Banner Image

Build, Buy, or Partner: A Manager’s Guide to meeting new requirements and delivering new capabilities in the SaaS world

This is a guest post by Senthil Venkatachalam, a Subject Matter Expert in product management, managed services, and cybersecurity solutions.

The rapidly emerging and evolving cloud-solutions landscape is dramatically changing the Information Technology business. Shrink-wrapped software is no longer bundled into a CD or DVD and shipped to a customer for installation within the data centers. Software developers must now learn IT hosting, operations and cybersecurity engineering. As businesses try and make sense of these changes, Business and technical managers are often faced with a trilemma [1] when trying to satisfy changing customer demand and preferences: Should we develop the new services ourselves (build), integrate with an existing solution in the market (partner), or buy a company/department/group to get this capability (buy)?

You can see where I am going with this; it is a classic product management decision that affects most technology products and solutions. It is also a strategic management decision. In this post, I consider some of the situations that demand one approach over the other; this is by no means an exhaustive set (there are entire books dedicated to this stuff) but simply a quick reference.

Factors that favor “build” option:

  • Capabilities: Building this product fits within the company’s core competence [2]
    • “Core competence” is a long discussion. But from a product manager’s perspective: Can we efficiently utilize resources in dev/engineering to build this new product and also build/manage existing products?
  • Portfolio: The “built product” is a core part of the product portfolio; i.e., “we want to play in this market”
    • Tread carefully here; it is not just building the product. There is product launch, marketing, ongoing support, feature enhancements, bug fixes, SLAs, etc. Can we handle them? Can we handle them cost effectively?
  • Time to market: If we “build” – can we get it to the market in time to be relevant?

If the answer is yes to all, then there is a strong argument to build in-house.

The Buy option:

This is a strategic option indeed; one that typically involves the highest levels of management. There needs to be a solid case for investment outlay, typically with a business case to support the NPV/ROI/IRR[3]. There are books on this topic, so these are just some of the high-level issues to consider.

Factors that favor the “buy” option:

  • Uniqueness of opportunity: The target company offers products that are unique, not easily reproducible by competition (barrier to entry) or by acquiring company.
  • Window of opportunity: Acquiring company can potentially replicate the product, but time-to-market will be too long and the window of opportunity will be lost forever.
  • Buyer’s value-add and leverage: Acquirer can add significant amount of value and enhance target’s products, much better than target could by itself. This could be in the form of:
    • Portfolio integration: This is the strongest reason to buy. The target product fits well in the acquirer’s portfolio and the value of resultant portfolio is higher than the sum of the parts. And most importantly, acquiring company has the capability to enhance the product’s functionality in ways that the target company by itself cannot.
    • Leverage buyer’s capabilities: This is a good reason to buy, but not in itself sufficient to make the case for an acquisition.
      • Cost reduction: Reduction of costs by using buyer’s capabilities such as: Supply Chain, manufacturing process, favorable vendor contracts, and rationalization of product development and production.
      • Channel/Sales: Leveraging buyer’s salesforce to sell target’s products – in essence making the buyer a captive channel of the target product.
      • Finance (Weakest factor in this sub list): Utilizing buyer’s better financing capabilities to get lower cost investment into the target business.
    • Market share growth (and product rationalization): This is usually the weakest reason to acquire the target, but employed often by companies chasing “inorganic” growth [4]

When should one partner?

Given that the two decisions – to build or to buy – are too drastic for most companies, they want a middle path where they can just add a solution to their portfolio and move on. They don’t want to spend enormous amounts of time developing a product from scratch or spend enormous amounts of money buying a company. This is the case most of the time. In such cases, my advice will be to just partner with the target to add the target product into the buyer’s portfolio: to be sold stand alone or in integrated form.

Many of the reasons to partner will be similar to that of buy (in terms of “Window of opportunity” for example) but the difference here is that the product is not strategic enough to acquire and it is best left to the target vendor to specialize in. Partnership can also be a way to dip your toe in the market to see if it is really as profitable and get a grip on the operational complexities before jumping in headlong.

Factors that favor the “partner” option:

  • Window of opportunity: The acquiring company can potentially replicate the product, but time-to-market will be too long. Quickest way to market is to partner and add product to portfolio.
  • Target Product is necessary, but not strategic: Why should the acquiring company spend the time and effort to build or the money to buy? Let the target company specialize in this product; the acquiring company will simply repackage, resell, and/or integrate the target product.

Partnership is an arm’s length transaction that provides many benefits to the acquirer: strategic flexibility, focus on its core product line, significant cost reduction, and Op Ex as opposed to Cap Ex, among others.

Thoughts? If you have some favorite reasons to tip the decision in one of the three ways that is not considered here, comment!

Partnership is the typical route taken by solutions integrators and SaaS companies that stackArmor works with. stackArmor helps companies reduce time to market and accelerate sales cycles by taking their solutions to the cloud, rapidly and securely. For further information, contact us.

Footnotes:

[1] Trilemma: while a trilemma is classically used to define a situation wherein all 3 options are unfavorable, as in the macroeconomic trilemma (see impossible trinity https://en.wikipedia.org/wiki/Impossible_trinity) facing reserve banks, I use this term here simply as presenting 3 choices, with no a priori preference on one versus the other.

[2] Core Competence: What are the company’s strengths and capabilities that can be leveraged to produce differentiated products.

[3] NPV – Net Present Value; IRR – Internal Rate of Return; ROI – Return on Investment; all these are financial metrics that define the profit potential of the project. NPV – is the discounted cash flow model over the lifetime of the project.

[4] “Inorganic” growth: This is growth that is not made up of Carbon, Hydrogen, Nitrogen, or Oxygen. Kidding aside, this is the growth achieved through acquisition as opposed to the organic variety: a company growing through its own sales.

Contact Us Please write to us at solutions at stackarmor dot com