Making the Right Choice: Determining Whether to Purchase or Do a Project In-House

As a CTO, one of your responsibilities is to make crucial decisions that can significantly impact your company’s success. One such decision is whether to purchase a project or undertake it in-house. An incorrect decision in this regard can have a lasting negative effect on not only your career but also the company’s growth. With industry myths surrounding million-dollar projects, it can be challenging to know how to proceed. Fortunately, you can employ Sakichi Toyoda’s “5 Whys” analytical methodology to determine the reasons behind a project’s failure and whether it was due to an incorrect decision to purchase or do it in-house.

Sakichi Toyoda’s “5 Whys” Analytical Methodology

Sakichi Toyoda, the founder of Toyota Industries, developed the “5 Whys” analytical methodology to determine the root cause of a problem. The method involves asking “why” five times to get to the bottom of an issue and understand why it occurred.

This methodology can be applied to determine whether to purchase or undertake a project in-house. By asking “why” five times, a CTO can determine the reasons behind a project’s failure and whether it was due to an incorrect decision to purchase or do it in-house. For example, suppose a company recently purchased a project that failed due to a lack of expertise or resources. In that case, a CTO can ask “why” five times to determine whether the company should have undertaken the project in-house.

By using this methodology, CTOs can make informed decisions and determine the best course of action for their company. The “5 Whys” methodology helps identify the root cause of a problem and provides insight into whether a project should be done in-house or purchased. By understanding the reasons behind the failure of a past project, CTOs can ensure that the same mistakes are not repeated, and the company can move forward with confidence.

Let’s apply Sakichi Toyoda’s 5 Whys methodology to assess the decision of building a tailor-made ERP system from scratch:

Problem: The business is struggling due to an unideal SAP implementation, and the IT manager suggests rewriting the entire ERP system from scratch.

1. Why is the current SAP implementation unideal? Answer: The current SAP implementation does not cater to our unique business requirements and lacks the flexibility to adapt to our evolving needs.
2. Why does the SAP implementation not cater to our unique business requirements and lack flexibility? Answer: During the initial implementation, the company did not adequately convey its specific needs to the vendor, and the system was set up based on generic industry practices without considering our distinctive processes.
3. Why were the company’s specific needs not adequately conveyed to the vendor during the initial implementation? Answer: There was a lack of clear communication between the business units and the IT team, resulting in the IT team not having a comprehensive understanding of the business requirements.
4. Why was there a lack of clear communication between the business units and the IT team? Answer: The company did not have a structured process to gather, analyze, and communicate requirements between the business units and the IT team.
5. Why did the company not have a structured process to gather, analyze, and communicate requirements between the business units and the IT team? Answer: The company underestimated the complexity of the ERP implementation and did not invest in proper planning, training, and resources to ensure effective communication and alignment between the teams.

Using the 5 Whys method, we have identified that the root cause of the problem is not the SAP system itself but rather the lack of proper planning, communication, and alignment between the business units and the IT team during the initial implementation. Instead of investing millions of dollars in rewriting the entire ERP system from scratch, which carries significant risks, the company should focus on addressing the root cause of the problem.

The company can consider the following actions:

1. Invest in training and resources to improve communication and collaboration between the business units and the IT team.
2. Conduct a thorough review of the current SAP implementation to identify gaps and areas for improvement.
3. Engage with the SAP vendor or a specialized consultancy to discuss possible adjustments, customizations, or enhancements to the existing system to better align it with the company’s unique requirements.
4. Establish a clear and structured process to gather, analyze, and communicate requirements between the business units and the IT team for future projects or system enhancements.

By addressing the root cause of the problem, the company can potentially save millions of dollars, minimize disruptions to the business, and avoid the uncertainties associated with building a new ERP system from scratch.

Other Popular Analytical Problem Solving Techniques

Toyoda’s 5Whys method is not the only problem-solving option available. Other popular options include DMAIC, Ishikawa diagram (fishbone diagram), Root cause analysis (RCA), and Failure mode and effects analysis (FMEA).

1. DMAIC: DMAIC is a structured problem-solving method used in Six Sigma that involves five steps: Define, Measure, Analyze, Improve, and Control. This method is often used to improve quality and reduce defects in manufacturing and service processes.
2. Ishikawa diagram or fishbone diagram: This method involves creating a visual representation of all the possible causes of a problem, which can help identify the root cause of the issue.
3. Pareto analysis: This method involves identifying the most significant factors that contribute to a problem by using the Pareto principle, which states that roughly 80% of effects come from 20% of the causes.
4. Root cause analysis (RCA): RCA is a structured method for identifying the underlying cause of a problem. It involves asking a series of questions to determine the root cause of the issue.
5. Failure mode and effects analysis (FMEA): FMEA is a method of identifying potential failures in a system, product, or process and their possible effects. This method involves assessing the likelihood and severity of the failure, as well as identifying and implementing measures to prevent or mitigate the effects.

In the remaining part of this chapter, I will discuss my own style that I have developed by combining these methods. I will provide an example of how this style can be applied to a purchase or in-house decision that a CTO often faces. These techniques can be used in any context and are effective in overcoming difficult decisions.

Key Factors to Consider for the Problem

Let’s start by assessing whether to purchase or do an in-house project.

To make the best decision, several factors need to be considered. First, it’s crucial to understand your company’s main duty, such as being an internet marketplace or a technology department of a corporate bank. This helps establish the context in which the project will be executed.

Next, identify your company’s “core competency” or the job it does best. For instance, if your company excels at personalized product offerings or fast supply and delivery times, you may be more inclined to perform those tasks in-house. However, if you lack the necessary expertise or resources, it may be better to purchase those services.

Furthermore, consider the profit margins of your industry and the realities of your company. Long-term infrastructure projects can be expensive, and you must determine when the project will end, how much you will invest, and how much time, money, or reputation it will bring to the company. Moreover, ensure that your team has the necessary skills to complete the project and that your in-house customers support the project.

The In-House Project Checklist

In general, it is advisable to agree with at least five of the following items before embarking on an in-house project:

1. Does the project serve the company’s main goals?
2. Does it “directly” serve the list of jobs the company does best?
3. Does your company have the economic resources to complete this project? Is it in an industry with constant profit margins until the project’s end?
4. Are there enough skilled employees on your team to complete the project? Can you build the core team with the personnel you already have?
5. Do your in-house customers support this idea? Are they ready to collaborate with you?
6. Can your in-house customers handle the mistakes of you and your team maturely? As a team, do they demonstrate how the process can be improved?
7. Can you quantify the investment amount and the project’s benefit to the company after completion?

By using this guideline in conjunction with one of the analytical decision-making techniques mentioned above, you can make an informed decision about whether to undertake a project in-house or to purchase it externally.

However, keep in mind that there are always exceptions. Sometimes a side project can lead to groundbreaking inventions.

Therefore, before making any decision, it is essential to consider all the factors, weigh the pros and cons, and evaluate how the project aligns with your company’s long-term goals and strategies.