It is increasingly common for IT to make a decision between subscribing to a service or purchasing a product and performing the same function in-house. For example, does the organization buy a firewall appliance or do they purchase a service for one year wherein the vendor supplies the hardware and then performs all of the management of the device?
Now, the decision to do this is often based on purchase price comparisons in a rush to cut obvious costs, but doing this is dangerous. There are a number of considerations, obvious and not, that must be taken into account when deciding between products and services.
Costs and Value
When comparing products and services as potential solutions, be very sure to understand the cost and value drivers associated with each prospect. Cost drivers are factors that create expenses. As these factors increase, so do costs to the organization. Conversely, value drivers are factors that are pushing the firm towards success.
Potential Cost Drivers
It is important to take the time to understand the financial goals both of your organization and expectations surrounding IT. The following list contains cost drivers that may apply to your organization or spur discussion of drivers that are a better match:
There may be benefits if the investment is in the form of a one-time investment, capital investment, lease or some mixture thereof. Accounting/finance can help you assess the various methods and their respective risks, costs and benefits. To throw another issue in, must the investment be an outright purchase or can it be leased?
Will labor costs increase, stay the same or decrease? The need to manage labor in one direction or another is dependent on the organization and its view of IT. If the goal is to have IT’s rate of labor growth less than sales growth, then the aim should be to target services or products accordingly.
What costs will be incurred while the organization learns to deal with each prospective solution? These costs aren’t the direct training expense, that’s the next bullet. These costs are associated with issues such as increased error rates, decreases in productivity, stress and so on due to unfamiliarity with the new offering. In other words, these are costs/issues that are incurred as the organization adapts and internalizes the new product or service.
What training will be required to bring the IT team and other relevant stakeholders up to speed in terms of effectively using the prospective solution? While training is an expense in the short-term, if the product/service aligns with long-term direction, then it can also be viewed as a strategic investment. It is important to understand this point and position the expenditure accordingly.
Extending beyond simple morale issues, turnover has very real costs associated with the recruiting and training of new employees plus the learning curve they must go through to adapt to the organization. Bringing in new employees and acclimating them extends far beyond recruiting costs and classroom training! If a new solution is likely to result in staff turnover, it should be noted. For example, shifting from the existing development language to a new language that the staff disagrees with.
The adoption of a solution can lead to other impacts on costs as well and will vary from organization to organization and project to project. Example cost areas includes: legal, maintenance, service parts inventories, expedited freight, telecom costs, etc.
Potential Value Drivers
The following are a list of possible value drivers that can be enhanced through the correct application of a product or service:
Will the enhancement directly generate additional sales? For example, if you buy a new development tool that will allow you to meet customer requests for a feature, can you create the feature and sell it? Would you be better off outsourcing the development vs. doing it in-house for this feature?
Will the prospective solution improve quality? How will this impact costs, perceptions, morale, sales, and so on? Quality must never be overlooked! For example, if the organization cannot afford an effective development organization, could it outsource the effort to improve quality?
Will the new product or service reduce cycle times? For example, will a new computer assisted manufacturing system reduce the production time per finished good by 20%?
Will the new offering improve the organization’s reputation or stature in the market? Will the organization be viewed as “savvy” or a “leader” by adopting the product offering as opposed to outsourcing a service from a vendor that other competitors use as well? In some situations, this perception matters a great deal and in others, it doesn’t matter at all.
How will the proposed solution affect customer satisfaction, both internally and externally? To illustrate, if a new portal allows both internal and external users to search for and retrieve order status in minutes versus waiting hours for the same information, plus this has been an issue for users, then a customer service issue is being met.
There are some dimensions to consider that don’t necessarily fit neatly into the buckets of cost or value. For some groups and/or projects, the positioning will be obvious and for others, the following items may seem inapplicable.
How does the new offering affect risk? For the purpose of this article, we will consider risk as the probability of an uncertain negative outcome. Regardless, does the new offering increase the level of risk or decrease it? What will happen if the service provider goes bankrupt or changes strategies? What will happen if the firm’s bottom line is impacted and headcount must go down — how will the product or service be impacted?
What opportunities does the new product or service create, both internally and externally? Can the organization now sell into a new market? Does the offering allow for a level of security that wasn’t previously possible? Can a new technology now be implemented as a prerequisite requirement has been met?
Does the new product or service increase the organization’s flexibility? For example, does it streamline manufacturing? Can the organization be more responsive internally and/or externally to required changes? By outsourcing, can the firm be more agile?
How long will this product or service be with the organization? Is it a short- or long-term investment? How does this duration affect the need for control, flexibility, knowledge transfer, and so on? As duration increases, the risk of change in the environment increases as well.
How does this product or service correlate with IT’s strategy as well as the strategy of the overall organization? Does it only make sense tactically and not strategically? Does it create a platform upon which to build the next generation or is it a one-way street into a dead end?
How often will the underlying factors driving the adoption change? For example, if it is a security need, how often will hackers revise their exploits? If the change is constant then the purchase of a pure product will bring with it either the risk of rapid obsolescence or the risk of constant maintenance not to mention the struggle of simply trying to maintain awareness of the changes. In other words, maintenance is one thing, knowing that something has changed and maintenance is required is another! Rate of change must be carefully considered, as it can crush an ill-conceived solution.
The decision to move with a product or service to meet a need, or needs, must involve more factors than simply the purchase price. There are cost and value drivers to consider in the equation. In the end, organizations need to select the solution that renders the best ratio of total value to total cost with an acceptable level of risk and strategic direction.