PMI CAPM – Procure Goods and Services in a Project Part 3

4. Decide to Build or to Buy in Projects

Sometimes it’s better to go out and buy a solution from a vendor, and sometimes it’s better to build it in house. And there are good reasons for both. So in this lecture, we’re going to take a look at why would we buy or why would we build, and then there’s a mathematical analysis. This just from a math point of view about when is it better to buy or build. So why would you buy or build? Well, sometimes it’s less costly in house or from a vendor. If I’m going to do it in house, I can take advantage of in house skills to build a solution. Or if I outsource this part of the project, then I can take these inhouse skills and they can work on other things that are more important.

So I can utilize my inhouse labor more effectively. If I take the solution and build it in house, I get control of the work. But if I could outsource that portion of the project, then I can control this more valuable work in the project. That also gives me the control of intellectual property. If my team is available, they can learn new skills by building the solution in house, assuming that it’s a skill that we need to learn and that it’s valuable to us. If I outsource the work, then my team can focus on core project work. So there are all sorts of reasons or side to the argument, should I buy it or should I build it? Let’s look at a build versus buy decision.

So this is a pretty typical scenario that you may encounter on an exam coming up in your life. So build versus buy. You do some analysis and you say, if we build this in house, it’s going to cost me $65,000 for this solution. And then to maintain it, we’re going to be spending every month $8500. So out of pocket, 65,000. My monthly fee is 8500. When we talk to a vendor and they say, hey, you know what? We’ve got a solution for you. We’re ready to go. It’s $52,000 out of pocket, considerably less than what it would cost you to have this same solution.

Now, the vendor says, though, you have to sign a contract with us where we’re going to maintain it, and it’s going to cost you $10,500 a month. So just a little bit more than what it would be for you to maintain it yourself. So you think, well, which is better? Should I spend $65,000 upfront and have a lesser monthly fee? Or would it be better to just go with the vendor and their solution and pay a little bit more every month? So we want to do some math here.

So what we do to solve this problem, we find the difference between your out of pocket, your build and the vendors buy. There’s a $13,000 difference between these two solutions. Then you find the difference of what’s your monthly fee it’s $2,000 in this instance. Then we divide the difference. We’re going to take $13,000, divide it by 2000 and this gives us 6. 5 months. So what does this mean 6. 5 months? If you were to build your own solution in six and a half months, you would pay the difference in the buy and build. It would be more cost effective for you to build your solution if you’re going to keep it longer than six and a half months.

If it’s just a small quick fix, then maybe the vendor is a better solution. We also want to look at that contract though for the vendor. Like they said, we have to have a contract to support it. If that contract to support though is for a year, this isn’t a good deal because we only need the solution or we could pay for it at six and a half months. So buy versus build, know how to do this? Probably going to have to do it on your exam in the next lecture. We’re going to walk through an activity where you’re going to try this buy versus build out. So keep going. We’re going to do an activity in the next lecture.

5. Activity: Build or Buy

Welcome back. We’ve got a little activity here where you’re going to practice. Should you buy something or should you build it? So here’s the scenario you want to determine. What should you do? So your team, you can create a solution for $$245,600. It’s going to cost $23,500 per month to support. Now, a vendor says that you can purchase their solution for $12,000, but you’ll have a monthly fee of $49,000. When could your solution be a better financial decision than the vendors offer? Okay, we’re going to walk through this together. Or if you want, you can pause it, try to solve this on your own, and then come back in and look at the solution.

So I’m going to start and walk through the solution in 3 seconds. So three, two, one. We’re going to walk through this together. The first step we do is the build. So write down how much should this cost out of pocket. That’s 245,600 will be your out of pocket to build. Then you fill out the next chunk here. What’s your build monthly fee? Well, we know it’s going to cost you $23,500 per month to support. Next, what’s your buy? How much will this cost? So if you go to the vendor, the vendor says it’s only $12,000. What a great deal. So your buy from the vendor will be $12,000. The monthly fee, though, is $49,000. So fill out that box. Now we’ll find the difference of the two. So the difference between buy and build. And then we’ll have the difference of the monthly fees.

So do a little math there. All right, now, we’re going to divide the difference. We’re going to divide whatever the difference of buy versus build is by the monthly. And that will give us an answer. Okay, on the very next slide, if you want to pause here, if you’re following along with me, you can pause if you need to finish your math.

On the next slide is the answer. So I’m going to change the screen to the answer in three, two, one. Here we go. So here’s the solution out of pocket, $245,600. My monthly cost 23. Five. If I buy it from the vendor, it was $12,000. Looks like I made a mistake here in my solution. And my monthly fees were $49,000 because the vendor said it was $12,000. So I tell you what, let’s just fix this so I’m human and we’re going to get rid of that.

So you’re going to watch me fix it. So here’s a real test. If I can do the math here. So we’re going to come back up. The buy is not $23,000, the build. You can purchase a solution for $12,000. So let’s just fix this right now and figure it out, the difference between the two. All right, I’m just going to pull up my calculator. You’ll have a calculator in the exam, so you can do this, too. So the difference of the 2245 six minus $12,000 is the cost of their solution. So the difference here is 233 633, comma 600. There you go. Now the monthly, let’s check that out and make sure I have this right. Okay, so the monthly is 49,000. Your monthly was 23 five. That’s the one I messed up on.

And the monthly is 49,000, a difference of 25 five. So let’s do the math. Now the difference 233 six divided by 25,500. So it makes a little bit of a difference here. So let’s fix our divide differences. 233 600 by 25 five. And we saw if we look at our calculator again, it was about 9. 16. So just over nine months. So just a little bit more expensive than what I have here. Okay, so that was an exercise in humility, but I’m human, so it happens. But we caught it, so we’re good. So that’s what we did here. We did our buy versus build, and our answer came out to be approximately 9. 16.

Great example, great lesson for us all. Double check your math. So that was a simple mistake, and it could have cost me a question on the exam that I knew how to do it, but I put the wrong number down that could affect the answer on the exam. Okay, that was an exercise, more than one exercise on how to find a difference. Should you buy or should you build? So here, just to be clear, if I’m going to keep this solution longer than 9. 16 months, it’s cost effective for me to build it. If this is a short term solution, less than nine months, then I should hire the vendor to do it. All right, good job, good activity, good learning experience. Let’s go ahead and move on. In the next lecture, we’re going to talk about actually executing that procurement management plan.