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This three-part series explores the theme of buying and integrating advanced technology. Today’s challenges can adversely affect technical projects involving a significant amount of third-party supply. Such projects often fail when subsystems fail to integrate properly. That’s why up-front planning and proper interventions are so important in the pre-contract “commercial” phase of a project to identify and remedy avoidable problems.

Part 1 surrounds the make or buy conundrum and asks a question we all face at some point. When acquiring a new technology, we often face the highly practical question -- do we build it in house or buy it in the marketplace? Today, of course, the answer is increasingly to “buy” advanced technology from third party suppliers, which entails certain managerial questions.

This article does not definitively explore the make or buy decision, which necessarily entails a range of considerations such as:

  • finance
  • return on capital and break-even analysis
  • investment required
  • market realities (Porter’s Five Forces) (SWOT)
  • sunrise or sunset technology
  • our own technical competencies
  • opportunity costs
  • management time
  • supplier dynamics, capabilities

For procurement professionals there will, in addition, be certain issues around competitive leverage, buy-sell dynamics, negotiating power, supplier positioning (Kraljic)1 and customer account attractiveness. This latter one boils down basically to how attractive is my company as a potential client to the supplier pool? That, in turn, helps us to assess negotiating dynamics.

So, what exactly is the issue around future integration of systems and subsystems within our suprasystem as encountered during the buying (or sourcing) phase? We contend that too often organizations fail to give full attention to future integration questions.

What does a typical procurement activity look like for a complex task?

Obviously all organizations will have a procurement process of some sort. These will differ in detail but possess common characteristics:

 1-Oct-27-2021-02-23-22-35-PM

 Our schematic suggests a typical sequential process for a larger and more complex project involving market testing (e.g., a competitive tender or RFP), tender assessment, negotiation, and risk evaluation. It depicts the commercial “world” as most organizations encounter it, whether public or private sector.

Make or Buy – Dynamics

There is often misunderstanding around make or buy dynamics. As we use the term in this article, we do not simply mean buying or making goods! The question is broader. Throughout the life of a project and during the operational life of the resulting suprasystem – whatever that may be – there will be questions around do we do this in-house or do we “buy” external resources to fulfill the task?

One could imagine a Build, Operate, Transfer (BOT) type technical project for a power station, for example, where our organization as the end client might ask, do we want to operate the power plant in the future, or would we prefer to hire the main contractor or some other organization to operate the plant on an outsourcing basis for a defined period of time? In this situation we would finance and project-manage, and own the resulting plant, but we “buy” its day-to-day operation via a third party. So, in this situation we would not be buying capital assets. Rather we would be buying services on the back of a technical construction project.

In any major technical project, technology integration questions will be considered. If we fail to do this effectively, the project may go wrong. In terms of our “right first time” objective, we need to ask ourselves pertinent questions early on. If the decision is to “make” will this ease technical and operational integration issues by giving us closer control over outcomes?

If so, what is this worth to us? How much are we prepared to invest for that closer control which a “make” decision will give us? Conversely, if the obvious economic and strategic situation pushes us towards a “buy” decision, which sub-system integration questions will arise and how much effort must we invest to surface those questions and solve them in a meaningful and practical way? Can we do this before we enter the sourcing phase of the project?

Although these are undoubtedly commercial questions, we very often see them as purely technicalto be answered by systems engineers. But that sows the seeds for later problems.

We cannot avoid some hard work to resolve these questions as is true with many elements of our quest to buy and integrate advanced technology. The two schematics below, however, should help to raise the level of internal discussion and highlight the issues at an earlier stage.

Make or Buy – Commercial Questions

If economics and market realities push us towards a “make” decision, then we need to consider carefully the investment opportunity costs and begin to plan what may be a major effort to gear-up for a manufacturing operation, or otherwise to gear up to handle the task in-house. The technical and integration issues may be easier to manage, because they now lie within our firm. Our decision process may look like the schematic below:

2-Oct-27-2021-02-23-22-33-PM

There is a great deal here about understanding market realities and assessing what our practical options may be. When an organization opts for a “buy” decision, the first commercial task will be to evaluate the state of play in the supply market to determine whether we shall compete this task or whether we fulfill the buy in a non-competitive manner.

Non-competitive does not mean uncompetitive! Nor does it mean we do not consider alternatives! It means that we steer towards a sourcing strategy that involves “wooing” the target supplier rather than using a good, old fashioned competitive tender, which tends to “pit” suppliers against one another in the competitive frenzy, but does not necessarily drive collaborative and collegiate behavior.

The real question here is what commercial and competitive levers do we have to warm up the marketplace? Kraljic Supplier Positioning will be a helpful tool for our procurement professionals to plan how they will handle any resulting contract negotiations. Porter’s Five Forces2 analysis helps us to be brutally realistic about how the market is likely to respond to our venture to “buy.” If we decide not to pit supplier against supplier in a typical “tendering” exercise then potentially a more nuanced relationship will emerge and the way we handle the supplier will need to be carefully considered.

Make or buy – integration questions

Our schematic below suggests the decision process for running through the integration issues we will face.

3-Oct-27-2021-02-23-22-34-PM

The above helps us recognize commercial realities and how we need to respond within system design -- however your company defines that task -- and through the supply market. The point is that we have not forgotten that integration questions must be considered and evaluated.

Summary

Many commercial people find themselves facing the make or buy question. How often do they surface and deal with the associated technology integration questions? We probably think we do this adequately, but do we do so effectively? At an early stage a project team should try to assess whether technologies can be built in-house or whether we will need to buy in the marketplace. Either way, we must systematically ask and answer many subsidiary questions. Questions most often missed (or not sufficiently understood) surround subsystem integration -- how does the stuff work together?! If we fail to understand this properly, integration problems may undermine our project at a later stage.

Questions to ask become action points

  1. How does your organization approach the make or buy question?
  1. How well is your company’s strategic plan articulated? Within that plan have you defined a clear pathway away from “make” solutions or is there an appetite to maintain in-house capabilities as core business competencies? Who decides these issues? How are these questions decided and what data helps to inform the decision process?
  1. Assuming you face a “make” decision, can you clearly identify where and how subsystems will need to interface and therefore integrate? What in your context does “integrate” mean?
  1. What audit records do you need to maintain to demonstrate your approach to this specific question, and who is responsible for maintaining that record?
  1. Does your organisation’s Procurement process or activity differ in any material way from the generic process suggested above?

ABOUT THE AUTHOR

Peter Sammons works as a business trainer with Procurement Central in the UK. The author of many books available online, Peter published Contact Management, Core Business Competence in 2017. The preview of this work may be found here His recent book Right First Time – buying and integrating advanced technology for project success looks in depth at this subject area. Available as hard or as soft copy.

END NOTES

 

  1. Kraljic Matrix See also Forbes article.
  2. Porter’s Five Forces definition.

Content reflects views and opinions of the author and do not necessarily reflect the views and opinions of World Commerce & Contracting.

Peter Sammons, Director at Buy Research Limited, a Cambridge UK based procurement consultancy


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