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:

 

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