Product managers, sales and alliances leaders, as well as corporate development (M&A) teams are constantly faced with a dilemma. Should they build, acquire or partner to complete their business offering? In this article, we are going over the key considerations with pros and cons of each alternative. Doing this will help find out where it makes the most sense to productize from scratch, internally, or buy intellectual property (or human talent), or coordinate a strategy with third parties on an alliance basis.
Option 1: build the product internally
When considering Build vs. Buy vs. Partner, it can appear straightforward to simply build what you want to sell. You own the intellectual property from the beginning, and you define the product roadmap, the product features, and complete the cycle with the ability to support that product. The same goes for a service. In order for this alternative to be viable you need to make sure your company has:
- The skills to create what you want to bring to market. This can include product development skills, as well as the infrastructure to produce it, whether the offering is fully digital (software), partly or fully physical (hardware), or a service. In case of a service, consider the staff and hiring needs as your offering scales: will you be able to meet the demands that will occur if you are successful?
- The skills to understand customers needs. The ability to build is not enough. It takes distinct skills to listen to the market and be able to create product-market fit. That’s why the concerted effort between product managers, sales and other departments is crucial, to minimize R&D resulting in no sale.
You can build the product fully internally, or also market it to customers as if it was your own, by embedding a third party item.
1.a: 100% internal product creation
All parts in the product come from your company, or from fully owned subsidiaries of your corporation.
1.b: OEM the technology
Some parts of the product can come from third party suppliers. This is called OEM, which stands for original equipment manufacturer. The full name is a bit misleading, because the tech industry uses the term OEM when embedding a third-party component into a whole product. For example, if a cell phone includes supplier parts inside, such as the display, the phone manufacturer OEMs the display from its supplier. In traditional OEM models, the parts and supplier names are listed. In cases called deeply embedded, the supplier name is hidden from the end user, who is unaware of the various vendors inside the whole product.
OEMing can make sense to accelerate time-to-market and leverage specialized expertise and economies of scale from parts suppliers. The OEM model applies both to the hardware world and the software world. The downside to OEM deals is that they create a dependency: your own product relies on parts from suppliers. What happens to your product if something happens to these third parties? They could go out of business, get hacked, or a competitor of yours might acquire them. When doing an OEM deal, contingencies are essential to deal with the increased uncertainty, allowing you to continue selling should unplanned events occur.
Option 2: Acquire assets (buy IP)
Acquisitions have one major upside: before buying intellectual property (IP), you can measure its customer and market appeal. Compared to building a new product, where you are unsure it will hit product-market fit, buying an existing product or company which has a customer base means the business is proven on the upside. There are customers, or free users, or both.
Acquiring IP has the advantages of being faster than building the product from scratch, and accelerate your engineering efforts. This is the case if your existing technologies are compatible and can be integrated with the acquired assets. If this is not the case, products or services may be sold separately, with limited cross sell capabilities.
When acquiring not just pieces of intellectual property (IP) but the entire business, you also benefit from a customer base. To the point made in the above paragraph, this presents you with the opportunity to upsell to these customers your other products or services.
The challenge with acquisitions relate to the synergies at the product level (are your existing products and the acquired IP technically compatible?), and synergies outside the product. This is truly an exercise of compatibility, like grafting an organ.
- Do the corporate cultures match?
- Will the acquired teams be able to continue thriving within the new entity?
- Would customers from the acquired entity see value in your other products or services?
Option 3: Partner with third parties
Partnering can make the best sense, more than building internally, and more than acquiring. Alliances are a flexible business relationship which takes many forms: co-selling, re-selling, or referring. They can be done ad hoc, loosely, or in more structured forms with a term sheet or a signed agreements. These document the spirit of the partnership and the business terms.
Partnering makes sense to gain time. You can create an augmented product by positioning your offering with that of your partners in a matter of days, and your partners can do the same, including your offerings.
When it comes to software, many companies prefer to partner with system integrators and other service providers instead of building their own service practice. There are two reasons for this:
- Software margins tend to be higher than service margins. So boards of directors often see a software company aggressively expanding into labor-intensive services as a dilutive to margins and profitability.
- Because service providers often recommend software products, they tend to like software companies which leave the service business to them. In other words, the software vendor can leave the majority of the service business to its partners. In turn, its services partners will like dealing with the software company, seeing full synergy and little to no competitive overlap.
Partnerships can be wonderful to develop an ecosystem.
Conclusion on Build vs. Buy vs. Partner
All three alternatives, Build vs. Buy vs. Partner, can make sense in the proper context outlined above. When a company puts its customers first, it can see what they want, and in what form they can most efficiently build a complete business offering to serve them. This can include its own products and services, those from complementary partners, as well as tactful acquisitions of technology and businesses into its structure.