Buy vs. Build

6 Key Factors to Aid Decision-Making

Most private equity (PE) firms and acquisition-focused corporations are looking at technology companies as acquisition targets. Whether you are a tech company yourself, offering IT software or hardware products and services, or a non-tech organization looking to go through a digital transformation, a critical decision is “buy” or “build”. If you’re a PE firm considering new technology as a potential investment vs. funding a “build” by one of your existing portfolio companies, the decision can yield widely-varied results in the economic value of your portfolio companies. Having a framework and predetermined decision criteria will greatly improve the likelihood of success.

Regardless of a build vs. buy path for augmenting technology to your portfolio, we recommend six key factors to aid in decision-making.



The Clear Vision

The first and most important factor to consider is your company’s vision of the future state. How clear is it? Is there a shared understanding among all key stakeholders? Whether you build or buy new tech, you must understand what problems you are going to solve with it and have a clear vision of the business outcomes in 3 to 5 years. As you evaluate future demand for the technology you are looking to acquire, make sure to evaluate the root causes of that demand and how the underlying factors are being addressed in the market. As an example, if the target is meant to improve customer experience, make sure you have a clear understanding of that end-to-end experience. Draw it! Visualizing the complete experience will help you with prioritization and focused deployment. Perhaps your goal is to improve the employee experience. The same principle applies. Draw it to understand the pain points and to prioritize their resolutions. Having gone through this process, you will be more confident of your decision.

Organizational Culture and Ways of Working (WOW)

Another critical differentiator between buying a tech capability vs. building one is the cultural differences between your organization and your target. While we hear the word culture used a lot, it’s not always easy to define. One definition we’d like you to consider is that “culture is the memory of all the past experiences”. It’s not the policies and value statements that make the culture, but rather continuous actions that make up your employee experience over time. If you are looking to build a certain capability, will your team have the necessary passion, creativity, and freedom of thought to bring it to fruition? An organization with more rigor and bureaucracy will likely have a much harder time achieving the necessary levels of creativity. An organization that has embraced a more agile and entrepreneurial style of working may be better positioned for such a task. In our experiences, tech companies typically have faster decision-making processes and turnaround times. A cultural evaluation is also important when you determine whether to integrate the target company or to leave it as a stand-alone entity. It is important to note that acquiring a business with a different culture could transform the “acquirer”. This may be deliberate and intentional. So, a critical factor when making a build vs. buy decision is to determine the future working environment of both workforces. How they are going to be organized and measured? Will they be set up for success? If you determine that the parent company culture would be challenged with innovation, buying a finished product may be the better choice. Regardless, culture is a key factor in the build vs. buy decision and one that should be given thoughtful analysis.

Post-Acquisition Integration

The next important factor to consider is integration. How will your existing IT architecture integrate with the new technology and what additional demands will arise? Will underlying infrastructure and security protocols need to be changed? What back-office or operational business systems will need to be integrated or retired? How will the data flow? What synergies exist to streamline IT, administrative functions, and business operations? Do you have the resource capabilities for a smooth transition? You will need a thorough understanding of your current IT environment, a future state vision, and the gaps to close. Developing a framework for answering these questions is critical for ensuring that an acquisition integration achieves the desired result.

Team Skills

It is important to understand your team and leadership skillsets. Do your leaders have the capability and capacity to envision and drive the acquisition and onboarding of the new technology, whether to build or buy? Further, can your team deliver the end product and achieve the desired outcomes? This is especially important for tech companies looking to expand. This is often overlooked, thinking the acquisition is just an addition to what we already do, and can be a risky notion. Any change, particularly introducing new technology, will impact most, if not all, areas of the business. It is important to perform an impact analysis and develop a plan for this. Oftentimes, an existing tech company that regularly builds new products have a heavier weighting in the ongoing support and maintenance function, and less innovation and development. Some critical skills within the team may be outdated. Finding new talent may be difficult and expensive. Similarly, for management, skills needed to manage the ongoing delivery of IT products or services are quite different from the new product development managerial skills. If you decide to acquire an established tech company, the needed development skills likely already exist. But thoughtful analysis and planning will prove valuable and increase turnaround time.

Capacity and Prioritization

A common thought is it’s easier to buy technology instead of building. However, this often turns out to be false post-acquisition. Of course, if your existing IT team is already challenged with high demand, they will be even further challenged to build or integrate something new. If your goal is to “buy and integrate”, the capacity demand will likely spill onto the new team quickly, causing them to get overwhelmed with additional work, often with a misalignment of skills. This also means additional work for various support functions, such as Finance and HR. Sometimes there’s a desire to invest in new features or to add capabilities. This, of course, has an impact on the technology asset and resources.

Another consideration is stabilization time. It is always good to plan a period of stabilization, to allow the team to develop a deeper understanding of the technology and solve various problems. This will also allow your team to prepare for the resulting growth, as well as impending new demands. Be clear about the capacity demands and organizational priorities.

The takeaway here is to invest in developing a solid Project Management Portfolio. The demands will increase and having a mechanism in place to value, prioritize, and manage the many workstreams will prove valuable.

Timing and Expectations

The final factor to consider is when to expect successful results – “when are we done?” What does success look like? When does the business require results? Is the timeline driven by market demands, competitor’s actions, or internal company goals? It is critically important to set realistic expectations. Further, the risk of losing key people is elevated during this time, so having clear and honest communications will reduce this risk. If the new technology is time-sensitive, communicate the timing and the reasons for that sensitivity to your people. If the timeline is based on assumptions, then share those assumptions as well. Setting realistic milestone schedules and regularly communicating those to your teams will help to ensure expectations are met.

Conclusion

Growth through technology is today’s reality. How you go about that growth is often a difficult decision and comes with high risks. Consider taking deliberate and measured actions to analyze and adopt the six factors described here. If you’re unsure of your team’s capability or capacity to do this, or if you’d like an unbiased perspective, reach out to Vaco. You will find our expertise to be comprehensive and thorough.