A Make Buy & Joint Venture Decision Making Process

1. A Make Buy & Joint Venture Decision Making Process

2. Make/Buy & Joint Venture Analysis • Users must first understand the relative costs of insourcing a particular requirement compared with the cost that would be incurred by suppliers. • The costs should always be defined as the total costs of ownership and not just the initial costs of purchase. • Users must also consider the technical competence they could supply (functionality/delivery) relative to that which a supplier could supply. • The decision-making matrix that follows provides some decision rules for buyers about the scope for insourcing, joint ventures and outsourcing under different cost and technical competence scenarios. • Having analysed their position within the matrix using the template provided users must then consider additional factors that could modify the decision, such as the impact of any decision on revenue generation and post-contractual risks of lock-in and dependency.

3. HIGHER COST HIGHER COMPETENCE HIGHER COST SAME COMPETENCE HIGHER COST LOWER COMPETENCE Insource JV Outsource JV Outsource Defensive Insource Outsource Defensive Insource 3 4 7 HIGHER SAME COST HIGHER COMPETENCE SAME COST SAME COMPETENCE SAME COST LOWER COMPETENCE Insource JV Outsource Defensive Insource Outsource Defensive Insource 2 5 8 SAME LOWER COST HIGHER COMPETENCE LOWER COST SAME COMPETENCE LOWER COST LOWER COMPETENCE Insource JV Create Core Business Insource JV Create Core Business Insource JV Create Core Business 1 6 9 LOWER HIGHER SAME LOWER The Make/Buy Decision MatrixRelative Buyer & Supplier Performance on Technical Competence & Cost All potential insourcing options at this stage need to be evaluated within the following decision matrix for make/buy Insourcing (Buyer) Performance on Cost Relative to Potential Supplier Insourcing (Buyer) Performance on Competence Relative to Potential Supplier See next slide for cell descriptions

4. The Make/Buy Decision MatrixRelative Buyer & Supplier Performance on Technical Competence & Cost MAKE/BUY OPTIONS IN EACH CELL 1 Insource all requirements and develop as core business (if margins acceptable). If not consider JV. 6 Insource all requirements and create core business (if margins acceptable). If not consider joint venture. If technical competence is more important than cost then insource/for all requirements (if margins acceptable). If quality not key consider JV. 2 7 If technical competence is not key but costs are insource and create core business (if margins acceptable). If quality is key create JV with high quality suppliers to work on improving cost/quality trade-offs. If technical competence is key and cost not important then insource requirements (if margins acceptable). If cost is critical then JV with lower quality suppliers. 3 8 Outsource all requirements especially if technical competence is more important than cost. Only consider insourcing defensively if technical competence is not important and there is a single source of supply currently. Outsource all requirements but consider JV when buyer has technical know-how of value to suppliers. Consider defensive insourcing if there is a single source supply market and cost is not critical. 4 9 Outsource all requirements but consider defensive insource/JV if there is a single source supplier (especially for high/medium impact requirements). 5 Outsource all requirements unless it is necessary to create competition with a single source supplier as a defensive measure.

5. Make/Buy & Joint Venture Analysis • Having analysed their position within the matrix using the template provided users must then consider additional factors that could modify the decision such as the impact of any decision on revenue generation, operational performance, and post-contractual risks of lock-in and dependency. • If the risks to operational delivery, revenue generation and post-contractual lock-in and dependency are medium to high, this may force users to reconsider their initial insourcing, joint venture and outsourcing decisions, based only on cost and competence criteria. • Users should evaluate the risks to these 3 variables in the template provided and then recalibrate their decisions using the decision tree framework provided.

6. Make/Buy & Joint Venture Risk Analysis Template OPTION 1 Make/Buy/JV or Outsource Option Enter options name here… Overall Option Risk H/M/L Risk to Revenue Generation H/M/L Risk of Post Contractual Lock-in & Dependency H/M/L Justifications for Risk Assessments made in relation to Revenue Generation and Post Contractual Lock-in and Dependency OPTION N Make/Buy/JV or Outsource Option Enter options name here… Overall Option Risk H/M/L Risk to Revenue Generation H/M/L Risk of Post Contractual Lock-in & Dependency H/M/L Justifications for Risk Assessments made in relation to Revenue Generation and Post Contractual Lock-in and Dependency

7. Make/Buy & Joint Venture Final Decision Tree Analysis Users should evaluate the risks to their initial cost and competence analysis based on the following decision-tree structure for the 9 options outlined earlier: Option 1: Do not joint venture if there is a high risk of post-contractual lock-in, and/or to revenue generation. Insource or joint venture if there are only medium to low post-contractual lock-in and/or revenue generation risks. Option2: Do not joint venture if there is a high risk of post-contractual lock-in, and/or to revenue generation. Insource or joint venture if there are only medium to low post-contractual lock-in and/or revenue generation risks. Option 3: Insource if there is a high risk of post-contractual lock-in and/or risk to revenue generation. If there are only medium to low post-contractual lock-in and/or revenue generation risks then joint ventures and outsourcing are feasible. Option 4: Insource if there is a high risk of post-contractual lock-in and/or risk to revenue generation. If there are only medium to low post-contractual lock-in and/or revenue generation risks then joint ventures and outsourcing are feasible. Continued …

8. Make/Buy & Joint Venture Final Decision Tree Analysis Continued … Option5: Insource if there is a high risk of post-contractual lock-in and/or risk to revenue generation. If there are only medium to low post-contractual lock-in and/or revenue generation risks then outsourcing is preferable. Option 6: Do not joint venture if there is a high risk of post-contractual lock-in, and/or to revenue generation. Insource or joint venture if there are only medium to low post-contractual lock-in and/or revenue generation risks. Option 7: Do not joint venture if there is a high risk of post-contractual lock-in, and/or to revenue generation. Insource or joint venture if there are only medium to low post-contractual lock-in and/or revenue generation risks. Option 8: Insource if there is a high risk of post-contractual lock-in and/or risk to revenue generation. If there are only medium to low post-contractual lock-in and/or revenue generation risks then outsourcing is preferable. Option 9: Insource if there is a high risk of post-contractual lock-in and/or risk to revenue generation. If there are only medium to low post-contractual lock-in and/or revenue generation risks then outsourcing is preferable.

9. Make/Buy & Joint Venture Decision Reporting Make/Buy/JV or Outsource Option Selected Enter decision here… Make/Buy/JV or Outsource Option Decision Rationale Enter Rationale here, to include: • Cost Analysis • Competence Analysis • Initial Option Selection • Post-Contractual Lock-in and Dependency Risk Analysis • Revenue Risk Analysis • Final Option Selection