From The Cannabis Diaries #3: Build vs. Buy
Updated: Jul 11, 2019
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A lot of organizations struggle with the question of build vs. buy when it comes to their technology. In this context, we’re not talking about custom software vs. off the shelf software. That is an entirely separate kettle of fish. Ahem.
The focus for this post and corresponding podcast is on the decision to build your IT team with internal hires or with service providers, also known as outsourcing. Even small companies are struggling with this decision and “strategic partner agreement” or “staff augmentation engagements” are fancy ways of saying outsourcing.
The typical business spends 30% or more on their technology and telecommunications operating expenses (OpEx). Adding or removing payroll and IT staff is one of the fastest ways to cut the budget, but it can be extremely disruptive to your organization. Listen to Episode 2 – Let the Right Ones In, for some reasons why you should be extra careful when hiring an IT resource.
Outsourcing itself is not inherently bad. However, it has an extremely negative reputation for displacing workers, reducing service quality, and driving IT to become a low cost commodity, rather than a strategic partner. IT resources and personnel are expensive, especially in key markets like California. Outsourcers, especially those that are publicly traded, profit only if they can manage cost efficiencies with predictability and certainty.
We are regularly contacted by clients who have swung from one end of the staffing spectrum to the other. I am not entirely sure how I became a source whisperer, but I have been tapped to fix hosted SAP implementations, correct outsourced project management offices, and claw back IT services from an underperforming help desk vendor.
Cannabis companies, like any small to medium sized entity trying to grow and scale, face a significant decision when they’re considering build vs. buy.
Here is how to start the process and make a decision that is right for you:
1. List Your Needs.
Think of IT services as a marketplace, e.g., EBay, Amazon, Wal-Mart. Make a shopping list by overall business goals and individual department or office goals. Augment these with current or expected pain points.
For example, a cultivation list of IT services might look something like this:
Increase sales and the amount of product sold at a premium with high margins.
Analyze sale and yield data to plan future products, strains, plant care, and soil chemistry.
Improve physical and information security of customer, employee, and IP information.
Integrate online sales capabilities with in person sales tools to expand reach.
Support printer, desktop, mobile device, connectivity, and business applications.
Develop business reports and executive dashboards.
Pretty straightforward and simple list. Note the items and services that create intellectual property or require a strong knowledge of your company culture or business. These are premium services and technology capabilities that make technology a strategic differentiator. These are services that will benefit from continuity, familiarity, and collaboration.
Next, note the items and services that are on the commodity end of the spectrum. These are typically considered to be device support and infrastructure capabilities. However, think carefully. The term commodity is not meant to be disparaging. Without connectivity or functional and secure devices, the bleeding edge technology solutions do not work. Period.
2. Quantify Your Demand.
What are your busy seasons or timeframes?
Full time resources cannot typically be idled, although some experimental staffing methods have been successfully piloted, e.g., December is a quiet period staffed at half time while the rest of the year is staffed at 44+ hours a week.
Contract resources can be idled, though smaller providers will struggle to keep your team consistent. Without guaranteed demand, they will often staff their best elsewhere. To avoid this, establish clear goals and mutually determined outcomes for success. We’ll explore these ideas a bit in our next episode.
What is the development cost versus the maintenance cost?
Most organizations fail to account for the cost to maintain or operate a solution or a product. At one client, the global head of tax advisory had requested $20M for five consecutive years to support their audit software. There were no supporting business cases projecting return on investment (ROI) or total cost of ownership (TCO).
You do not need a Harvard Business Review approved writeup, but a two-page explanation of the investment costs, returns, and expected results is the bare minimum. Five years ago, the initial $20M investment had not considered new maintenance, enhancements, or support costs. The contractors working on the initial project effort had taken root, racking up expenses.
Take a hard look at customization needs and enhancements. If your internal team does not have these capabilities, consider adding a resource or team member to learn from the deployment team. This will reduce your cost of ownership and reduce the risk of being held hostage. If your company has been using contractors for over 12 months, review their performance and determine if you should add them as full time staff.
If you have any reservations about bringing the contractor on board, focus on knowledge transition to a full time internal hire instead. Do not hire assholes just because you think that you need them. That need is likely overstated and perpetuated by the asshole.
3. Add Costs. Review the Whole Picture.
Now that you have a clear picture of your service needs and demands, you can incorporate costs. Technology hires are typically expensive. Telecom spend, including mobile devices and mobile data plans, can add bloat to your technology operating expenses.
Apply staffing pyramid strategies to minimize these costs and your resource risk. At the top of your pyramid, you have key leaders and subject matter experts. Think of these individuals as the head attorneys at a law firm; the women and men who have their names on the practice. Balanced firms use paralegals and associates to help balance the workload and ensure that partner time is applied to marketing, customer management, and high profile work.
Balanced IT organizations have entry level staff providing support and hands on administration with supervision from senior resources. There is active knowledge sharing and coaching. Senior staff are rewarded not with fixing issues, but with coaching teams and people to fix issues together.
At one client, the business team was concerned that their core systems needed to move from the mainframe to a new technology. The root cause of their problem was that the IBM maintenance agreements were becoming more expensive as knowledgeable internal resources were retiring more frequently. As a railroad, they needed to know that their train control systems were unassailable.
Our solution was simple: Hire junior resources from the local universities and have them learn from the senior leaders. At the time, the labor market was in their favor and university graduates were clamoring for security and career growth.
Consider augmenting short term, relatively low IP creation demands with third party contractors or providers. In situations where strategic technology help is needed and not available internally, focus your consulting engagements on ensuring a smooth knowledge transfer and clear actions that your team can implement themselves.
If you quantify your needs, clarify demand, and manage costs sustainably, you can build an organization that will know your business, provide quality services, and support growth instead of becoming a sinkhole. In our experience, a hybrid model, using full time hires and short term contractors or providers, is a balanced path forward.