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Introduction
In today’s rapidly changing business environment, your decisions on investing in digital projects often prompt a critical question: Should you buy or build software solutions? The decision is crucial as it can directly affect your company’s ability to innovate, differentiate itself in the market, and maintain operational efficiency.
Making the right decision is vital for driving growth and maintaining a strategic edge. However, the choice between "buy" or "build" is not often so simple. It depends on your organization’s culture, values, core business model, and strategy. It is also essential to consider how these factors align with the business’s IT landscape and its capacity to integrate new technologies and successfully execute projects.
This article presents a simple model to help decision-makers choose the right path. We consider two key dimensions: First, what we call the “Company Essence”, which defines the core identity of your business, and second, the Systems that support your business strategy. These two dimensions combine to form a framework within which you can determine if you should build or buy software solutions.
Company Essence: Defining Your Identity
Company essence refers to the fundamental nature and core attributes that define your company's identity, including its values, culture, business practices, and approach to innovation. It encompasses the unique combination of characteristics that make it stand out in the marketplace—guiding how it operates, interacts with internal and external stakeholders, and evolves over time. This is what makes the firm distinctive, driving its purpose, behavior, and long-term success.
You can measure and categorize your company essence through the following scale:
Traditionalist | Innovator | Disruptor |
Deeply rooted in conventional practices and time-honored values. The focus is on consistency, reliability, and maintaining the status quo, often prioritizing long-standing relationships and proven methods over rapid change. Stability, trust, and a commitment to preserving the business heritage are key characteristics. | Characterized by adaptability, creativity, and a forward-thinking approach. Innovators blend tradition with new ideas, constantly evolving to stay ahead in the market. The pursuit of growth through innovation, finding fresh solutions, and improving upon existing practices are key characteristics. | Defined by boldness, agility, and a willingness to challenge and overturn the status quo. Disruptors actively seek to redefine industries, often introducing groundbreaking products, services, or business models that significantly alter the marketplace. Transformative change, fueled by a vision to reshape the future are key characteristics. |
We will use the “Company Essence” along with “The Gartner Scale for Systems” in our analysis later.
The Systems Dimension
To make an informed choice about whether to build or buy, you must understand the different types of systems that form the backbone of any business. A traditional Gartner's framework categorizes these enterprise applications into three distinct types: Systems of Record, Systems of Differentiation, and Systems of Innovation. Each type plays a unique role in shaping your company's strategic direction and operational effectiveness.
Systems of Record | Systems of Differentiation | Systems of Innovation |
These are the foundational applications that manage your core business processes and data. Typically, stable and reliable, they focus on maintaining consistency and compliance. Examples include ERP (Enterprise Resource Planning) systems, HR management systems, and financial management systems. Although these systems are essential for day-to-day operations, they are not always a source of competitive advantage. Their primary function is to ensure accuracy, efficiency, and regulatory compliance. | These systems support the unique business processes or workflows that distinguish your business from its competitors. More flexible and customizable than Systems of Record, they enable tailoring solutions. Examples include customer relationship management (CRM) systems with custom features, or supply chain management systems that can give you a competitive edge. These systems help you deliver your unique value propositions and become a market leader. | These are applications or technologies that enable you to explore new business models, launch new products, or enter new markets. They are typically experimental, fast evolving, with a focus on agility and innovation. Examples include advanced analytics platforms, AI-driven solutions, or mobile apps that provide new customer experiences. These systems are vital for staying ahead in rapidly changing industries and are often the source of disruptive innovation. |
The categorization of systems, such as the one used here from Gartner's framework, is often influenced by a company’s unique perspective. For example, your business might consider an HR system as a system of record, while another company categorizes an Employee Performance Management system as a system of differentiation.
Putting It All Together
The B2 (Build/Buy) Matrix
By combining our concept of “Company Essence” with Gartner's Systems in our B2 Matrix, we create a guide to help determine whether a company should "build" or "buy" software:
| Company Essence | ||
Traditionalist | Innovator | Disruptor | |
Systems of Record | Buy | Buy | Build or Buy and Customize |
Systems of Differentiation | Buy/Customize | Build | Build |
Systems of Innovation | Buy/Customize | Build | Build |
Analyzing the B2 Matrix:
Systems of Record:
It usually makes sense for every company type to buy these systems. It would be inefficient and costly to try to build these from scratch and there would be no significant competitive advantage. The only exception to this rule might be for “Disruptor" companies that require custom-built systems for their unique needs .
Systems of Differentiation:
For Traditionalists, it is often better to buy and customize existing solutions . This approach accords with the desire for stability and their limited internal capacity to build highly specialized systems.
Innovators might favor building these systems to fine-tune them to their unique processes and so gain a competitive edge.
Disruptors are likely to prefer to build these systems from the foundations to fully align with their disruptive strategies, and to ensure that the technology supports their specific differentiation goals.
Systems of Innovation:
Traditionalists might prefer to buy or customize innovative solutions rather than build them, as innovation is not their primary focus.
Innovators are more likely to build these systems to stay ahead of the competition and continuously develop their offerings.
Disruptors will almost certainly build these systems as part of their core strategy to redefine markets and introduce groundbreaking products or services.
Clarifications and Considerations:
One-size does not fit all: Our approach offers you general conceptual guidelines rather than strict rules. Your company might need a mix of building and buying based on specific circumstances, such as the availability of in-house expertise, budget constraints, or time-to-market pressures.
Contextual Factors: Industry-specific factors such as company size, and market position, influence the decision to build or buy. For example, in highly regulated industries, even systems of innovation might need to be bought rather than built due to compliance complexities.
Hybrid Approaches: Hybrid approaches (e.g., buying a core system and building additional layers on top) are advisable for many companies, particularly Innovators and Disruptors.
Emerging Technologies: Emerging technologies (e.g., AI) might shift the balance more towards building, even for Traditionalists, depending on the strategic importance of the technology.
Historical and Strategic Consistency: Companies often have their established behavior patterns (e.g., always building or always buying) shaped by their strategic focus and culture. This should be a consideration because shifting strategies might require significant organizational change.
Working with Highly Specific Business Processes
When your business processes are highly specific and tailored to your unique value proposition, off-the-shelf software solutions may not fully meet your needs. In such cases, building custom software becomes essential. Custom-built systems allow for precise alignment with your business workflows, providing the flexibility and control needed to optimize performance, ensure seamless integration with existing systems, and deliver a truly differentiated customer experience. By developing a tailored solution, you can address the complexities and nuances of your operations in ways that generic solutions simply cannot, empowering your company to maintain its competitive edge.
Conclusion
In a world where technology is increasingly central to competitive advantage, understanding when to build and when to buy is not just a choice, but a critical strategic decision that can have a major impact on your company’s future. By aligning your company’s identity—whether as a Traditionalist, Innovator, or Disruptor—with Gartner’s framework for enterprise systems, you can make more informed decisions that contribute to your long-term success.
How TDVG Can Help
TDVG, specializes in helping our clients successfully implement their business strategies . Whether you need strategic advisory services or customized software solutions, our team of experts is dedicated to ensuring your company thrives in today’s competitive landscape. Let us help you navigate the complexities of decision-making and take your business forward to achieving its strategic goals.