To Buy or to Build: Why the Old Argument is Changing

When it comes to better meeting the needs of their customers, employees and shareholders, many banks see an upgrade to their existing technology as a starting point. I meet with banks around the globe, and the key issue many of them are debating is whether to build the software themselves or buy an existing solution from a third party. Traditionally, in-house solutions have been the favored option for large banks due to the lack of presumed customization available from third-party providers. However, significant advancements in enterprise technology and security over the last several years have changed the norm.

Recently, I was speaking with a principal at KPMG LLP about this very topic. He said the evolution of more sophisticated software companies has helped turned the tide for many banks. “The maturity of these software platforms, particularly in the last eight to 10 years, around addressing workflow issues and responding to changing regulations in a very nimble way, has really helped move people away from building their own solutions.”

As an analogy, consider the home security business. Millions of people hire specialized home security companies to safeguard their residence each year, because they are the experts. The same holds true for the financial services industry. Whether it be storing and protecting a bank’s most valuable data assets, updating a major operating system or deploying new products and services with the customer’s experience in mind, software companies may bring a level of expertise, experience and readied technology that most banks cannot match on their own–at least not near term.

When faced with their next major tech decision, banks should closely evaluate buying versus building. Below are some key things to consider:

Cost Effectiveness: Most off-the-shelf third-party software systems follow a subscription model, where costs are determined by usage/volume or the number of purchased licenses, instead of paying significant amounts upfront. These systems may be easily configurable and require less extensive resources to implement or maintain, especially when hosted, or even partially hosted, by the provider. Beyond the initial investment with a custom-built solution, there can be significant ongoing maintenance costs. A report by consulting firm McKinsey & Company found that financial services firms spend more than half of their entire applications budgets to support, maintain and enhance custom built, in-house software solutions.

Speed to Market: When it comes to building solutions from the ground up, it’s not uncommon for development and implementation to take upwards of seven years. In some instances, the timeframe may not present any challenges. In a world where speed to market is extremely important, however, banks can usually purchase and implement a fully functional system in a fraction of that time. Depending on the size of the institution and scope of the project, the implementation of a ready-built solution can take as little as six months for community and regional banks, and still within 12 or 18 months for large national banks, reducing financial and opportunity costs, as well as human resource investment.

Long-Term Support: When building and maintaining a custom system, banks must have a thorough succession plan in place to ensure that the institutional knowledge of the system will survive employee turnover. Will the bank have the depth of talent and knowledge to sustain the system once the founding developers leave? For many banks, the answer may eventually become no. While ongoing system familiarity is necessary in any case, the support of a third-party software company can help ease those worries. Many banks appreciate knowing that an outside expert is primarily responsible for continuously driving system improvements, and can be available for training assistance and support if needed.

Efficiency Gains: Strategic applications of technology can revolutionize operations across the bank to improve efficiency by automating workflow, reducing errors and eliminating duplicate data entry. If banks don’t have to worry about intricate details of the system and process, work becomes easier for employees, prompting lower expenses and higher outputs. The largest measure of efficiency is generally how long it can take a bank to see tangible efficiencies from recent technology projects–and how quickly they can offset the cost of deployment.

Brand Consistency: Banks want software that conforms to their own branding strategies. In the past, that was difficult for third parties to achieve and usually resulted in a check in the “build” box. However, many of today’s third-party applications are designed with the ability to take on the same brand of the bank’s other digital and customer-facing applications, giving the bank flexibility and ensuring a consistent look and feel across the enterprise. Depending on the extent of customization made possible, the flexibility to shape an application’s outward identity may no longer be a barrier.

Banks today have options, where the pros and cons of buying or building may seemingly balance out. My greatest piece of advice is to recognize that today’s software landscape looks very different than in the past. Make your decision based on what will allow your team to focus most on core competencies, drive down costs and increase efficiency as much as possible– extending all the way to your customer.