Build vs. Buy

As a technology executive I am always faced with the decision to build vs. buy. For each feature and for each project, for each component that is implemented, the decision has to be made. And it is seldom easy. There are many factors that play into making a decision and it is not always clear what the long-term effects are. One of the bigger factors is time-to-market, and not less important is integrability. So, how do I make the build vs. buy calls?

Company type is important. Different companies have different needs. And those needs should be fulfilled in different ways. A technology company is different from a service company or financial institution or factory. But because they are different does not mean the way they look at technology differently from each other. The question of technology usage has to do with the purpose of it.

It seems obvious that a technology company will tend to build most of what it uses. But that may not be the case. Similarly, a service company, we would think, would buy and integrate what they use to conduct business every day. And again, that may not be the case. It is all in what is core to the company and what can be best leveraged on a financial event – M&A or IPO.

The way I look at it is that if technology is core to the value of the company and intrinsic to the company itself, then you build it. It is an investment that will pay big dividends. And all ancillary technology should be bought. For a non-financial company it makes no sense to build a general ledger. There are some good accessible products that will do just fine. For a financial company may be worth reinventing the proverbial wheel if they have some new paradigm they want to implement, but if they do not, then most likely it would be fine with a tool like Oracle Financials – I will let the CIO/CTO for such a company decide.

But a company’s technology does not need to be build from the very beginning. Proof of concepts can be constructed on top of canned software. There are a myriad of sites that implement different business all built on top of Drupal, a content management system. The only concept these sites have in common is the fact that they are content rich and that content needs to be managed. But how the content is displayed or monetized, that is different. Drupal is a great tool that can get you going fast, meet your market on a short amount of time, with as little as possible development investment. And then what? Then, again, if owning 100% of the core of your technology is important from a valuation point of view, you start re-implementing and replacing little by little the bought components.

At the end you build if your technology adds to the valuation. Else, you buy. Nobody wants to buy or invest in a company that does not own its most precious asset, technology. Nobody wants to buy or invest in a company that is at the mercy of some third party technology producer.

For large established companies I propose a very similar argument, but with a more macroscopic approach. Larger established companies should be on the lookout for small or large companies that complement them and help expand and cement their position on the market. These acquired products may remain on the periphery or become core.

But, what about their internal technology folks? These established companies have core products that they own, that got them to where they are. These folks work on that and keep on building new version of the core products. Also, they build more core products that the company would own and would positively affect the value of the company as a whole. The companies that they buy in combination with the core products create a more powerful market offering.

In the end, it turns to be a balancing act between core values to the company, existence of quality products, time to market, budget and what strategy the company follows.

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Filed under Business, Technology, Thoughts

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