Make or Buy Analysis using DAR (Decision Analysis and Resolution)

(I had also published this article in medium :

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A make or buy analysis can be used to decide whether project activities should be undertaken by the in-house project team or whether these activities should be contracted to an external vendor. Several factors should to be considered in the make or buy decision such as the availability of the required expertise in-house, organization’s current skills and abilities, cost effectiveness by engaging the external vendors, recruiting more experts, etc.

Let’s think of a scenario where you are asked to perform a make or buy analysis for creating a software. You have a few options to choose from such as engaging your in-house team for the work or choose vendor A or B to do the job.

Decision Analysis and Resolution (DAR) is a technique to analyse possible decisions using a formal evaluation process that evaluates identified alternatives against established criteria. We will use the Decision Analysis and Resolution (DAR) to evaluate different options.

Let’s look at the steps involved

  1. Establish the criteria — in our case, we will define technical expertise, cost involved, on time delivery, delivery quality as criteria. We will just take only these 4 factors to keep this example very simple.
  2. Identify alternative solutions — in this example, our options will be in-house team, vendor A and vendor B.
  3. Select methods for evaluating alternatives — in our case, we will use weights to reflect the relative importance of criteria. We will define a scale from 0–3 where 0=poor, 1=below average, 2 = average, 3 = good.
  4. Evaluating alternative solutions using established criteria and methods and selecting recommended solutions — in our example, we will select the best option based on the overall score. Overall score for each solution will be obtained by summing up the points of each criteria for that option.

Consider that your inhouse team has average expertise in the technology you are using to build the software — you can provide 2 points against “Relevant Expertise” for the in-house team. Similarly, Vendor A too has average expertise and therefore 2 points are allocated, Vendor B has high expertise and 3 points are allocated.

Regarding cost, let us assume that the project work, if undertaken inhouse, will only incur low cost as per hour billing rate for your permanent resources is much less when compared to that of the vendors’; so, let’s give 3 points to inhouse team for cost incurred. Assuming Vendor A and Vendor B billing rates are high, we will give each of the vendors just 1 point for “cost incurred”.

Based on your previous experience, you know that the vendor A and B provides average code quality. You can allocate 2 points each. Your in-house team produces high quality deliverables, so 3 point are assigned for ‘Quality of Deliverables’.

For “Deliverable on Schedule” criterion, based on your previous experience you know that the In-house Team delivers everything on time, vendor B delivers most of the code and artifacts on time and vendor A misses most of the timelines. You can assign points 3,2,1 to in-house team, Vendor B and Vendor A respectively.

We can represent the details as below:

After calculating points for each criterion and summing it up to get the final score for each option, we see that the score is highest for the in-house team (with 11 points), vendor B comes second, and vendor A finishes last. Obviously, you can now decide that your in-house team will undertake this project. Risk associated with each option should be carefully evaluated. You should now identify and log the risks associated with this decision of your in-house team doing the project work. E.g. You can raise a high risk if you don’t have enough Subject Matter Experts.

The example we saw earlier was a very simple one. In real life business situations, a lot of other key factors needs to be carefully evaluated. Since the business situation of vendors can change drastically at any given time, we can also consider framing vendor evaluation process as an iterative process among many other considerations. Also note that several strategic considerations are involved in too. For example, if the organisation currently does not have the required experts in a specific emerging technology, but there is a future competitive advantage in adopting such emerging technology, there is an incentive for the organisation to build teams or train the existing resources in that area. So, we need to frame the criteria keeping in mind the immediate business objectives and as well as long term strategic decisions.

Hope this article was helpful to you. Please post your comments and connect with me on Twitter and LinkedIn. Thank you.


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