In engaging with companies about register-map automation, it amazes me how many engineers think that because they have an in-house register solution, or because they could build one, that this route makes the most sense. Although there are some people that get it, quite often engineers fail to take opportunity cost into consideration (sunk costs too, but I’ll cover that in another posting). I’ll explain via an example…
Picture this; an engineering team needs a register automation tool for developing a new ASIC that is the highest performance XYZ. Their options are:
The engineering manager estimates the costs of the different options using an hourly rate per engineer vs. the licensing costs for the commercial tool. Due to the fact that the commercial tool is shared among several companies who subsidize its ongoing development, it’s priced lower than the cost of creating an in-house solution. For argument sake, though, let’s assume that somehow the manager estimates that option 2 is cheaper by some accounting magic. Forget about option 3, the ASIC has way too many registers to do manually, so that’s out of the question.
The engineering manager chooses option 2 because, in this strange, imaginary, upside down world of magical accounting, the cost of building an in-house tool is less than the cost of buying a commercial one. Reasonable right?
Wait a minute, maybe not…
The company’s core competency is building high-performance XYZ products, not building, testing and supporting tools. That tool building dilutes focus. What is the cost of forgoing the opportunity to focus as intensely as possible on building the best and highest possible performance XYZ? That’s a bit harder to quantize, but it is a cost. That’s the opportunity cost!
What happens if the competition chooses option 1, and smokes the company in terms of performance? How much does that cost in the long run?
If the manager had decided to go with option 1 — licensing a commercial register tool — that would enable the team to focus more effort on building a better, higher performance XYZ product. That extra focus would enable the company to be more differentiated from their competition, ensuring their dominance and their ability to demand higher profit margins. It’s this differentiation that provides competitive advantage in the marketplace.
One other way to think about it is that differentiating value-added efforts have a greater return on investment (ROI) than non-differentiating efforts.
Something to think about, next time you have an option that would enable more intense focus on differentiating core competencies.
Stay tuned for more postings on the economics of build vs. buy engineering decisions.