The maturity of the organization. Application domain knowledge. Technical knowledge. Economics

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1 Decision Framework, M. Blechar Research Note 13 December 2002 Build, Buy and Outsource Decision Factors Application solutions should be built, bought or outsourced according to organizational maturity, application domain and technical knowledge, need for flexibility, time-to-market, strategic value and productivity. Core Topic Application Development: Managing Application Development Key Issue Which development processes are appropriate for ensuring on-time delivery of both opportunistic and systematic applications? Many organizations are struggling with a key strategic decision: Is it better for an enterprise to build its own (Web) services, components and applications from scratch, to buy pre-built solutions such as packaged applications or to outsource the entire development process to a third party? We believe the decision ought to be based on six sets of decision factors (see Figure 1): The maturity of the organization Stability or flexibility of the business problem Time-to-market demands vs. desire for competitive advantage Application domain knowledge Technical knowledge Economics Gartner Entire contents 2002 Gartner, Inc. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

2 Organizational Maturity Flexibility Time To Market Application Domain Knowledge Technical Skills Cost Figure 1 Decision Factors: Build, Buy or Outsource - Degree of structure and standardization - Tolerance for new technology - Organization - Willingness to take risks - Volatility of requirements - Application integration - Platform and OS volatility - Business unit flexibility/adaptability -Timetodelivery - Need for competitive differentiation - Service-oriented development of applications productivity improvements - Business understanding - User analytical/visioning skill - User availability - Technical knowledge of the languages, tools and environment - Acquisition cost vs. modification cost - Total cost of ownership Source: Gartner Research The combination of factors will help determine the proper course. Although many organizations will want to buy the application at first, each application "opportunity" might suggest a better alternative. For example, where there is a shortage of either technical or application domain knowledge within the organization, it would be better to buy or outsource the application. However, if flexibility is a key factor, the enterprise's needs would be best met by building the application in-house, and buying it would be least likely to meet long-term enterprise needs. Today, time-to-market goals are so important that business users will hire outsourcers, system integrators and developers to shorten the cycle or guarantee a resulting system. Back-office functional packages continue to sell well, and few companies have not considered or bought general ledger, accounts payable, accounts receivable, payroll, personnel or expense processing packages. Vertical packages such as those for manufacturing, finance and health claims are gaining momentum. Horizontal packages in areas such as customer relationship management and supply chain management are also selling well. However, the danger with some of these solutions is that many were designed to handle "pre-web-services application domain thinking." They were built in older development environments and deployed to declining, traditional architectures. 13 December

3 Build vs. Buy Economics: Gartner's case studies reveal that only in a minority of cases is building an application more productive than buying it. When appropriate, buying applications substantially increases productivity and lowers costs. Gartner studies, based on the industry standard measure of "function points per unit of labor per person/year," show that: Productivity of bought applications tends to exceed those built by more than 3:1 Bought applications cost 40 percent less than built applications However, bear in mind that installed packages often include function points that go unused and the cost statistic does not include the cost of application integration, which is often more difficult to address via packages than via newly built applications. These figures do not take into account total cost of ownership or flexibility. Packages are generally far less flexible than welldesigned, custom-built applications, and total cost of ownership largely depends on how volatile the application is and how complexitistomakechanges. Build vs. Outsource: Figure 2 looks at two major criteria, cost and strategic value, to help guide the build, contract, outsource and partner decision. Selective outsourcing should be a key part of every IS organization's approach to application delivery. Today's use of outside resources as with today's view of critical skills is formed around a set of assumptions about how IS organizations deliver time-to-market value. Few applications provide a specific "edge" that generates a sustainable enterprise competency. 13 December

4 Figure 2 Decision Drivers: Cost vs. Strategic Value Cost Outsource Customer/supplier Partner Trust relationship Joint goals Interdependence Joint investments Shared risk Contract Temporary Consultant Public services Purchased products/ services Build Internal Skills transfer Hire/train Strategic Value Source: Gartner Research Internal development will shift to application integration of infrastructure components for example, business objects that insulate and interface between the embedded package architecture and the enterprise's architecture, and that link external process outsourcers (for example, payroll, travel reconciliation and interenterprise materials movements) with internal operations. Where applications are created for specific purposes, joint ventures will increasingly be used to create "standard packages." "Coopetition" partnerships within vertical markets can substantially cut development costs. For example, several utility companies might have a system integrator build a solution that can be shared between consortium members, but which could also have 20 percent of the code customized. Arrangements such as these are becoming more feasible because of emerging standards such as Java 2, Enterprise Edition (J2EE) and Microsoft's.NET. These enable system integrator to develop a core product and enhance it for each party, giving each a competitive difference or advantage. Build/Buy Hybrid: Figure 3 illustrates the main build/buy dilemma packages are too inflexible and don't provide competitive differentiation, but custom-built solutions are too slow 13 December

5 and costly. System integrators are starting to offer nextgeneration pre-built solutions; competing with the package vendors. Soon, a more-customizable approach will be available through industry models development tools using architectural and design patterns and able to build and assemble components and services. These can be used as starting points for morestrategic implementations that differentiate an organization without the full development cost. Figure 3 Decision Factors: Speed vs. Flexibility Buy Speed to Market Competitive Differentiation Build Flexibility Source: Gartner Research Improving "Build" Productivity: The next generation of service-oriented development of applications technologies will change the buy/build decision. Initial customer feedback shows that many of the latest rapid application development frameworks targeting J2EE and.net improve productivity by 40 percent to 80 percent compared with traditional application development tools. Improvements of this magnitude could lower the cost and time-to-market involved in building applications, making this the best option. Bottom Line: While most organizations decide whether to build or buy applications based solely on initial implementation costs, a broader evaluation using our decision factors ought to be made on an application-by-application basis to ensure the best result. Every IS organization's portfolio should include selective outsourcing. Productivity improvements based on new, serviceoriented development of applications approaches and 13 December

6 technologies should be explored, rather than metrics based on traditional technologies. 13 December