From small funds to large institutions the debate of whether to ‘build’ or ‘buy’ software is one that comes up on a regular basis.
While Alterest develops software for the non-bank lending space, we also use many external tools to make us more efficient. For example, we use HubSpot CRM for sales, Microsoft Office 365 for business applications, Slack for team communication and Amazon Web Services for our application Cloud Infrastructure.Each one of these were selected for their market leading features and functionality as well as their close fit to our specific requirements.
Looking at the examples above, one could estimate that hundreds of thousands hours of development time has been spent getting them to where they are today. We benefit from this in the current solution and also all the future innovation that gets added to these products through R&D, competitive pressures and exposure to the market. I’m certain that as a reader you’d agree that given the nature of our core business, buying these solutions made more sense than to build them in-house.
When it comes to institutions with Internal development teams, making decisions to buy instead of build can be a lot trickier with internal culture at play and a large group of interested parties to convince.
As a software company our preference would be for you to choose the ‘buy’ option, ideally from Alterest. Having surveyed dozens of clients who have attempted both internal builds and external buys it’s our opinion that if your requirements aren’t a core competitive edge you should bring in external expertise.
We are going to outline the key reasons that can tilt the decision in favour of buying at a Financial Institution when examining the prospect of building vs buying a solution.
Technology in most institutions will often be an enabler rather than a core competitive advantage. Most company’s technologies are built around a combination of existing plugins and common underlying infrastructure. It’s often client service, business models, that institutions rely on to grow and compete.
The acknowledgement of the importance technology plays in today’s successful companies is the reason that we exist, but it’s important to look at your organisation, it’s leadership and focus to determine whether the process in question ultimately contributes to your competitive edge.
Most of the clients surveyed spend a significant portion of their budget maintaining and supporting existing applications. Most of this legacy infrastructure supports part of a business rather than providing a standalone income as a technology platform.
A good rule of thumb when checking if a new solution does or does not provide a competitive edge is to ask whether it will directly lead to new revenue that couldn’t be achieved without it.
One shouldn’t underestimate the importance of these incremental gains because added together the process of constant incremental improvement can be very powerful. Once a company stops making such improvements they’ll quickly fall behind the pack.
Another thing to consider is that pulling internal resources onto this project has an opportunity cost that might be better spent pursuing projects with potential for creating a true competitive edge. Alterest’s dedicated Quantitative Support team has specific domain knowledge meaning that we can deliver a custom implementation of our platform, while still allowing you to focus your resources on driving revenue.
Project Management vs Product Management
When companies decide to go down the internal development route there is normally a project manager appointed and stakeholders, objectives and timelines identified.
The product manager is responsible for setting the product strategy.
By having an objective focus to building the product, the best product managers can create initiatives to help reach those objectives mid project. This approach helps determine which features should be built to achieve those objectives. Product managers must answer the following questions:
- What problem does this solve?
- What are you building?
- What will the benefits be?
A big challenge with internal projects is once you enter the development phase it can be very difficult to course correct based on feedback or new information. Alterest’s Implementation and Customer Success teams have a proven track record of successfully uncovering, understanding and delivering on specific client requirements by leveraging previous experience and maintaining a pulse on market developments.
A common scenario is that business requirements will be relayed to the development team early in the process. The development team then delivers these requirements as specified but since then the business unit realise the requirements have changed due to a new client onboarding and want to make alterations to the original design.
Alterest has a team of Product Managers leading development on each solution and always factor in new user requirements. With Internal builds once the initial version is completed the project team can be disbanded or move on to the next shiny thing. Straight away the solution begins to become obsolete. Without external market pressures and an ongoing Product Manager the solution soon falls victim to ‘good enough’ until it isn’t.
Operating Expenditure vs Capital Expenditure
The software world has seen a massive shift towards Software as a Service (SaaS) and cloud computing. Alterest’s ability to provide a solution with a flexible commercial model has allowed many of our clients to transition CAPEX to OPEX, thus improving their overall financial position and capital efficiency.
This is not possible with internal builds as the majority of costs are incurred up front and must be capitalised.
Total Cost of Ownership
It can be difficult to accurately compare vendor to vendor pricing, never mind external to internal.
The easiest way to do this is to calculate the ‘Total Cost of Ownership’ over a set period. This can encompass the lifetime of the solution or arbitrary periods are often used e.g. 3, 5 or 10 years. The key to this is to not leave anything out and try to include any ‘hidden’ costs.
Calculating these figures accurately can replace emotion with facts in the debate of whether it would be better value to build internally vs buying an external solution.
Below is a high-level checklist for items to include when evaluating total cost for both Internal and External:
For internal include:
- Internal resources for solution build e.g. 1 x Project manager, 1 x designer, 3 x engineers x 6 months x average salary
- Maintenance costs e.g. bug fixes, new features, software upgrades
- Hardware costs e.g. servers, database licences, electricity
For external include:
- Implementation fee (if applicable)
- Annual software maintenance
- Does the vendor limit the usage through additional user or volume fees?
- Are there separate charges for support, hosting, development or training?
- If it’s not a cloud solution you might need to include Hardware costs similar to an internal build
Alterest’s pricing model is designed to ensure that we are able to provide the exact solution for the size and complexity of your business while remaining far below the cost of any internal build.
Build vs Buy is an important strategic decision and a misstep can often slow a company down for years to come.
Sometimes buying the wrong solution can be confused with making a mistake to go external, when in fact the external option was the right choice but executed poorly. Alterest’s domain knowledge and track record ensures the successful execution of the strategy, ensuring that internal resources are focused on revenue generating activities.
Key points on why an external solution is most often the best option can be boiled down to:
- Focus internal development on core competitive R&D – import the rest of your innovation. There is a high bar in defining a ‘Competitive edge’ when deciding to build a solution internally. If it forms part of the overall plumbing and doesn’t create new revenue then going external can often be the best option
- Product management is a core competency of vendors in a competitive market – leverage that
- Financial Services companies are under massive capital efficiency pressure. Take advantage of the pay as you go model
- Better value – there’s nothing like competition to get you a better solution at a lower cost. Internal teams don’t have competitive pressure.
If this is a choice your organisation is facing, please do not hesitate to to contact our team who will be happy to provide you with more detailed information, case studies and our experience to help to support your business case.