Make Or Buy Analysis, Made Simple

Jose, a project manager for a large software implementation company, is working on the project plan. The business analyst, Mary, mentions a third party tool which can fulfill some of the business requirements on the project. She talks highly about this tool and how another client had benefited from using it. They discuss the possibility of using this tool with the technical lead, Bob.

Bob advises against using the tool. He feels that the team has the capability of creating a similar tool. In such a scenario what should Jose do?

Should he make the tool or buy it.

As highlighted in the example above, make or buy analysis is done to ascertain if a piece of the project work should be done within the team or it should be purchased from an outside source.

The main reason to prefer ‘buy’ is to reduce the project risks or reduce developmental time.

Organizations prefer to ‘build’ in cases where:

  • There is available capacity in the project (or organization)
  • The business information is critical to business success, this includes dealing with proprietary information, business processes that give customer advantage over its competitors

There are various factors that are considered during this analysis:

  • Capability: The knowledge of the in house staff to do the work
  • Capacity: The availability of the right resources to complete the work without affecting the project constraints. Mature organizations also evaluate the opportunity cost.
  • Budget Constraints: This includes evaluating the total cost of ownership, including the direct cost and indirect cost. The cost can be calculated using the following formulas:

Cost to buy = Direct cost of the item + Long term maintenance cost + Procurement process cost;

Cost to build = (per unit cost of resources * units of time) + Maintenance Cost;

In cases when you decide to buy, it may be wise to evaluate if there is an alternative of leasing instead of buying . You may require the equipment/product/service for a short time and the leasing may save you some cost.

So what do you think our friend Jose did?

He analyzed the cost of buying the tool, this included the direct cost of the tool, training cost, the cost of integrating the tool with the existing system and the cost of the procurement. He then compared it with the cost estimates of building and maintaining the tool in house. Once he had all the information it was easy for him to make a decision.

Time for a Quiz:


Project Charter, Made Simple

Imagine that you are a Project Manager working for the city of Newtown, Alaska.

Do you think you can wake up one day and decide to spend municipality’s money to build a Gym & Indoor Pool for the city?

Of course not! As soon as you start calling potential stakeholders or suppliers, they will ask you if you have the money to spend, and who authorized you to do that?

Someone in the city council or town hall has to set aside a budget, and authorize you as the PM to spend it on building that Gym.

Project Charter is that document which formally authorizes the project.

What kind of information does the Project Charter contain?

Organizations tend to modify the project charter in a way where information is more relevant to their business environment but the basic structure of a project charter includes:

  1. Project description including expected benefits
  2. Business case of the project to highlight the business benefits of the project vs. cost
  3. High-level requirements
  4. Known risks
  5. Summary of project milestones
  6. Project budget
  7. Project success criteria
  8. Assigned project manager
  9. Approval of the project sponsor

Since the Project Charter is a document that marks the start of the project who is responsible for creating it? 

The completion and approval of the project charter has to be done by the Project Sponsor. He’s the person with enough authority to assign a budget so you as the project manager can spend it! In our example it can be the mayor of Newtown, or the city manager. Project Manager may assist in creation of the project charter.

What is the significance of Project Charter besides a formal project approval? 

– Acceptance by Senior Management: Project Charter indicates indicates acceptance of the project by senior management. They can be contacted for issues, escalations or guidance in reference to the approved tasks.

– Organizational Resources: Since the project budget is approved the project manager can start spending it (within the approved authority) and can also apply for organization’s investment into the project.

– Reference Document: Project Charter serves as the reference document through the life cycle of the project. It can be referred to in case of scope uncertainty, cost confirmation, understanding the business case etc.

– Critical Resource Assigning: In certain cases the project team members are assigned. This is done when the identified members are critical to success of the project.

How does a typical Project Charter look like?

Here is a sample Project Charter to give you an idea of how it looks like (click to enlarge):


Time for a Quiz: