Dr. Russell F. Henke -- Business Consultant
Case #5 -- In-House Vs. Out-Sourced ?
Going "in-house" is not always the right choice! A mature electronics design automation (EDA) vendor has offered its customers access to a limited collection of computerized information about electronic components and parts typically used in customer designs. The information might be part size and shape, electrical characteristics, number and location of connection pins, etc., up to and including complex simulation models of specialized electronics chips for virtual prototyping. The collection of this information is carried out continuously by a not-inconsequential R&D staff inside the EDA vendor, using highly skilled and expensive personnel scattered over several continents.
Unfortunately, the revolution in the electronics industry begins to create such a huge demand for parts data that it overwhelms the productivity of the EDA vendor’s in-house group. Moreover, the parts required are getting more complex and the new parts’ actual in-use product life cycles are often shorter than the time it takes for the EDA vendor’s in-house team to model a part and make it available. End-user customers try to handle the demands internally by setting up their own parts modeling & data collection departments, but they too fall behind and the parts they do create are often inaccurate and untested. To add to the problem, semiconductor and DSP vendors and microprocessor companies are inventing and introducing new components at a furious pace.
An experienced business consultant is asked by the EDA vendor to help. He first evaluates a newly available parts library system (PLS) just adopted for internal trial use at one of the world’s leading electronics communications manufacturing companies. This PLS is being enthusiastically advanced by internal EDA vendor advocates as the panacea for the EDA vendor’s dilemma. There appear to the Consultant to be two main reasons for this internal advocacy: 1) the EDA vendor’s sales force "promised" the communications company that the EDA vendor would adopt PLS, in return for a huge order of standard EDA vendor software previously booked; and 2) the EDA vendor’s existing R&D staff would have "guaranteed jobs" for the years it would take to commercialize the PLS to allow access by most of the EDA vendor’s other customers.
The consultant does not think that the PLS is the optimum answer. This unpopular assessment by the Consultant is tempered by his knowledge that the EDA vendor’s top management truly desires a viable parts data and library management solution for the long term to offer to its expanding customer base.
Accordingly, the Consultant explores other possible options. Recognizing that the half-dozen competitive EDA vendors also need a solution, the Consultant investigates outside specialty companies whose founders may have observed the same needs of the burgeoning electronics marketplace and moreover may have done something about it! The Consultant’s search is quickly rewarded with the identification of two independent entities already in the business. One is small and still private, the other a small piece of a huge, public general information distribution company. Both offer terrific economies of scale, as each can gather data "once" from hundreds of parts suppliers, and in turn offer the library data and library management system to all comers, leveraging CD-ROMs and later the Internet.
After extensive due-diligence, the Consultant recommends a relationship between the EDA vendor and the small private entity, and suggests starting with a modest OEM Agreement. Working with an internal employee co-advocate, the deal is consummated and offered via the EDA vendor’s professional services arm. Internal EDA vendor staff devoted to proprietary efforts is re-directed and even the large electronics communications company comes to favor the new solution.
Undaunted, the small private entity executes an impressive IPO three months later. The valuation at IPO time? Nearly 3X the aforementioned acquisition price. Since the IPO, this now public entity has flourished with rapid revenue growth, acquisitions of its own, and a tripling of its capitalized value over 3 years to well over a billion dollars. In March 2000, this entity was itself acquired for the astronomical sum of $9 BILLION...a figure that would have netted the EDA company a 90 to 1 return in 4 years. C'est la Vie.
While the EDA vendor itself did not fare quite as well overall, the EDA vendor did economically solve its dilemma of a supplier to its customers of library management systems and component information. The EDA vendor continued the original OEM deal for years.
