Procurement Management in Project Management - Build or Buy?

October 21, 2008 | Author: PM Hut | Filed under: Procurement Management, Procurement Plannning

Procurement Management in Project Management - Build or Buy? (#4 in the series Procurement Management in Project Management)
By Joseph Phillips

Ah, one of the great arguments of all time. Should we buy it or should we build it? Well, it’s probably not that great of an argument, but I’ll bet you’ve been in some heated discussions on the value of either side of the debate. If not, let’s start one now.

Sometimes, like it or not, it’s more cost-effective to spend the cash and pay someone else to build the thing for you. Why? Your crew is busy doing other jobs, they don’t have the competence to build the thing you need, or your organization doesn’t want to take the risk of creating the thing in-house. Lots of reasons.

Other times, like when your project team is lounging by the company pool sipping pinot noir and snacking on spaghetti, it’s ideal to put them back to work building something. Again, there are lots of reasons why it may be better to build versus buy, or the other way around.

But sometimes it’s purely a price decision. Here’s the deal: Let’s say that if your organization builds a piece of software, it’ll cost $45,000 to create and then $4,500 each month to support. Now, a vendor says they’ll only charge you $23,000 to build the initial product, but they’ll need $6,500 each month to support it as part of the deal.

Hmmm… so what’s a project manager to do?

Math.

Here’s how it works: Take your build option of $45,000 and subtract the vendor’s quote of $23,000. The difference is $22,000. Now take the monthly support fees of the vendor, $6,500, and subtract your lesser in-house fees of $4,500. The difference is $2,000.

Now, drum roll please, divide the initial out-of-pocket expense difference of $22,000 by the monthly support fees difference of $2,000 and you’ll get 11. Ths if your software creation will exist for less than 11 months, hire the vendor to do the work for you. If your solution will be around longer than 11 months, and price is the only factor, build the software yourself.

Joseph Phillips is the author of five books on project management and is a, PMI Project Management Professional, a CompTIA certified Project Professional, and a Certified Technical Trainer. For more information about Project Management Training, please visit Project Seminars.

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2 people have left comments

Hi Joseph Phillips,

I prefer to buy instead of building from scratch because only few companies can complete a project successfully and it will take lot of time and money.

If a small company like us started a project(which is its first project)I am sure it will consume more time and money than estimated and not sure about it success.Only less than 50% projects will be successful.

So in my opinion buying is better than building(only for small companies)

Rajesh wrote on October 23, 2008 - 1:31 am | Visit Link

Hi,

I feel that, one should take a development of a product if it is worth iin the market and can be developed ASAP before someone comes out with similar idea.

But for project based companies, we need to carefully decide which part needs to be outsourced and ratain with yourself. It depends on many factors but one of the major factors is non-availability of skill sets and hence we outsource those parts.

Taking calculative risk is always a successful business decision, I feel…

Thanks..

Vyas wrote on February 18, 2009 - 5:51 am | Visit Link

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