Buy beats Build, read to find out more.
There much being written today about the rapid advances in ever-more complex digital technologies and the potential or eventual strategic benefits to those that deploy them. Topics include digitalization, supply chain automation, artificial intelligence and our own discussions of an integrated and interconnected platform. The field of information technology is expanding exponentially in every direction – in a kind of accelerating Big Bang – and older technology is rapidly being left further and further behind.
And as new information technologies evolve, so do the foundational concepts that underpin them. New languages support globally accessible user interfaces and APIs used to exchange data; new methods of processing data use the new strengths of the new languages and their underlying technology. Put simply, there is a lot going on today that was not part of the thinking and skill-set of the generation that built the legacy technology that still prevails in our industry today.
All this brings up the old corporate question: do we build or buy our next generation of technology?
The tried-and-true wisdom taught in MBA training is that companies should only build when there is no commercial product available that can meet their requirements and / or be adapted to gain strategic advantage.
As an aside, we should probably define ‘strategic advantage’. If a company, country or culture has a strategic advantage, it has a particular characteristic or way of doing things that makes it more successful than others. Strategic advantage can be acquired by adopting a superior, game-changing technology as a fundamental element of a company’s or culture’s method of operating. Examples include the use of firearms vs swords, the wireless telegraph vs surface mail, electricity vs steam as a power source and steamboats vs sailing ships – each of these new technologies game-changers in their own right. Those that adopted them competed and succeeded against those that didn’t. It’s important to remember that strategic advantage isn’t about how a company deploys a technology – that’s tactical – it’s about the basic adoption of the new technology at the core level. Once that new technology has been adopted, then the competitive paradigm has changed for the adopter and they move forward with less effort, more efficiency, and that combination brings success vis-à-vis those that still work within the old paradigm.
During the ‘80s and ‘90s and even the early 2000s the world of global trade was in agreement on the need to use computers – the new technology. However, there were no universal software applications for businesses, so companies wanting to use the new technology had to employ their own teams to build software solutions adapted to that specific, individual business. Literally trillions were invested in the global movement to adopt and deploy the computer as a tool to gain strategic advantage, even as the rush toward globalization and containerization accelerated. In fact, both globalization and containerization would have been held back tremendously if it had not been for the simultaneous advances in computing – another example of how advances in technology are mirrored by advances in other, related fields of endeavor.
So, what is different today? The Web, the Cloud, and a variety of other technologies designed to enable large-scale global computing. The word “Global” is key here. A significant number of businesses and IT infrastructure functions worldwide benefit from these new technologies. Not the least of these is global, factory-to-consumer e-Commerce. But there are few industries with as great a need for global computing as Global Trade, Global Supply Chain Management, and Global Transportation.
So, why not build using the new, ‘hot’ technology options today? The answer is that the old rule of not building if you can buy and invest in advanced development still applies, and today there are commercially available applications that address the business process in significant detail.
An interesting article called “The End of Corporate Computing”, written back in 2005 by Nicholas G. Carr, a Harvard Business School professor, and published in the MIT Sloan School of Management Review, illustrates this point. In it, the author drew a parallel between the development and adoption of electricity vs steam power in the 1900’s with the adoption of computing in the 1990’s.
In the 1900’s, if you wanted to adopt electricity as the power source for your factory, then you had to buy a dynamo from General Electric and hire a team of electricians to create the electrical system for your factory. But, eventually, a number of key technologists such as Thomas A Edison and Nikola Tesla developed commercial versions of electricity that could be purchased rather than generated in-house. This included advances such as alternating current electricity that could be transmitted over long distances with fewer energy losses. Large-scale dams to supply hydropower using turbines were constructed at the same time, and public power simply became more accessible and less expensive than proprietary systems could possibly be. So, a second level of competition arose in electrical development between those adopting public power versus those that continued to produce their own electricity. That transition is long over and it’s clear who won.
There was a time to build, but that time has come and gone. The best strategy now is to buy our new technology and enhance it to meet our requirements. Why? Because buying allows for three clear advantages:
First, you can see what you’re going to do. By buying or incorporating an existing system into your business the specific customization and enhancement that will be needed to dovetail it with your own infrastructure are immediately obvious. When you build your own system, a procedure which is notoriously complex and prone to delays, you can only assume that the desired result will be what is needed.
Second, the speed to market is vastly increased. What you buy you can take to market now, after a few modifications. By choosing to build, you are exposed to developmental delays, and the more complex the requirements of the system the more time that will take to develop and the less certain you can be of the ultimate outcome. This is a key point if the market you’re working in is actively changing, or if there is a first-to-market advantage where timing is a key component of the ultimate success of a project.
Last, there’s the matter of cost. When buying, costs can be easily understood and negotiated, whereas when building, potential developmental costs can only be estimated and include the time factor, which adds an additional layer of uncertainty.
In the end, when it comes to the end game for digitization there are two possibilities relative to buy vs build: either there is a point where development ends because everything that needs to be done has been done – an example might be our electrical infrastructure today, although even that is changing with the advent of solar power. Or, there will be an ever-expanding universe of functions and connections and processes that need to be developed.
In the case where there is an end point to development, Buy will get there first, and those that choose to begin building now will lag behind. That equates to giving up substantial strategic advantage to those that chose the commercial route by buying.
On the other hand, in the situation where there is an infinite technological expansion, those who choose to build now will always lag behind commercial systems that are well established in modern IT architecture, languages, and processes. The head start is too significant combined with the complexity of the project to begin with. Moving from a “Local Server-Based System” to a Global System demands new structures and processes. It just takes time work these out. Those who are starting today will need to make and then test new system foundational concepts and that trial-and-error period will take time. Meantime, commercial systems that have spent the past 20 years working this out will be moving ahead to create new solutions in a broad and complex marketplace. That head start will be significant.
In both cases, Buy beats Build.