Differentiation Through IT: Buy for Competitive Parity, Build for Competitive Differentiation

According to Gartner, by 2018 20% of all business content will be produced by machines and over 3 million people worldwide will be supervised by a Robot. Things are changing in the business world. But they have always been changing and will continue to do so.

What has not changed and will not change is the need for companies to differentiate and increase revenues and reduce costs. How does information technology play a role in this, today and in the future? 

Should companies get on the bandwagon and ‘buy’ the best solution for their needs or should they ‘custom build’ what they need for their business? Is their business so unique that only ‘build’ will do or are their systems so broken that just getting to standard procedures, as established in common packages, will do for them?

According to a Forrester’s Global Business Technographics Survey, 2015, 41% of the decision-makers in the global software technology firms actually believe in building because it lets them create a unique customer experience and engagement with customers, partners and employees while the other 59% feel that this unique might not in-fact be superior!

40% of them feel that it actually lowers their total cost of ownership because packaged software is too expensive for many tasks.

Before we answer this let us take a one paragraph diversion into the change in the application landscape since the 1950s. First we had mainframes right until the early 1980. Everything was custom built behind glass walls without much business input. Then came the ‘Client server’ technologies and business started having a much greater view into what was being built and how it was going to look. But it was still custom built. Then with Y2K, many of the old mainframe programs were retired and replaced by horizontal ERP packages like SAP, PeopleSoft and other. Then 15 years of IT efforts were spent on building internet applications (all custom) to improve customer connect. Now the pendulum has swung back in looking at internal applications to improve company productivity. And companies are faced with the decision once again to build or buy. Build bespoke custom applications internally or buy best of breed package (cloud) applications.

Here let us take a simple case. Should any company build a ‘mail application’ like Microsoft Outlook? Obviously the answer is a no. Or build a word or excel or an antivirus application for that matter. The reason is the differentiation is in how they are used, and not in their functionality.

Similarly should a company build a HR Payroll package, or a Sales Contact Management system? These were indeed custom built by companies during the mainframe era. Today nobody will think of doing it. Why?

Because these only bring companies to a ‘minimum standard’ to achieve competitive parity. If a company today does not efficiently process payroll, HR benefits, General Ledger, then they cannot run their company efficiently and will not be able to compete effectively. But will this differentiate them in the market? Can one company tell their customer that they are different due to the way they process payroll? Not.

Although, there are other situations that define what the company does and that is different for each company. Take a multi-billion dollar company whose business is to buy clothes that are out of fashion and make recent fashion available at a different price point to retail customers. So, their inventory and merchandising system is their key differentiator. That they do not just need ‘parity’ with other competitors but ‘differentiation’. Here they will probably not want to go with an available package, but create custom differentiation. They need to build this. There are similar examples possible in every situation.

So for a build or buy decision, a company needs to find out where it needs to achieve parity with other companies and what is ‘non-core’ for them. Those they can buy. Then functions where a company wants to differentiate itself, it should seek to do something that no other company can have done – and that is to build competitive differentiation with information technology by ‘building its own unique solution’.

So ‘Buy’ to achieve Competitive Parity and ‘Build’ to gain Competitive Differentiation is the mantra.