an important decision. While these are actually two separate issues – outsourcing more often related to services and build-vs.-buy typically related to products – I will discuss them both as a general topic in this article.

Reasons to Consider Outsourcing

There are many reasons for companies to consider outsourcing products and services.

  • Cost, Product Quality, Quality of Service (QoS), Time-to-Market, Company Politics, Architecture, Skill Sets, and Strategic Value, Corporate Focus, Competitive pressure
  • Reduction or elimination of internal resources to positively impact the balance sheet and/or turn fixed-costs into variable-costs.
  • Combine best-of-breed suppliers to create business leverage (e.g., economies of scale, world-class skill-sets, cost-effective labor)

Arguments to “Build”

  • Differentiation – Build when you’re dealing with the core processes that differentiate your company.
  • Unique Business Needs – If your business is unique enough that off-the-shelf products and services will not meet your needs, then it may be beneficial to keep the function in-house.
  • Interoperability – Sometimes, the function is not standardized enough and the effort to create interfaces into your business are too expensive.
  • Skill-Set/ROI – Create an objective analysis of your skill-sets and cost-basis.  If you can honestly say that you have stronger skills internally and that your cost of running the business is cheaper internally, then you should keep the function internal.

Arguments to “Buy”

  • Standardization – Frequently, outside agencies can standardize a process and add a level of professionalism to a company that is difficult to build internally (e.g., Public Relations, Legal Services, Web Development)
  • Time to Market – Always consider the ramp-up costs of building a solution.  If the product or service already exists, is it worth “hitting the ground running”?
  • Economies of Scale – Building a product or function internally one time may not have the ROI that can be recognized by an outside company that can spread the cost over hundreds or thousands of clients.
  • Quality – Using the same argument as the item above, firms with hundreds or thousands of users will typically identify and correct bugs or process errors in a more efficient manner than an in-house single-client model.

The 80/20 rule: If there appear to be significant benefits to either building or buying, then try to apply the 80/20 rule.  Is the compelling argument 80% in favor of your decision?  This tends to keep you honest and remove the emotional side of the decision process.  The discussion can often become an emotional one because frequently the decision will impact jobs.  Some internal positions may be eliminated.  Often jobs will be moved out of the U.S. and these are decisions that may invoke significant emotion into the discussion.

Execution

Once you have decided to outsource, there are some simple steps you should take to increase your probability of success.

  • Build a Plan – Take the time to document the goals, timeline and budget for your project.  Without a plan and proper expectations, you will likely fail.
  • Due Diligence – Research the market and find the top vendors in your market.
  • Compare Your Options – Ask for proposals and then create an objective comparison.  Look at your potential vendor as if they are going to be a full-time employee.  Don’t shop on price, but rather on experience, skill-sets and the criteria you defined in your plan.  Make sure you check references and review their portfolio.  At the end of the day, “listen to your gut”.
  • Agreement – Hire a “partner”, but “get it in writing”.  Great working relationships are typically based on a good contract.
  • Goals/Payment – Always set clear, mutually agreed upon goals and then align payment with your milestones.  This will keep both sides honest in the relationship.
  • Intellectual Property – Always negotiate ownership of intellectual property in the contract.  Once a winning product/process has jointly been developed, is no time to begin arguing over who owns the result.
  • Ongoing Support – Make sure you consider support needs in the contract.
  • Beta Test – Start with a small task and test the working relationship.  Give yourself time to fine-tune the process before you take on the full project.

Summary

There are many great examples of products and services that should be outsourced and others that should be kept in-house.  For each example, there is a counter example where the opposite is true.  I have managed marketing organizations where we had external PR and others where we had internal PR.  I have had external web, SEO and graphic work; and others where we brought it all in-house.  In each instance they were defendable, and arguably, the correct decision.  Every instance is different and requires analysis to come to the right decision.

One phrase that I like a lot is “are you working ‘on’ the business, or ‘in’ the business”.  In other words, how strategic or tactical are you, or should you be?  Sometimes, I ask myself the simple question, “given the wage the company is paying me, or my team, can this work be done at a higher caliber of quality at a lower cost?”  Generally, a good rule of thumb is to “buy” when you want to “standardize” and “build” when you want to “compete”.  With the growth of outsourcing functions worldwide, it is becoming increasingly difficult to compete without leveraging this capability.  For many companies, especially smaller ones, the recipe for success has been to focus on your core-competencies and outsource the remainder.

Share

If you enjoyed this post, please subscribe to the RSS feed.

Advertisements

Responses

  1. Thanks for the write-up. Another variation of this that I’ve had success with is combining the different approaches. In cases of product development, grow and keep the main IP in house. Outsource the rest and even use multiple vendors to spread the risk. Like Kevin mentioned, there are lots of factors to consider.

  2. To outsource or not to outsource has been an interesting topic of debate throughout my career. As a service provider working with the federal government and the military, this debate not only centers around ROI on our taxpayer dollars but is hugely influenced by the political climate du joir. Within the military, many believe that soldiers should soldier and not run server farms, etc… while others believe that only through insourcing can the military build a service environment that is specialized enough to meet their requirements. Both viewpoints can be justified – In the end, your comment that every instance is different and requires it’s own analysis is right on, but in the public sector that analysis is often rooted in current public opinion, political reality and leadership’s personal preferences toward this issue more so than the ROI.

    Thanks for another great post!

    • Mike,

      A great additional perspective that I had not considered. Excellent insight. Thanks for sharing.

      – Kevin


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Categories

%d bloggers like this: