Transcript S4_MakeBuyJVFramework

A Make Buy & Joint Venture Decision
Making Process
© Robertson Cox 2011. All Rights Reserved.
Robertson Cox / Sourcematix Confidential
1
Make/Buy & Joint Venture Analysis
1. Users must first understand the relative costs of insourcing a particular
requirement compared with the cost that would be incurred by suppliers.
2. The costs should always be defined as the total costs of ownership and not
just the initial costs of purchase.
3. Users must also consider the technical competence they could supply
(functionality/delivery) relative to that which a supplier could supply.
4. The decision-making matrix that follows provides some decision rules for
buyers about the scope for insourcing, joint ventures and outsourcing under
different cost and technical competence scenarios.
5. Having analysed their position within the matrix using the template
provided users must then consider additional factors that could modify the
decision, such as the impact of any decision on revenue generation and
post-contractual risks of lock-in and dependency.
© Robertson Cox 2011. All Rights Reserved.
Robertson Cox / Sourcematix Confidential
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The Make/Buy Decision Matrix
Relative Buyer & Supplier Performance on Technical Competence & Cost
HIGHER
HIGHER COST
SAME COMPETENCE
Insource
JV
Outsource
JV
Outsource
Defensive
Insource
SAME COST
HIGHER COMPETENCE
SAME COST
SAME COMPETENCE
3
SAME
2
4
Insource
JV
LOWER COST
HIGHER COMPETENCE
LOWER
All potential
insourcing
options at this
stage need to
be evaluated
within the
following
decision matrix
for make/buy
Insourcing (Buyer) Performance on
Cost Relative to Potential Supplier
HIGHER COST
HIGHER COMPETENCE
1
Insource
JV
Create Core
Business
HIGHER
5
Outsource
Defensive
Insource
LOWER COST
SAME COMPETENCE
6
Insource
JV
Create Core
Business
SAME
HIGHER COST
LOWER COMPETENCE
7
Outsource
Defensive
Insource
SAME COST
LOWER COMPETENCE
8
Outsource
Defensive
Insource
LOWER COST
LOWER COMPETENCE
9
Insource
JV
Create Core
Business
LOWER
Insourcing (Buyer) Performance on Competence
Relative to Potential Supplier
See next slide for cell descriptions
© Robertson Cox 2011. All Rights Reserved.
Robertson Cox / Sourcematix Confidential
3
The Make/Buy Decision Matrix
Relative Buyer & Supplier Performance on Technical Competence & Cost
MAKE/BUY OPTIONS IN EACH CELL
1
Insource all requirements and develop as core
business (if margins acceptable). If not consider JV.
2
If technical competence is more important than cost
then insource/for all requirements (if margins
acceptable). If quality not key consider JV.
3
4
5
6
Insource all requirements and create core
business (if margins acceptable). If not consider
joint venture.
7
If technical competence is not key but costs are
insource and create core business (if margins
acceptable). If quality is key create JV with high
quality suppliers to work on improving cost/quality
trade-offs.
8
Outsource all requirements especially if technical
competence is more important than cost. Only
consider insourcing defensively if technical
competence is not important and there is a single
source of supply currently.
9
Outsource all requirements but consider defensive
insource/JV if there is a single source supplier
(especially for high/medium impact requirements).
If technical competence is key and cost not
important then insource requirements (if margins
acceptable). If cost is critical then JV with lower
quality suppliers.
Outsource all requirements but consider JV when
buyer has technical know-how of value to suppliers.
Consider defensive insourcing if there is a single
source supply market and cost is not critical.
Outsource all requirements unless it is necessary to
create competition with a single source supplier as a
defensive measure.
© Robertson Cox 2011. All Rights Reserved.
Robertson Cox / Sourcematix Confidential
4
Make/Buy & Joint Venture Analysis

Having analysed their position within the matrix using the template provided users
must then consider additional factors that could modify the decision such as the
impact of any decision on revenue generation, operational performance, and postcontractual risks of lock-in and dependency.

If the risks to operational delivery, revenue generation and post-contractual lock-in
and dependency are medium to high, this may force users to reconsider their initial
insourcing, joint venture and outsourcing decisions, based only on cost and
competence criteria.

Users should evaluate the risks to these 3 variables in the template provided and
then recalibrate their decisions using the decision tree framework provided.
© Robertson Cox 2011. All Rights Reserved.
Robertson Cox / Sourcematix Confidential
5
Make/Buy & Joint Venture Risk Analysis Template
OPTION 1
Make/Buy/JV or Outsource Option
Overall Option Risk
H/M/L
Enter options name here…
Risk to Revenue
Generation
H/M/L
Risk of Post Contractual
Lock-in & Dependency
H/M/L
Justifications for Risk Assessments made in relation to Revenue Generation and Post Contractual Lock-in and Dependency
OPTION N
Make/Buy/JV or Outsource Option
Overall Option Risk
H/M/L
Enter options name here…
Risk to Revenue
Generation
H/M/L
Risk of Post Contractual
Lock-in & Dependency
H/M/L
Justifications for Risk Assessments made in relation to Revenue Generation and Post Contractual Lock-in and Dependency
© Robertson Cox 2011. All Rights Reserved.
Robertson Cox / Sourcematix Confidential
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Make/Buy & Joint Venture
Final Decision Tree Analysis
Users should evaluate the risks to their initial cost and competence analysis based on the following
decision-tree structure for the 9 options outlined earlier:
Option 1:
Do not joint venture if there is a high risk of post-contractual lock-in, and/or to revenue generation. Insource or
joint venture if there are only medium to low post-contractual lock-in and/or revenue generation risks.
Option2:
Do not joint venture if there is a high risk of post-contractual lock-in, and/or to revenue generation. Insource or
joint venture if there are only medium to low post-contractual lock-in and/or revenue generation risks.
Option 3:
Insource if there is a high risk of post-contractual lock-in and/or risk to revenue generation. If there are only
medium to low post-contractual lock-in and/or revenue generation risks then joint ventures and outsourcing
are feasible.
Option 4:
Insource if there is a high risk of post-contractual lock-in and/or risk to revenue generation. If there are only
medium to low post-contractual lock-in and/or revenue generation risks then joint ventures and outsourcing
are feasible.
Continued …
© Robertson Cox 2011. All Rights Reserved.
Robertson Cox / Sourcematix Confidential
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Make/Buy & Joint Venture
Final Decision Tree Analysis
Continued …
Option5:
Insource if there is a high risk of post-contractual lock-in and/or risk to revenue generation. If there are only
medium to low post-contractual lock-in and/or revenue generation risks then outsourcing is preferable.
Option 6:
Do not joint venture if there is a high risk of post-contractual lock-in, and/or to revenue generation. Insource or
joint venture if there are only medium to low post-contractual lock-in and/or revenue generation risks.
Option 7:
Do not joint venture if there is a high risk of post-contractual lock-in, and/or to revenue generation. Insource or
joint venture if there are only medium to low post-contractual lock-in and/or revenue generation risks.
Option 8:
Insource if there is a high risk of post-contractual lock-in and/or risk to revenue generation. If there are only
medium to low post-contractual lock-in and/or revenue generation risks then outsourcing is preferable.
Option 9:
Insource if there is a high risk of post-contractual lock-in and/or risk to revenue generation. If there are only
medium to low post-contractual lock-in and/or revenue generation risks then outsourcing is preferable.
© Robertson Cox 2011. All Rights Reserved.
Robertson Cox / Sourcematix Confidential
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Make/Buy & Joint Venture Decision Reporting
Make/Buy/JV or Outsource
Option Selected
Enter decision here…
Make/Buy/JV or Outsource Option Decision Rationale
Enter Rationale here, to include:
 Cost Analysis
 Competence Analysis
 Initial Option Selection
 Post-Contractual Lock-in and Dependency Risk Analysis
 Revenue Risk Analysis
 Final Option Selection
© Robertson Cox 2011. All Rights Reserved.
Robertson Cox / Sourcematix Confidential
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