As a leader you will be constantly confronted with the “make or buy” decision. Unknowingly, you may have set up certain conditions in your mind as you made this decision in the past. The purpose of this post is to look at this from a competitive advantage perspective and consciously put in some parameters to facilitate an informed decision.
What is “make” and what is “buy”?
In the context of this post, make would mean anything that is “in-house” to a company or an activity that a person indulges in, spending their own time, effort and expertise. In-house means you own 100% ownership of the site, resources and resulting intellectual property of the product/service without fear of losing knowledge.
“Buy” on the other hand, means outsourcing the work to some other entity. When you buy, you have to part with some requirements and take possession of the services/product for some agreed compensation. It is possible for the other entity to then perform the same task for your competition. You do not have much control over the intellectual property.
A notable “buy” exception is when you buy the service provider completely, as in the case of Facebook buying Instagram. Then Instagram becomes “in-house” and all their products and services are owned by Facebook. This kind of buy decision is different and not part of the make or buy concept.
Why is a “make or buy” decision important?
My previous boss likes to talk about this baseball pitcher, who at his peak spent the off-season laying carpet in his new home. He spent a full week perfecting the carpet-laying in his home. His back got a lot of work that week. He realized later that he had pulled his back and missed the best part of the following season having messed up his back.
For a few thousand dollars he could have “bought” the services of a carpet layer. He chose to “make” it himself and lost a couple of months of playing professional baseball, which cost him a few million dollars.
The pitcher did not have the benefit of reading this post!
Technology companies store heaps of cash (in the billions) and utilize that to “buy” new companies that come out with innovative products. Can these companies (Microsoft, Google, Facebook, etc.) not “make” those products as the model becomes clear? Of course they can. But they choose to buy them for various reasons.
Why would you make something that you can buy?
It would be silly for Google to outsource the design and build of their search algorithms to another company. For the same reason, pharmaceutical companies choose to keep their research and development activities “in-house” and Apple and Nike make their own product designs.
Any activity that is strategic to the core business function or which enhances a company’s competitive advantage must be “made” or kept “in-house”. This is a fundamental rule of thumb.
Check out this informative Booz paper on this topic that distinguishes strategic and core aspects of a business. Anything “core” to your product should be “made” in house.
In a leadership situation you constantly want to consider the competitive aspects of such a decision.
For example, you may want to enlist the services of a fitness trainer to help get your team fit. But you would not want to have someone from the outside lay out the game strategy for your team for the next championship season. This must be performed by the captain or the coach of the team, i.e. kept “in house”.
To ensure you maintain your strategic competitive advantage (whether an individual or a business) you must keep your activities “in house”.
When should you buy something that you can make?
Three major factors influence the purchase of an essential service or product that you would otherwise have the option of making yourself. These are time, labor and quality of the product/service.
If something will take a considerable time to make, you may consider buying it.
If something will take a lot of labor and managing the resources (translating into distraction from your “core” activity), you would be better off buying it.
If you have to “learn” to make something and not sure about the quality of the end-product, you are better off buying it.
Of course, when you choose to buy, you have already ensured that the product/service is not strategic to your business.
Applications of the make or buy decision
While the examples above relate to businesses, the make or buy decision confronts an individual, a leader or a business manager every day.
You can consciously choose to make or buy by doing simple analysis of time and cost.
For example, I could choose to make some home repairs myself. All I need to do is go to the store, buy the material, check out some YouTube videos and simply get to work.
This would be a “make” decision.
I have to factor in my time to do the work, figure out how good the end product would be and what other resources I would need. I can easily put a dollar figure to these components.
Compare this with the price quoted by the handyman and I can make the decision easily.
There are some activities though that just cannot be quantified. For example, the exercise you get while mowing the lawn, the pleasure of doing yard-work, or the kick out of grilling your own chicken is far more valuable and you wouldn’t want to outsource these activities.
When it comes to giving gifts, consider if “making” the gift will delight the person receiving the gift (such as baked items).
Subway sandwiches make their own bread, but the ketchup comes from Heinz!
Next time you are confronted with a make or buy decision, it need not be a coin toss!