Make or Buy: The Blacksmith and the Toothpick

Make or Buy: The Blacksmith and the Toothpick
By Dave Gordon

Under a 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 any 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 takes into account capital costs, development expenses, maintenance costs, licenses, time to value, evolving product requirements, and of course, risks. For some proposed solutions, simply collecting all of the information required for a comprehensive analysis can be a project in itself. Many proof-of-concept projects have been initiated just to help clarify the issues for a make or buy recommendation. But for those who make, buying is simply foolishness. There is nothing on the market they can’t find fault with. Given enough time, they could make something better. Just ask them.

The larger 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, it isn’t likely it could be available as quickly. And that basic notion, time to value, is becoming a key driver in a lot of make or buy decisions.

Make, Buy, or Subscribe?

Many companies are moving to software-as-a-service applications in order to minimize time to value, even if the application doesn’t 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 there? What is the incremental value of a shortened adoption cycle?

If you talk to enough 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 won’t use right away. Of course, the folks who sell software licenses want to talk about their exotic features, pointing out all of the things the SaaS offering won’t 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.

Getting to a Good Decision

A comprehensive make or buy analysis requires inputs from all of the alternative parties in interest. You simply have to qualify the information received. Those who make things want to make them; that’s their livelihood. The same goes for those who sell. Recognizing their interests and respecting their input, while adjusting their predictions to match most likely, rather than most optimistic case, is 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 portfolio.

Dave Gordon is a project manager with over twenty years of experience in implementing human capital management and payroll systems, including premises-based ERP solutions, like PeopleSoft and ADP Enterprise, and SaaS solutions, like Workday. He has an MS in IT with a concentration in project management, and a BS in Business. He also holds the project management professional (PMP) designation, as well as professional designations in human resources (GPHR and SPHR) and in benefits administration (CEBS). You can read more from Dave on his blog.