Make or Buy, and Packaging

Make or buy

The first decision is whether to do the work internally or procure it. The considerations:

• Capability — do we have the skills, and are they available for this work rather than nominally available?
• Capacity — do we have enough of them at the right time?
• Cost — fully loaded internal cost, including the opportunity cost of what those people are not doing, against the supplier price plus the cost of managing them.
• Risk — who is better placed to carry the technical and delivery risk?
• Strategic importance — is this a capability we should own and develop, or is it peripheral?
• Speed — a supplier with existing capability may deliver considerably faster than building the capability internally.
• Control — internal work is directly controllable; contracted work is controlled through a contract, which is a much blunter instrument.

The most common error is treating buying as a way to remove a problem. Procurement transfers the execution and not the accountability: if the supplier fails, the project still fails, and the contract determines only who bears the cost.

Packaging the work

How the work is divided into contracts is a strategic decision with lasting consequences.

• A single main contract — one supplier accountable for the whole result, simple to manage, with interface risk carried by them. The cost is premium pricing, less competitive tension on the elements, and heavy dependency on one organisation.
• Multiple specialist contracts — better prices, specialist capability, no single point of dependency. The interface risk returns to the project, which must then actively manage the boundaries between suppliers.

The choice turns on where interface risk is best managed. A project team without the capability to manage interfaces between several suppliers should not split the work, whatever the price advantage — the coordination failures will exceed the saving.

The supply market

Understand it before committing to an approach: how many capable suppliers exist, how busy they are, whether the work is attractive to them, what the lead times are, and where the risks in their supply chain sit.

A procurement strategy that assumes competitive tension in a market with two available suppliers, both fully committed, will not produce the expected result. Early market engagement — talking to potential suppliers before issuing anything — is legitimate, valuable and consistently under-used.

Timing

Procurement takes considerably longer than project plans assume. Specification, approval, tendering, evaluation, negotiation, contract award and supplier mobilisation together commonly consume months, and public sector processes longer still.

Long-lead items should be identified early and procured ahead of the main package. A project that discovers a twenty-week manufacturing lead time three months before it is needed has a problem that no amount of expediting will fully solve.