The purchase of services is an important strategic instrument, especially for SMEs, regardless of the industry. This is because an acquisition releases valuable resources that you can then use for other goals, such as consolidating your company, boosting growth or driving digitalization forward. Purchasing services also makes it easier to focus on your core business. In any case, it can strengthen your company's competitive position.
However, the decision as to which services should remain in-house requires not only a certain willingness to change, but also reliable figures.
The first priority is transparency regarding the strategic importance and competitiveness of the affected stages in your own value creation. These include both the productive and administrative areas as well as the support processes. By introducing a make-or-buy benchmarking adapted to your company in the relevant areas, you can identify the potential that can be achieved in the specific markets by purchasing services that are currently provided in-house. These are then quantified. With this form of specific evaluation, the strategically important areas of value creation remain in-house and strategically less important areas of activity can be purchased in the future.
One thing is clear: a sustainable increase in your company's profitability will only be achieved if you take all the opportunities and risks of purchasing services and the associated impact on the company's results into sufficient consideration.
When implementing this strategy, you should therefore adhere to the following eight steps:
1. Evaluate the competitiveness of each stage of the value chain
The competitiveness of your company is based on the ability of each stage of the value chain to compete. However, this ability can change as a result of growth, market shifts, corporate transactions and the like. The prerequisite for sustainably securing or increasing the competitiveness of your company is therefore transparency regarding the competitiveness of the individual value creation stages in the entire value chain. This applies both in the case of restructuring with the aim of consolidation or a turnaround, as well as when it comes to creating resources on the process and production side for future growth.
Therefore, you need to look at all areas relevant to overheads - whether productive, administrative or other.
2. Create a meaningful decision matrix
A clear decision matrix is the basis for well-founded make-or-buy (MoB) decisions. Such a matrix should enable well-founded decisions about which services you want to provide yourself in your company in the future and which services you will buy in to increase competitiveness or boost growth. Accordingly, it contains the criteria that are relevant to your company
- according to their importance to your company's strategy for strengthening resource allocation or implementing a restructuring approach,
- according to the most realistic cost recording of productive areas, namely production or service provision,
- according to the most realistic possible cost recognition of general value-added areas, such as internal plant logistics, IT services, building maintenance, etc., and
- according to the market availability of external components or services - i.e. the question of which company headquarters and which business model potential suppliers have
. With this structure of the matrix tailored to your company and the company-specific definition of the decision criteria, you already have two important factors of a decision-making process that will prove itself in the long term. And this creates trust - especially in situations where there is still a lack of willingness to change despite major challenges.
3. Identify strategically valuable expertise
Strategically valuable expertise and the associated value creation stages must be qualified and quantified accordingly in the MoB decision-making process. It is important to know exactly the strategic value of the value creation stages that can be assigned to the know-how. This value will of course vary depending on the size of the company, industry, business model or location. The strategic value should therefore be identified and evaluated just as pragmatically for medium-sized companies as for large corporations.
Those stages of the value chain that prove to be strategically important will naturally remain in the company's own value chain. Nevertheless, it makes sense to also review their competitiveness in order to identify and exploit any existing optimization potential. On the other hand, the value creation stages whose strategic relevance is low are then weighted, prioritized and analyzed in this order for their competitiveness.
4. Determine the internal costs of all value creation steps
In order to make a well-founded MoB decision, the internal costs of all value creation steps must be known. Otherwise, you quickly run the risk of a buy decision causing higher overall costs in the medium or long term than current in-house production.
In order to determine these costs validly, the following procedure has proven its worth:
- Simulate the influences that external outsourcing would have on a value-added stage, as well as the associated effects on the cost structure, as realistically as possible,
- After implementation, check the simulation results in a target/actual comparison
Of course, when determining internal costs, operational factors such as capacity utilization and availability of internal resources in this value-added area must also be taken into account. Typical questions are, for example:
- Can employees be qualified and deployed for functions that are more important for the company's strategy?
- And if so, can external suppliers or service providers fill the vacancies that have arisen, and more profitably in the long term?
However, the complexity created by taking operational factors into account must be sufficiently limited to keep the effort manageable - especially if your company operates at more than one location.
5. Record the total cost of ownership
Once the costs of all value creation steps have been quantified, you can record the TCO - i.e. all cost components of a switch to external procurement, including the associated risks - in a practical manner. However, it is not infrequently a challenge to quantify the economies of scope that would result from a relocation or the corresponding transactions, especially for small and medium-sized companies.
In this case, it is worthwhile using an external management consultant with the relevant expertise and experience. They can help you focus on the key factors and, in collaboration with your purchasing organization, controlling and other affected departments, identify the cost and risk elements that are actually relevant to your company and the specific use case. You should document this cross-functional process comprehensively. The documentation can be used to create checklists and the original process can be used as a blueprint for future MoB decisions.
6. Determine the basis for decision-making cross-functionally
Form a cross-functional project team to determine the basis for decision-making. If several areas of the company work closely together to set up the decision matrix, allocate costs and implement decisions, the procedure and method will be internalized more strongly by the employees involved. This team should be managed by an objective project manager who is not directly involved. This can be a staff function within the company or an external expert.
When developing a basis for decision-making, it is important to know the exact costs of switching from in-house to external services, including the possible risks, and to plan for them. After all, if unrecognized risks have to be dealt with later, valuable resources may be allocated unnecessarily. And that can be expensive: After all, the costs of this allocation correspond to the profit that would have resulted from using these resources to strengthen the company's own value creation.
In any case, controlling, the purchasing organization and, of course, the functions involved in the respective value creation stages must be included in the course of determining and assessing the risks of relocating the provision of services. When calculating the expected total costs of a relocation, you should not just rely on extensive checklists for items and risks that are included in the calculation. Ultimately, the decisive factor will be the experience that employees have gained from comparable tasks. Incidentally, you should also make sure that the cooperation between the company divisions is defined in appropriate process documentation (RACI) during the project, including work instructions if necessary. Following the transformation process, you should also offer targeted training to establish the procedure for MoB processes, including the role of Purchasing in your company.
7. Use your purchasing organization as a driver in the decision-making process
Your purchasing organization is a driver in the decision-making process - or should be. This is because your purchasing organization forms the interface between the upstream value stages and the market. This is where most of the knowledge about the value stages is located, which suppliers may be able to offer and provide more cost-effectively or more quickly, which is why purchasing has an important trigger function in MoB decisions. With good market knowledge, also in the environment of your market participants, Purchasing quickly recognizes which sources of supply appear attractive for the corresponding added value and where in-house production would have advantages.
This is why Purchasing should determine the TCO components in the MoB process, such as
- on-site audits at suppliers,
- Reiseaufwand,
- Null-Serien,
- Serienfreigabe,
- Lieferanten-Management,
- Ramp-up
- etc.
take over. In this way, the expertise in the cost components usually existing in the purchasing organization, which is associated with the changeover to new suppliers, can be used as extensively as possible.
8. Make your purchasing organization fit for this process
Conduct a brief 360-degree check in your purchasing organization in advance to dispel any doubts that your purchasing department can adequately handle the task. This check can be carried out using WCP criteria, for example, which are specified for the task in your company. Benchmark the organization, the relevant processes and the methods used against industry and business standards. From these findings, you can develop concrete measures to increase and maintain your company's competitiveness in the long term by further expanding the strengths of your business model and consistently closing gaps.
An example: Outsourcing a mechanical production area
A company produces complex systems that include mechanical components, electronic components, software and services for commissioning and maintenance. The recently modernized mechanical production area is being criticized in terms of costs because it is planned too large for the current market situation and is therefore underutilized. The under-utilization increases the imputed hourly rates and thus burdens the company's earnings situation. An adequate increase in turnover is not foreseeable in the short and medium term. The possibility of bringing the division into an adequate capacity utilization range with mechanical contract manufacturing or through cooperation with other companies is rejected due to the existing business model and the process landscape that does not exist for these approaches.
The outsourcing of the complete mechanical processing to external suppliers with correspondingly flexible production capacity appears to be a viable solution. A MoB decision-making process is initiated. In this case, the MoB decision matrix not only includes the TCO for outsourcing, but also the restructuring costs for closing the division, including the sale of the machines and systems, some of which are almost new.
The purchasing department works with an external expert to identify globally suitable suppliers that meet the requirements in terms of quality and delivery performance. Taking into account all identified risks, the assessment of the suppliers' TCO proves to be sustainably cheaper than in-house production at nominal capacity utilization.
Together with the social partners, a solution for the closure of the division and the sustainable further deployment of the freed-up skilled workers is developed. A decision paper is then drawn up together with Controlling. Once the decision to outsource has been made, a detailed milestone plan for the implementation, including the ramp-up of external production and the ramp-down of the previous in-house production, is developed and implemented by the implementation team. At the same time, the skilled workers who have been released are being trained for their new area of work.
The critical review after completion of the measure is within the planned corridor in all respects. The expected synergy effects have materialized both on the profit side and with the new allocation of the freed-up specialists.
How much effort does the MoB decision-making process involve?
What effort is involved in the MoB decision-making process and its implementation in this example?
- The project period up to the MoB decision is around nine months and is integrated into a larger restructuring measure.
- The implementation will take another twelve months until the closure of in-house mechanical production.
- The external expert was required for approximately 15 months.
The methodology is now firmly anchored in the company. The MoB decision-making process has been set up for further stages of the value chain in order to ensure the company's competitiveness on an ongoing and sustainable basis. The team for decision preparation consists of two trainees, one of whom comes from Purchasing. The team is managed by the external expert. The business cases developed by this team are verified by the restructuring team, which is made up of independent internal experts, and presented to the company's higher-level decision-making body. This ensures objectivity in the decision-making process.
