Build or Buy?

Shortly after my husband and I got engaged, my parents bought us a beautiful and very expensive bedding set. It was far nicer than anything else in our small one bedroom San Francisco apartment. I immediately had a vision of a large old world natural wood and fibers headboard to complement the bedding. I searched for my vision in stores and online for about a year, when I finally gave up and decided I would just build the thing. Did I have experience as a carpenter? No. But I had done enough arts and crafts (and science fairs) in my day that I had confidence in my skills, and my husband’s power drill. It took several months to come upon the right natural fibers for the headboard paneling (in the form of grass based table runners from Cost Plus), and another week or so and several trips to Home Depot to build it. And it looks great. I knew we had pulled it off when a friend of mine said, “Did you have a professional decorator do this room?” and especially when my mom said, “Beautiful headboard, where did you get it?”

This was the semi-perfect “build” decision, in the buy versus build dilemma. It was a custom job that could not be purchased to meet the specifications. I call it “semi-perfect” only because making headboards, or carpentry of any sort, is not my expertise. As a product manager, the decision isn’t always this straight forward. There are often investments in previous solutions that sway you one way or another. When weighing the decision of buy versus build, ask yourself these questions:

BUY

• Is it a commodity?
• Do viable solutions already exist?
• Do the existing solutions benefit from economies of scale and/or a learning curve (thereby reducing the cost)?
• Is there a competitive market that creates efficiencies (driving costs down)?
• Will it be easy to plug in and go (can you integrate the solution with minimal investment)?
• Is ongoing maintenance/upgrades guaranteed and straightforward?
• Does your team have limited time/bandwidth?
• Are there things you’re much better off focusing your efforts on?
• Is it a “me too” feature?

BUILD

• Is it your core business?
• Is it highly customized?
• Is it complex requiring significant coordination?
• Is it tightly integrated into your system?
• Do you risk hold-up from a supplier (a change of terms after you’ve sunk costs in relationship specific assets, see footnote for details)?
• Do you have the expertise to complete the task well?
• Would it be costly to switch in the future?
• Is quality at the very top of your list?
• Will it create unique value for your customers?

Whichever category you answered yes in the most is the decision you should lean towards. Some people refer to this decision as “in the firm or outside the firm” or “the market or the firm” since it is not always a product based building decision.

“The team is excited to build it”, “You like that existing solution? I guarantee we can build something identical”, and “We’ll we’ve already spent time on our own custom solution, so we better continue with it”, are not compelling arguments to build. Buying may not seem as sexy to your development team, but it may be the right choice for your product and the company. Plus, I have a feeling building won’t seem so sexy when the team is neck deep in bugs or doing ongoing maintenance for the next year.

Footnote: Jonathan S. Leonard of the Haas School of Business warns that if a relationship requires an investment that has little to no value outside the relationship, it may be hard to maintain the value inside the relationship, once the costs are sunk. This is referred to as hold-up. For example, if my friend tells me she’ll sell me her ipod for $20, but before I purchase it I go out and spend $50 on an ipod specific speaker set, my friend is likely to increase her initial price quote. Why? Because the ipod is worth more to me now! I just sunk relationship specific costs on a speaker set. Now I really need that ipod… (P.S. if your friend uses hold-up on you, you might want to consider finding a new friend)