Should you build or outsource?

Read time: 4 minutes

Hey there 👋 - it's Brian.

I've advised 30+ Fortune 500s on their growth strategy. I hear a common frustration about their capabilities (people, processes, and tech):

"I can't believe we built this! or "Ugh. We need to bring this in-house." 🤬

In today's issue, we'll explain the trade-offs and help you decide whether to build or outsource your capabilities.

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A $2B+ SaaS communication company built a pricing system in-house. It lost them millions

A few years ago, a $2B+ SaaS communications company was losing revenue.

Let's call them, "SaaS Comm." SaaS Comm had the best product in the market, but their customers were leaving them. Why?

They decided to build a pricing platform in-house. As the business grew, their platform needed so much maintenance and upgrading that it was taking their focus away from their core business. The platform created a terrible customer experience:

• Customers received the wrong invoices• No one understood how they were priced• Manual process to generate invoices took too long

SaaS Comm's decision to build their pricing platform instead of outsourcing became an expensive mistake. They paid millions in customers leaving them, maintenance/upgrading software, and migrating to a new platform.

Let's learn from these mistakes so you can decide when it makes sense to build or buy capabilities for your business: 👇

What's a capability?

Imagine you've decided to launch a new growth initiative to hit your revenue goals.

New growth initiatives could be:• Launching a new product• Expanding your existing product to new customers• Increasing the amount your current customers spend

To make your new initiative a reality, you'll need to upgrade the capabilities you have today. A "capability" is just something you need to make your initiative happen.

Capabilities fall in 3 categories:1) People (e.g., training, recruiting)2) Processes (e.g., workflows)3) Tech (e.g., data, systems)

For this issue, we're focusing on one decision: should you build or outsource a new capability?

In future issues we'll cover how to figure out which capabilities you need. In the meantime, reply to this email with any capability questions and I'll help guide you.

So how do you know whether you build or outsource new capabilities?

How to decide when to build or outsource

When balancing the pros and cons of build vs outsource there are 4 factors to consider:

Let's use the SaaS Comm example. They need to send customers quotes, invoices, and billing.

Does this new capability fit into your strategy?

SaaS Comm built a pricing platform, but their core solution is communications. The time and money invested in the pricing software did not give them a competitive advantage.

Here are a few questions to consider if the new capability fits into your strategy:

• Who's your target customer?• What problem do they have?• What solution do you provide to that problem?

If this new capability improves your solution to your customer's problem, then it's a good candidate for building in-house.

How much does it cost to build vs outsource the capability?

Compare how much it costs to outsource against how much it costs to build in-house.

Outsource:The majority of outsourcing expenses come from vendor fees. Talk to different vendors to get different cost estimates.

Examples of SaaS Comm's outsourcing expenses:• Consulting: Strategy, planning, implementation• In-house: Teams allocated to the system• System: Vendor contracts

Build:The same 3 buckets of expenses apply to building in-house, but more of the expenses shift from consulting/system to in-house.

We can't go into detail on how to list out your in-house expenses in this issue, so here's a brief overview.

How long will it take to build vs outsource the capability?

And what's the opportunity cost of that time?

Let's say you estimate your new product will make you $50k a month. That means that every month you delay, you're missing out on $50k.

For SaaS Comm, we estimated outsourcing would take over 1 year. They decided that during the year that their pricing platform was migrating to a 3rd party, they'd focus on a few short-term fixes that would improve customer experience (new processes).

Talk to different vendors to get time estimates for how long they think it'll be to build the capability.

If you need it done faster, build a temporary solution to get your product to market faster and quickly get customer feedback.

The benefit of a temporary solution is you can get rapid feedback and apply what you learned to the longer term solution.

Do you have the people needed to build your capability?

Consider getting outside support if:

1. You need your teams focused on other prioritiesIt was too painful to ignore the customers leaving SaaS Comm. They also wanted to keep leadership focused on their priorities, so they brought in my team to help fix the customer experience.

Time and attention is your most valuable resource. Consider the cost of having your leadership team not focused on your highest priorities.

2. You're missing the skillsets needed to build your capabilitySaaS Comm was missing experts in consumption pricing models, vendor relationships, and executing the migration. Since these experts are no longer needed once the project is over, it was worth outsourcing temporarily.

Outsource if you're missing the skillsets on your team.

3. You're missing the experienceSaaS Comm had a pricing strategy team, but they were looking for advice from pricing consultants who had fixed their problem at multiple companies. This way they can avoid the expensive mistakes other companies made.

You may have the skillset needed to deliver, but you'll save time and money by getting an opinion from someone who's experienced your challenge.

When should you build vs buy?

Get the build vs outsource decision right and you'll avoid headaches down the road. It's rarely a straight-forward answer, but to recap the 4 considerations: 👇

1) StrategyIf the capability improves your solution, consider building in-house.

2) CostsIs it cheaper to build in-house or outsource?

3) TimeIs it faster to build in-house or outsource?

4) ResourcesDo you have the talent, resources, and experience you need to build?

If you have any questions, reply to this email and I'm happy to guide you.

See you next Thursday 👋

Brian

Clickworthy Resources:

Article: Should you build or buy software?

Article: Decide to build or buy to expand your business

Template: Capability gap analysis

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