- Identify the factors that are considered when deciding whether to buy goods from within the organization or to obtain them from outsiders.
- Identify what factors are considered when deciding to outsource or perform the work within the organization.
The project team decides the work that will be self-performed—performed by members of the project team—and the work that will be outsourced to others. The procurement strategy focuses on the work that will be outsourced—performed by outsiders.
Luu, Ng, and Chen (Luu, Ng, & Chen, 2003) studied project procurement selection priorities and identified budget and schedule as the most important considerations in the decision to outsource activities. This study of construction projects also identified other items that project managers must consider in developing a procurement strategy, including quality, risk, complexity, and flexibility. Some outsourcing decisions are easy.
Outsourcing Steel and Concrete in New York
A construction company has a contract to build a large building in downtown New York. Most, if not all, the construction materials, such as steel and concrete, will be purchased from companies that specialize in steel and concrete. Existing companies that produce and sell steel can provide the steel the project needs at a much lower cost and faster than if the project manager’s organization attempted to build the capacity itself.
Some outsourcing decisions—sometimes called make or buy decisions—are more difficult. On the same building construction project, new construction materials and methods are required that will make the building more energy efficient. The project manager can outsource this portion of the project to companies that have this expertise or develop this expertise on the project and self-perform the work. The costs of developing this expertise within the project will be more expensive and may take more time than outsourcing this work.
Self-performing this work also has benefits. The project team would develop this expertise and the additional expertise would add value to the parent company and save money on future projects. The project management team would have greater control over the work because the work would be performed by members of the project team instead of outsiders. Self-performing and outsourcing the work have both benefits and risks.
This decision is primarily influenced by the following:
- Cost (budget)
The following factors also influence outsourcing decisions:
Outsourcing Versus Self-Performing
On the New York building construction project, the project manager decided to outsource the portion of the work that required new methods and materials. The project team assigned engineers from the project team to evaluate the work during the project and to assess the appropriate methods and costs for the parent company to develop this capacity within the company. The additional costs of developing the capacity and the additional risks of implementing a new method with existing resources outweighed the benefits of developing the capacity within the organization.
The project procurement strategy begins with these self-perform or buy decisions.
New York Construction Project
On the New York building construction project, the basic engineering and construction activities are core expertise of the parent company, and the project team had access to the qualified resources to perform the work. The decision to self-perform this portion of the work was easy because the company had a cost and schedule advantage by using the existing resources. The purchase of the steel, concrete, and other commodities was also easy because the costs of developing those resources far outweighed the benefit of purchasing them.
Some of the procurement decisions are not so obvious and the project team evaluates the cost, schedule, quality, flexibility, and risk implication of self-performing versus outsourcing the work.
- The factors that influence procurement are primarily cost and schedule but also include risk, quality, and flexibility.
- To determine whether to outsource or do the work within the organization, consider which option is less costly and which option can deliver the work on time.
- The primary factors that influence procurement are cost and ____________.
- In addition to the two primary factors that influence procurement, what are three other important factors?
- What is one advantage of doing the work within the organization instead of outsourcing it?
Internalize your learning experience by preparing to discuss the following.
Choose a situation with which you are familiar where you or your organization chose to hire someone outside your organization instead of developing the skill yourselves. What factors were most important in making the choice and how do they relate to the factors described in this section?
Luu, D. T., S. Thomas Ng, and Swee Eng Chen, “Parameters Governing the Selection of Procurement System,” Journal of Engineering, Construction, and Architectural Management 10, no. 3 (2003): 209–18.