To make or to buy is a question of critical importance in any industry. In the manufacturing sector, for example, the make-or-buy strategy involves the question of whether to create a product in-house or buy from a third-party vendor. In any professional service industry such as consulting, there are options to get the job done by your in-house team or outsource it to any other organization, specializing in that line of service.
What is make-or-buy dilemma in consulting sourcing?
In consulting projects, an independent task force can bring focus, speed, and pressure to the table, which is the prerequisite for the successful execution of a project. Now, when it comes to executing a consulting project, you have two options:
- First, you can rely on internal resources.
- Secondly, you can work with external consultants.
For consultancy services, the make-or-buy strategy is more of a strategic choice that has to be made after considering a host of factors other than a cost-benefit analysis. Hence the dilemma. Here are just a few examples of what needs to be considered to work out an effective make-or-buy strategy.
In case you contemplate going with the first option, you have to ensure that resources with the right skills would be available, they would be given the right authority and responsibilities, and they would be able to work independently.
However, for employees, while acting as internal consultants, it often becomes difficult to challenge the boundaries. Naturally, people who are put into those projects are high potential and result-driven. The fact that the team members are part of the company can make it difficult to disrupt the established order, as opposed to external consultants, who are not part of the organization.
The internal team may be unaware of the latest trends in the industry or capability. They may waste time reinventing already well-established improvement methodologies, resulting in longer projects and higher overall costs. Again, the fact that the team members are part of the company can make it difficult to disrupt the established order.
This leaves organizations to opt for the second option, which is to work with external consultants who enjoy more freedom and flexibility. Here, however, you have to make sure that they have the right expertise and also experience in your industry to be able to understand your business needs.
Besides, there’s also the matter of confidentiality to factor in. It’s a well-known fact that consultants tend to use a benchmark, what they learn on other projects. And that’s why we hire them in the first place, don’t we? But for some specific projects, this can turn out to be a problem.
Creating An Effective Make-Or-Buy Strategy to Deal With the Dilemma
Aimed at optimizing an organization’s external spending and the pool of suppliers to execute the project as profitably as possible, your make-or-buy strategy will enable you to choose confidently between internal and external consultants. It’s nothing but a framework that includes five strategic components – understanding of project needs, centralization of the project, assessment of the externaliza-bility of the project, strategic value assessment, and externalization value assessment. We call them the Five pillars of a Make-or-Buy strategy Framework.
Pillar #1 Understanding your project
Start by answering the following questions to determine your project needs:
- What are the key activities that can be outsourced?
- What does the pool of potential suppliers look like?
- How mature is the market for suppliers?
- What providers are appropriate for us?
- Is it worth it to outsource a particular activity for the long term?
Unfortunately, most companies have neither the experience nor the methods to answer them. As a result, when it comes to signing contracts for major consulting projects, they end up hiring external consultants based on word of mouth, on perceptions of the reputations of various providers, and on the sometimes-outsized claims of the consultants themselves. Or they take the line of least resistance and simply hire the consultants they have used in the past, regardless of whether those consultants are the most appropriate for a particular project or for furthering the broader strategy of the company. Consequently, the project outcome is often not aligned with the overall strategy of the enterprise.
Therefore, procurement leaders must leverage a reliable way or methodology to determine if a particular consultant precisely meets the company’s needs, gauge a consultant’s likely level of performance, and compare among multiple providers. When they have an independent, credible means of assessing providers and matching them to their company’s needs, they can hire an external consultant with full confidence.
Pillar #2 Centralize to Monitor the Category
So, we just told you the kind of questions that you have to ask yourself to understand your project needs and make a choice between internal and external consultants. But then, how do you really get started from a practical standpoint?
Well, many companies respond to their make-or-buy strategy dilemma by centralizing consulting procurement. The aim is to have a more global vision of consulting efforts, better understand the costs, and more powerful levers for negotiating volume discounts and creating synergies across functions and business units. Recognizing that Consulting is an accelerator of change, these companies bring Consulting Management under the direct responsibility of the head of strategy or a transformation leader.
Generally speaking, putting the Consulting Budget’s accountability and, the monitoring of the Consulting Expenses, in charge of the strategy team, is the right move.
This team needs to define the rules for procuring Consulting Services. Demand management, Make-or-buy strategy, and Consulting Spend analysis should go through them to ensure the alignment with the overall strategy and their consistency across the board.
Pillar #3 Find out the “Externaliza-bility” of your project
After completing the above-mentioned steps, now is the time to analyze if a project can at all be externalized. You need to assess if the issue you want to solve is a candidate for outsourcing.
Best procurement practices recommend having a well-defined project that can be handled independently (as much as possible) by the rest of the organization. For Consulting projects, these best practices translate into the ability to function in project mode with a focused team.
- Are you able to define clear deliverables for your project?
You need to describe and properly document the results or outcomes you expect from the project.
- Can you define a firm deadline for the project?
Any project has to be completed within a stipulated timeline. The deadline is closely related to your project’s level of priority. The higher the priority, the tighter the deadline.
- What is the level of uncertainty of your project?
Too much dependency on the delivery of other internal teams can impact the quality and speed of the project adversely. You need your project to be as independent as possible from other parts of the organization.
- Do you have access to the necessary resources?
Tricky question. The idea here is to assess if the resources you need for your project are accessible internally or externally. Or in other words, are there individuals in your companies or in external consulting firms able to deliver on your project?
If you get the answer in the affirmative for all the above-mentioned questions, then, doing it in-house makes more sense. In such cases, outsourcing should not be your first choice, if not necessitated by other factors, which we are coming to subsequently.
Pillar #4 Find the Strategic Value of the Project
Every project has a strategic value. When the expected impact is high, the project is said to have a high strategic value.
Some projects have clearly high strategic value. But some projects that are not strategic still can bring value when they enable another strategic project.
Understanding the strategic value of the project will help you define the level of priority for the project, which in turn will help you decide if you need to hire external consultants immediately. The concept of strategic value is closely associated with the demand management function. We will come to this point later. First, let us take a look at the questions that need to be answered to assess the strategic value of a project:
- What is the expected impact of the project?
You can expect an impact on the top line, the bottom line, the costs, the culture, the leadership… This information will help you define the level of priority for the project.
- How much are you willing to pay for the project?
Or in other words, you must ask yourself, “can we afford this project right now?”
- Is now the best timing for the project?
Even when a project is strategic, “now” may not always be the right time. In some cases, you may require an enabler project first, before you launch this project. Alternatively, you might have to launch a regulatory project, and in that case, you may have to wait a couple of years before you launch this project.
- Will we need this skill for other projects in the next three years?
A project that helps you to build the foundation of a new competency, and up-skill your teams, has immense strategic value, and using external resources can be a brilliant long-term move, here.
Pillar #5 Find the Externalization Value of your project
We have earlier discussed the aspects that contribute to the externalizability of a project. You also need to assess the externalization value of your project, which is the value created through the outsourcing of the project.
- Are the skills involved in the project core for your company?
When you have the right skills and resources available internally, it might make more sense to do the project in-house. If that is not the case but the skills are or will soon be core to your company, you might want to beef up your existing teams and launch the project internally.
- Is there a specific reason to go external?
You might want to take advantage of independent expertise, get third-party validation for your management decisions, or leverage a consultant’s brand to justify a painful decision. In all these cases, working with external consultants will be a key success factor for your project.
- Do we improve the business case if we accelerate the project?
Outsourcing a project should bring more value than doing it in-house. If boosting the project (compared to the time it would take internally) adds value, you want to work with consultants.
- Do we have the necessary skills and resources to supervise the project?
You will need to find a project manager who understands the project’s scope and the work the Consulting Firm will do. And you will need to free some of his team to supervise the project properly.
- Are there companies that can provide that service?
This is a tricky question. If you are looking for a very niche or a hybrid skillset, it might make sense to do a little research.
- How confidential is your project? Is there sensitive IP or information involved in the project?
You don’t want your IP or your strategy to be out there. Some consultants have specialized in working across the board in one industry and selling their benchmark. Besides, from a strict risk management standpoint, extremely confidential projects have the highest risk of breach of confidentiality. Hence, you need to have as few people involved as possible in confidential activities. And here, when you work with consultants, you are always taking the risk of breach of confidentiality. Of course, you can cover yourself with an NDA and make sure that it’s really well, you know, well organized and covered.
However, you are always taking that risk and you have to keep that in mind when you are on a project that has low IP sensitivity, you’re fine. But when you are in a very strategic, very secret project, you should be honest in your evaluation, of whether it is really worth it to work with an external consultant.
Is There Any Solution That Blends the Benefits of Both Internal and External Consultants?
Yes. To achieve the best performance, we need to look at the middle. There is a middle path that can bring you the best of the two worlds: a hybrid execution. There might be parts of the projects that can be isolated as stand-alone workstreams, where the confidentiality or the service availability will not be a challenge. You can then, under the direction of a highly-experienced project leader, outsource parts of your projects and keep the rest in-house.
However, when you are opting for the hybrid execution model, you must keep to the context and the objectives of your project. Here are a few points to consider:
- Like any other consulting firm, an internal consulting group has its own Consulting DNA which has its roots in the expertise of the group and the profiles of its managers. You need to have an extended internal consulting group to tap into the diverse skills of its members, otherwise, you may end up using just a few of the capabilities of your internal consultants, instead of using them for all the areas where you want to use them. Let’s imagine that your company launched an internal group to rationalize the manufacturing capability. You have to bring in an internal team that has developed operational effectiveness skills and experience. Otherwise, bringing them on a high-level strategy project will be like mere a throw of the dice.
- Then, there are scenarios where internal consultants have to implement unpopular decisions such as cost-cutting or making sure that teams are delivering synergies at an accelerated pace. In these situations, it becomes difficult to sustain healthy relationships with their colleagues. As such, when internal consultants have to manage such situations that might lead to unpleasant decisions, they constantly have one thought playing at the back of their minds — they will still be in the company after the project. This can create a great dilemma for them. External consultants, on the other hand, can come and go without enduring the consequences. In such cases, working with external consultants seems like a better solution for the Company. However, going the hybrid route, you might just present the conclusions provided by the internal consultants to the higher management. Then, to validate and add more weight to that conclusion, you can bring in an external consultant, giving it the power of a third party’s brand.
- Conversely, when you are dealing with a project that will span over a long period of time, will involve a lot of team interactions, dealing with sensitive issues, proposing buy-ins and likes, going hybrid can be a practical option.
- Leveraging a hybrid model is ultimately all about integrating your internal consulting group in the competition for the projects where their skills and experience could be an advantage. These hybrid teams can help immensely in reducing costs and ensuring knowledge transfer.
Start Building Your Make-Or-Buy Strategy Framework
So, we have discussed all the questions under five pillars, that executives should consider understanding if they’re in a ‘make’ or in a ‘buy’ situation.
Depending on how procurement savvy your executives are, you might want to describe in more or less detail what each of these questions really means. Sometimes you need to have them go through all those steps and be very clear on what is expected from them at each step of the process. And you have to remember that that framework has to be in line with your make-or-buy strategy and your culture.
Now that you have all those answers, you can start building a decision matrix with the strategic value on one axis and the externalization value on the other one. The decision-matrix method, also Pugh method or Pugh Concept Selection is a qualitative technique used to evaluate various alternatives based on multiple criteria. This system will help you to make the decision by considering both factors at the same time, saving much time and energy.
When your list of criteria is stable, you should start to define the importance of each item relative to others and assign a weight to each of them. That will allow you to sort your projects on the two dimensions, Strategic Value, and Externalization Value, from high to low.
A very common and visual tool to support decision-making when the criteria are difficult to compare is the Decision Matrix. The efficacy of the Decision-Matrix lies in removing the subjectivity and thus facilitating the discussion and the reach of a consensus.
Having trouble in interpreting colors in this decision matrix? We have mapped it for you; just refer to the table below:
|DECISION MATRIX COLOR TABLE|
Projects have very low strategic value. Here, you have to apply the demand management rule to assess, is it really worth it to outsource the project?
|Green||Strong impact with added value when outsourced to external consultants. The added value can be linked to skills or to $$$. In other words, your decision to avail of specific expertise or work with consultants can accelerate your project and generate more value and that is also faster than an in-house project.|
|Blue||Consider hybrid execution. Here we are in the situation where the externalization value is not optimum (but with strong strategic value) or the strategic value is medium (with medium-high externalization value). It would make sense to examine the projects and see if you can cut your projects into small lots and run the make-or-buy analysis again to end up with a hybrid execution (a mix of internal and external resources).|
|Gold||Strong impact / low externalization value- Should be done in-house. Typically, a project with skills available in-house or sensitive IP.|
|Orange||The strategic value is medium, the externalization value is low. Typically, a project that requires skills that you will need in the future. Launching a project now could help build and train your teams.|
When your project falls in one of the clear verdict zones – for example, in the green zone – your decision-making happens smoothly. But when your project has a low or medium strategic value, then it is time to put your team’s demand management skills to work.
Let’s explain how make-or-buy decisions relate to Demand Management. But before, that just for a recap – Demand Management is a planning methodology used to forecast, plan for and manage the demand for Consulting Services. It allows companies to monitor and control the Consulting Spend, ensure the alignment with the strategy, and identify Synergies. Read this article to know more about the concept of demand management.
While looking at different quadrants, everything that has low strategic value comes under the purview of demand management. You decide not to go ahead with the project with low strategic value unless you have an extra budget, but sometime, even with the budget, it may not be worth it.
When you start with medium strategic value, you need to depend on the externalization value to decide whether you should go internal or externalize the project.
If you’re more familiar with the make-or-buy strategy, you can add another dimension, which is the priority of a project. And you can also add some new options like hybrid projects, you know, that are mixing internal and external consultants.
And you can have also team development projects, which are projects that you do because you know that you will need the skills in the future.
And you’re just taking the time to train your employees in order to get them to grow in that specific area that you’re interested in.
Detail how to work with your Business Lines
Now that your Make-or-Buy Strategy Decision Framework is ready, the last part of the work is to bring it to the business lines and get their buy-in.
- Explain the case for change
Any change implemented has to be explained and rationalized to your employees. Putting in place a framework to make-or-buy decisions will help your company keep your focus on the strategy and the consulting costs under control.
Tell the story from the beginning (what’s the problem?) to the end (what are the expected benefits?). It will help your managers better understand the stakes and address potential objections and challenges.
- Inventory the projects
Once your teams are on board, you can start identifying the pool of projects to be analyzed.
At that stage, you have probably already implemented demand management. You can only consider the projects that are highly strategic or over the threshold.
- Map benefits vs. efforts
Another important filter is a rough estimate of the benefits vs. efforts or the expected value creation for each project identified. This should help you make the first prioritization and leave on the side projects with lower created-value.
- Select candidates for externalization
First step in the framework, select the projects that are externalizable easily. That will save you some time and energy. You can always come back to some of the projects that have high benefits but vague deliverables/timelines later with more of a retainer structure.
- Apply make-or-buy matrix
Apply the make-or-buy strategy matrix to refine your selection of high-priority projects to be realized either internally or externally.
- Implement governance
Once you have had your first run, in a project mode, you want to integrate your new framework as business-as-usual. Define the governance for the make-or-buy strategy matters. If your company is extremely centralized, including the procurement of Consulting Services, you might consider building a Consulting committee to examine the different projects and monitor the results at the company level. If you are more decentralized, you might think of several committees per business unit, or function.
To Round Up
So, you see that implementing a make-or-buy strategy requires some degree of centralization, and also increased collaboration between procurement business lines, strategy, finance, and human resources. But the value created can be really significant. Hence it makes sense to have your make-or-buy strategy in place. And remember that the framework needs to be in line not only with your Strategy but also with your organizational Culture.