Last week our CEO, Mike Powell, took part in a panel exploring the much debated issue of whether firms should buy or build trading technology at the JSE’s SA Trade Connect event in Johannesburg. A familiar topic, but one that is constantly worth revisiting given advances in technology and the margin pressure facing financial institutions. This is a common theme globally, and the issues facing South African institutions are a microcosm of a far wider trend.
Joining Mike on the panel was ABSA CTO, Andrew Baker, and Andries Potgieter, Head of Electronic Trading at Investec. Merlin Rajah from the JSE moderated the discussion. Below is a summary of the discussion and some of the conclusions reached by the panel.
There are no hard and fast rules on whether to buy or build trading tech. Such decisions depend on multiple factors, not least a balanced approach from CTOs that involves optimising business results while operating within the practical economics of the industry today. One of the key factors over the last decade has been the shrinkage in discretionary budgets. As the cost of regulatory compliance has risen dramatically in the face of new legislation, non-discretionary spend has grown significantly, squeezing internal investment for new projects.
Given the margin pressure on the industry, internal development teams have had to reduce costs. Even when teams do have the resource to build internally they may struggle to secure budget to maintain applications or fund tech refreshes down the road. Buying from third parties can therefore be attractive, particularly solutions provided under a subscription model – tighter capital adequacy rules mean banks need to be hyper-critical of large scale projects with high up-front investment.
However, there are many cases where it makes sense for firms to build, particularly if this generates a meaningful competitive advantage. Much capital market technology performs common, undifferentiated functions across the industry and it is perhaps not the best use of limited resources to replicate what other firms are comfortable buying off-the-shelf. But where they can demonstrate unique IP in support of a business strategy, achieve first mover advantage, or compete on performance or cost, then in-house development can easily be justified.
Firms may also have concerns regarding a vendor’s ability to keep pace with regulatory change for certain applications. Having confidence in a supplier’s ability to deliver relevant functionality in a timely manner to meet new reporting obligations, onboard new liquidity sources or ensure production systems adapt to protocol changes, is a key part of the decision criteria when selecting partners to work with.
It is worth noting, however, that the buy v build threshold changes over time. Today’s competitive advantage can be eroded over time as vendor solutions evolve. A critical part of a CTO’s role is therefore to maintain a dynamic view of prevailing third party technology and solutions and understand the life-cycle of internally developed capabilities. Only in this way can firms blend build and buy to their best advantage.
For organisations with large internal development teams there is also the question of where to locate these resources. Cost is obviously a key driver and therefore offshoring can be an attractive proposition. Bank development teams are common place in lower cost locations with strong education systems, such as India, Eastern Europe and parts of Asia. However, many of these locations have seen significant increases in cost of living, wage inflation and staff turnover as demand for skilled IT resource from finance and other sectors outstrips supply. Factoring exchange rate risk is another important consideration as is the trade-off between cost and proximity to the business and therefore access to expertise, particularly in complex areas such as trading and risk. Ultimately though, the choice to on-shore or off-shore will be heavily influenced by the availability of required skill sets, with local teams complemented by pools of talent with specific capabilities or cost profiles from other parts of the world.
The focus on cost is also driving momentum behind cloud adoption, both for in-house development and as an efficient means for vendors to deliver their solutions. Public cloud take-up in capital markets has been slow due to genuine concerns regarding security, deterministic latency, data sovereignty and the highly regulated nature of financial markets. But with such questions increasingly being addressed, the attractive economics and agility that cloud represents have accelerated adoption over recent years, particularly in data and analytics. The ability to bypass overstretched internal infrastructure teams and quickly spin-up compute capacity to test prototype applications or deploy new capabilities can significantly improve time to market, while cost savings are generated by having an elastic server footprint. The biggest challenge will always be migrating large legacy systems and infrastructure, but for new capabilities cloud is increasingly seen as a viable or even preferred option.
Concluding the buy versus build debate, it is perhaps most accurate to say ‘it depends’. For CTO’s and senior technology executives, the question comes down to optimising budgets to deliver their firm’s business strategy. Achieving the right blend of cost, time to market and best use of limited resources together with an understanding of what really differentiates your firm and what is simply reinventing the wheel, are the factors that should influence these decisions. And where buy is the answer, platform technology must enable organisations to rapidly build and deploy their own unique IP and expertise on top if these vendors wish to become preferred long term partners.