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The Make or Buy Decision


Last updated 6/3/2014

The Talent Focus Decision, otherwise known as the Make/Buy decision, deals with the question of whether you should rely primarily on the use of internal development (Make) or external replacement (Buy) to strengthen your leadership bench. While all organizations make some use of both approaches, the attempt to straddle these strategies and do "some of both" is likely to simply diffuse your resources and send confusing messages to your organization about what you are attempting to accomplish with your talent development efforts.

At the same time, it's important to keep in mind that, as with the other four talent decisions that I'll be discussing, the Talent Focus Decision isn't irreversible. Over time you may encounter changing business conditions that require you to adapt your talent strategy to shifting requirements. Later in this chapter, I'll provide a few examples of conditions that can prompt such changes to strategy.

The Make Strategy
Employ the Make Strategy if you assume that business conditions are stable enough to ensure that your leadership career ladders will be relatively stable over the next few years, and that the development experiences you are offering to managers will be applicable to tomorrow's business changes. After all, there is no point in spending the next several years running leaders through formal leadership development training programs if the skills that they are developing will be obsolete by the time that they complete such activities.

This decision also assumes that your current internal pool of leadership talent is sufficiently broad and strong. One way to gauge this is to ask yourself how the leaders in your company would fare if they were forced to compete against external job applicants for their own jobs.

Pay-Offs Associated with the Make Strategy
Because the Make Strategy can provide a relatively broad and stable pipeline of leadership talent, it offers a number of advantages. It supports organizational continuity by allowing junior-level managers to learn the business from more senior-level executives, producing leaders who are more knowledgeable about the intricacies of their businesses. A recent study of 373 companies by Hewitt Associates found that the top 20 companies, like GE and Johnson & Johnson, which were characterized by stronger leadership programs, also tended to perform better (see n. 1).

Another advantage involves the nature of managerial on-the-job learning. Much of what managers learn on the job is not anything that can be neatly summarized in a policy statement or procedural manual, but rather consists of that vast body of tacit knowledge that managers learn through close-quarter observation and personal experimentation. Tacit knowledge consists of that know-how that is sometimes difficult for managers to articulate and express (n. 2). At the same time, tacit knowledge has been shown to play a vital role in what has been termed "practical intelligence," the ability to make effective decisions in real-life situations that require anticipating emerging problems, working with problems that are "fuzzy" or ill-formulated, and balancing trade-offs among alternative solutions (n. 3). From the perspective of talent management, it's important to note that a leader's ability to display tacit knowledge and practical intelligence has been shown to be a strong predictor of leadership success (n. 4). 

Pitfalls Associated with the Make Strategy
A strategy's weaknesses are often a mirror-reflection of its strengths, and the Make Strategy is no exception. First, if you are just launching your internal development, assessment and succession efforts, be willing to accept the fact that that you are in for a multiyear commitment that will take a few years to begin to show returns. This is particularly likely to be the case when you are identifying and developing midlevel managers to take on executive positions in your company.

Your CEO must be willing to keep internal development and selection at the top of the corporate agenda for several years. When a company turns its development efforts off and on again to accommodate each fluctuation in its profit picture, the Make Strategy loses much of its credibility and effectiveness.

Another drawback that you need to consider is that, over time, companies that become heavily reliant on the Make Strategy can fall into the trap of becoming excessively insular. When this happens, they tend to gauge the strength of their leadership talent solely by historical standards. Thus, they ask themselves the question of whether their managers are getting stronger over time, rather than raise the more fundamental, market-driven question, "How would our managers compare if we forced them to compete for their own jobs against the best external candidates available?" This kind of internal fixation can cause a company to suddenly wake up to find itself woefully behind in the talent curve—simply because it failed to periodically compare its performers against those of outside players.

The Buy Strategy
The Buy Strategy is often employed whenever an organization seeks to jump-start its performance, such as in the case of attempting a quick financial turnaround, or making a leap into a new market. To be successful, these types of corporate mutations may require the whole-scale importing of leaders who are either much stronger than current incumbents, or who bring with them very different backgrounds and skill sets.

This strategy may also prove inevitable when your company is growing so fast that your internal pipeline can't keep with up with your growth projections. In this case, external acquisition may serve as a necessary pump-priming mechanism for accelerating growth. Once you've reached a growth plateau you can always convert to a Make Strategy, as a means of supporting the continued development of those leaders that you've brought on board.

Finally, you may determine that changing business conditions warrant the need for leaders who have completely different skill sets or mind-sets that will simply take too long to develop. This scenario frequently occurs when a new CEO or senior-level executive is brought on board who holds very different views regarding his company's desired direction. In this case, one of the biggest challenges you face is making a quick determination on whether incumbent managers will be able to climb the new performance ramp and take your company to the next level.

Pay-Offs Associated with the Buy Strategy
The strongest advantage associated with this strategy is that it allows you to undertake the rapid replacement of personnel, particularly when you need to fill senior-level leadership positions and your internal development efforts have just taken root. It can also provide you with opportunities to significantly upgrade your leadership bench by swapping out those bottom-feeders who comprise the lowest 5 to 10 percent of your leadership talent pool with stronger performers.

One final advantage of the Buy Strategy is that it can help you build your internal bench strength while simultaneously hamstringing your competitors. In the example that I've just reviewed, as a means of beefing up the company's marketing department the CEO and his senior team conducted extensive raids on the marketing department of one of his strongest competitors. As a result, during the next year the company was able to aggressively eat away at its competitor's market share, leaving the competitor unable to mount an effective counterstroke.

Pitfalls Associated with the Buy Strategy
Unfortunately, the Buy Strategy can prove incredibly costly, since the current market value for top-notch leaders may be quite high when compared to the compensation currently being paid to those incumbents who have slowly worked their way up the internal salary escalator. Add to this the costs associated with severance packages for displaced managers, relocation and executive recruiting expenses for outside candidates, and the bill quickly rises.

The Buy Strategy can also prove to be very disruptive to an organization if it takes the form of the rapid, large-scale importing of outside talent. If you find yourself in this scenario, you will need to create a transition plan that can help you keep your organizational units in motion during the six- to twelve-month period in which acquisition and on-boarding is underway.

Still another drawback associated with the use of the Buy Strategy is that, when compared with the Make Strategy, it typically requires organizations to accept a higher level of risk for their leadership staffing decisions. The reason for this is that rather than promoting leaders who have been repeatedly tested against tough business challenges, under this strategy you are hiring managers who are relatively unknown to your organization. At issue here is the question of whether these outsiders will be able to successfully "graft on" to your organization.

Notes
1. Research Highlights: How the Top 20 Companies Grow Great Leaders, Hewitt Associates, LLC., 2005.
2. Sternberg, Robert J., et al. Practical Intelligence in Everyday Life (New York: Cambridge University Press, 2000).
3. Wagner, Richard K.,  and Robert J. Sternberg. "Tacit Knowledge in Managerial Success," Journal of Business and Psychology 1,  no. 4 (1987): 301–312.
4. Sternberg, Robert J., and Jennifer Hedlund. "Practical Intelligence, g, and Work Psychology," Human Performance 15, nos. 1–2 (2002): 143–160.

Adapted with permission of the publisher from Bench Strength by Robert Barner. Copyright 2006, Robert Barner. Published by AMACOM, AMA’s book division. Click here for more information about this title. For information about other AMA books, visit www.amacombooks.org