The make or buy analysis in 10 steps

The make-or-buy exercise is a fundamental and essential technique for sourcing and procurement strategic decisions. It should be done rationally and with objectivity, and be supported by facts and figures. Keep also the two major underlying principles and the seven sourcing business models in mind.

 

The exercise is not only about deciding to make or to buy. It is further to decide among or compare the different models and solutions of sourcing.

 

The process is quite straightforward and simple, but its application requires some conditions and points of consideration.

 

Now let’s walk through the process:

• Preparation: We define in this part the responsibilities and accountabilities during the make-or-buy process. Who will collect, analyze and decide. What are the products and services concerned and their requirements…not only inherent ones, but also in their usage, maintenance, and function. We plan also the execution of the process and the resources needed, and define the data that need to be collected, and under which form. We also define the weights given to the different dimensions analyzed. Defining these beforehand will ensure more objectivity in the analysis. Keep the context in the loop too!

 

• Data collection: Typically, this is the phase where data, qualitative or quantitative, are collected. Attention and care should be paid to collecting the right form and the correct data. Also, ensure they are raw and pretreated to continue enforcing objectivity through the process.

 

• Analysis:
  1. Quantitative analysis: Analyzes the measured data, including financials, operational, economical
  2. Qualitative factors to influence the relation model: Taking into account the different sourcing business models, what are the type of relationships we can afford, what are the ones we are not in position to realize, what are the different components defining the recommended one, and so on.
  3. Qualitative factors to influence the economic relationship model: Same as the relation model, it analyzes our power position on the market vs. the sources, and the economical mechanisms we would like to put in place (price only, service level agreements (SLAs), result-based rewards, share risk-share gains, etc.)
  4. Qualitative aspects in the quantitative assessment: Here all the parameters influencing the quantitative results are analyzed. For example, if data have been collected under certain circumstances, how to compensate for these circumstances. Also, other considerations should be taken into account when preparing the decision: social impacts, influence on motivation, preferences, and so forth.

 

• Final make-or-buy decision: Based on the data collected and the analysis, a model should be chosen. Map the results towards the seven sourcing business models. Refine and hone the business model towards their implementation form. What is accepted vs. what is not? What are the boundaries? What are finally the parameters of the relationship? If the decision diverges from the results, it should be justified and documented. If well done, the decision should be objectively taken based on the business strategy, the risks and opportunities, and the economic factors.

 

• Feedback, formalization and documentation: The final stage is to inform the stakeholders of the decision and its justification. Formalize the decision taken and the different elements. And keep the documentation. These last two steps will be, by experience, relied on later in the sourcing process. Often during negotiation or further sources analysis, we will refer to this analysis, results and decision. It is needed to keep track and an understanding of them.

 

The process is quite straightforward but the quality of the result relies upon the enforcement of the condition.IT requires therefor some expertise and knowledge for the output to be pertinent and delivering the expected added value. Consider using experts resources to support you in this traject or a consulting company. Check our services.