Buy vs. Build

Don’t reinvent the wheel

In 1994, the U.S. government enacted Federal Acquisition Streamlining Act. A key provision in FASA is the government’s stated preference for the purchase of commercial items because the purchase of proven commercial items can:

• Reduce government-funded R&D expenses
• Minimize acquisition time and
• Reduce the need for detailed specifications and product testing

This legislation, which dramatically changed the U.S. government’s procurement philosophy is a great argument in favor of BUY in the BUY vs BUILD debate. Although this debate is generally accepted to have been won by those in favor of BUY, it still raises its head every now and then, mostly in software buying decisions of public sector agencies.

There are different versions of the same question. BUY vs BUILD has strong overlaps with GOTS vs COTS (Govt.-Off-The-Shelf vs Commercial-Off-The-Shelf) and even with BEST-OF-BREED vs BEST-OF-SUITE to some extent. Whatever be the nomenclature, the fundamental question at the heart of this debate is – What are an organization’s differentiating activities and non-differentiating activities. I will revisit this point later in more detail.

The tip of the iceberg

Often software buying decisions are based on the “visible” criteria such as product features, upfront pricing, and implementation costs. But there are a whole host of hidden and often more important criteria such as Integration, Risk Management, and link with the IT and Business strategies. Bespoke application development by an in-house IT team is a classic case in point.

The Lifecycle cost iceberg

And these hidden costs manifest themselves over the lifetime of the application often leading to delays and higher costs and more often than not, the entire project gets shelved.

What differentiates your company?

Since 1985 when professor Michael Porter of Harvard spoke about competitive advantage, companies across industries have been trying to identify what they can do best and focus on those areas. Anything that does not offer a competitive advantage in the market is or should be contracted out.

Broadly speaking, 3 areas exist in which companies try to differentiate themselves.

1. Operational Excellence (example: MacDonald’s) – companies that differentiate themselves via a combination of Speed of delivery, Production cost, Technology, Scale, Information
2. Customer Intimacy (example: Walmart) – when your advantage lies in Citizen/customer service, Personalization, Experience and/or Location
3. Product / Service leadership (example: Apple) – leveraging Speed to market, Price, Quality, Selection, Technology / Design, IP & Trademarks

And this is true across sectors; whichever industry you consider, companies are focusing on what they can do better than others and outsourcing non-differentiating activities to service providers/vendors/partners. These service providers, in turn, are able to differentiate themselves in performing the activities that their customers consider “non-differentiating”.

Across industries, companies are increasing focus on their core strengths

So, in a BUY vs BUILD debate, a company must ask itself if BUILD is a differentiating activity for the organization. Would the IT team serve the organization’s interests by investing time in coding or would it be better to focus on strategic activities such as improving organization’s productivity via digitalization and go for commercial or BUY options for enterprise applications?

Scott Wahl, the CIO of Shell, said in 2018:

” I want to innovate the things that matter…competitively differentiating processes….I don’t need to innovate the standard parity processes.“

Having realized that about 80-85% of their activities are non-differentiating, Energy Industry players including the likes of Shell, BP, Chevron & Apache are jointly developing Industry ERP guidelines, to free up time & resources for Innovation. And SAP along with Accenture, are partnering with these companies in this initiative.

Find out more here.

And there you have it. From governments (The US FASA act) to industries, the debate on BUY vs BUILD continues to be judged in favor of the BUY side; and with good reason.

For a detailed discussion on this point of view, please leave a comment.
For a better understanding of COTS vs GOTS, please click here.