4.3Procurement and contract types

The starting point of procurement management is make-or-buy analysis, which judges whether work should be outsourced at all. Once outsourcing is decided, the next crucial judgment is choosing a contract type. Which party—the buyer or the vendor—bears the risk of cost overrun differs fundamentally by contract type, and the optimal contract type shifts depending on how firm the requirements are (certainty). This section compares contract types along the consistent axis of risk-bearing, building judgment for choosing among them based on the situation.

4.3.1Make-or-buy analysis

• Make-or-buy analysis compares whether a given product or service should be developed/performed internally within one's own organization, or procured (purchased, outsourced) externally, weighing factors such as cost, schedule, in-house know-how, and strategic importance (core competence). Beyond a simple cost comparison, whether the product or service touches the organization's core competitive strength (core competence) is an important criterion.
• Casually outsourcing an area that directly touches core competence carries the risk that know-how never accumulates in-house, eroding competitive strength over time. Conversely, continuing to build a non-core area internally often results in inferior quality and cost compared to a specialized external vendor. Make-or-buy analysis is not a one-time decision—it is re-evaluated at every project phase or scope change.