Inside or Out: When to Turn to Vendors

The debate over buying vs. building is eternal in financial services. Financial firms have always pondered the pros and cons of building systems internally versus outsourcing them.

And yet, here we are in 2016, and it seems the decision about whether or not to turn to vendors is still top-of-mind for many. A question submitted by an anonymous attendee via sli.do during an end-user panel at this year's Toronto Financial Information and Technology Summit sparked the interest of the crowd and panelists.

The audience member asked how you know if and when it's a good time to stop an internal project and turn to a third party.

Ben Draper, technology director of Bermuda-based insurance company Validus Holdings, said it comes down to when a project starts to be stagnant. Most commonly seen while using the waterfall approach, according to Draper, if progress is extremely slow, or goals seem a long way off, it might be time to look outside your firm.

Looking to outsource doesn't mean scrapping the entire project internally. In fact, he urged against outsourcing an entire project. If something was developed internally there is likely some sort of business intellectual property that a firm is interested in keeping in-house and shouldn't want to move outside, Draper said.

The solution, according to Draper, is having a vendor help the internal team, but it's a move firms must approach with caution.

"It could be a very delicate process because people's feelings get hurt, especially if they're invested in this project over a long period of time," Draper said. "But I think you can bring in outside sources to help you do things a little faster—help things move along. Worse-case scenario, you do have to take it away from the existing team."

Don't Buy the Taxi

Chai Lam, lead architect for Royal Bank of Canada (RBC) Insurance, used moving to the cloud as an example of the buy-vs-build debate. He compared buying servers to calling for a cab and paying for the entire cab as opposed to just the ride.

"We can pay per use. We don't have to do all this work to provision our servers. Somebody else can put it together and we use it like any utility," Lam said. "That's one good example where I think companies need to look at taking costs out of the IT equation and look at vendors to do those things."

Jim Gilligan, the recently retired president and CEO of Blue Cross Life Canada, said he believes it always makes sense to look at the possibility of using outside vendors. Too often, emotions get involved when a project is kept internal, which is why he said he likes to look at third parties from the outset.

"What I've seen when it comes to big internal projects, is when people themselves start to get invested in it personally, I think then maybe you've gone too far. I always ask the question: What's the sunk cost on this deal?" Gilligan said. "There is always a lot of ego on the table, and that's why I would generally want to talk to people first on the outside before going down that road."

Better Suited

Erik Vynckier, a board member of UK-based insurance company Foresters Friendly Society, was also in favor of outsourcing, but cited a commonly used adage when discussing buy versus build: You might be able to outsource cost, but you can't outsource responsibility.

Vynckier said that with roughly 300 large asset managers in the world, it doesn't make sense for firms to try to develop all their systems in-house. There is a large ecosystem of suppliers available to firms that specifically focus on specific tasks, he said. He used analytics as an example of something he would outsource.

"You're always going to have more experience and more scale if you externalize that sort of task rather than trying to do it in-house," Vynckier said. "How many people are doing exactly the same task across the industry? Does it make sense for each of us to internalize that, or is there maybe a vendor that can do it for us efficiently with a much larger experience base that is better?"

The Bottom Line

Panelists at the Toronto Financial Information and Technology Summit debated buying vs. building. All four agreed that there are big benefits to looking toward third parties, but the decision shouldn't be a blanket one.