Is Buy vs. Build Just Another Bell-Bottoms vs. Skinny Jeans?

We all make dubious decisions in life: Bell-bottom jeans and platform shoes, mullets, and that person you dated just because your parents warned you not to. Some of these decisions are quickly forgotten. Others, like certain fashions, are cyclical, and seemingly inescapable. One such issue in the world of financial data and associated technology is the buy-vs.-build debate, which is never decisively laid to rest because of the cyclical nature of management trends, budgets, and available capabilities.

Each choice has advantages, pitfalls, and risks. If you buy technology rather than build it in-house, the good news is that your project will generally come in cheaper than the cost of building it yourself, because you can leverage vendors’ “build-once-sell-many-times” economies of scale, and that includes not only the cost of hardware and software licenses, but also the cost of hiring staff—or the opportunity cost of taking them away from other projects—with the requisite skills. There’s also the fact that—especially in today’s fast-moving markets, where being first to market can deliver a fleeting yet worthwhile advantage—it’s quicker to deploy an off-the-shelf solution.

For example, if I need a new kettle, I’ll buy one. Even if I were an electrical engineer, I doubt I’d be able to build one on the fly, buy the components cheaper than the cost of a new kettle, or get it done in time to satisfy my coffee craving. But on the other hand, if you buy the same tools as everyone else, you should expect to perform only as well—or badly—as everyone else. And one reason why firms pursue in-house builds is because they think they can deliver an advantage over the commoditized tools available on the market. Indeed, that’s how many low-latency developments eventually went mainstream—because initially firms built their own feed handlers or microwave networks. Once everyone else has caught up, they can buy off-the-shelf again, but in the meantime, they’ve had an advantage, and (if successful) have made more money.

Vendor Lock-in

Another reason firms are willing to build in-house—even when it might be more expensive to do so—is to avoid vendor lock-in that could prove much more expensive in the long term. A kettle might be cheap, but if I also have to buy that manufacturer’s proprietary power adapter plus a special water filter to prevent limescale build-up, and an extension cord because this wonderful new kettle won’t fit where my old one did, the incremental costs add up—and that sunk investment makes me more likely to buy the same kettle again, rather than switching brands if I know I’ll need to replace all those incidentals.

One reason firms are willing to build in-house—even when it might be more expensive to do so—is to avoid vendor lock-in that could prove much more expensive in the long term.

To illustrate, let’s look at two recent examples from the pages of Inside Market Data. First, low-cost data terminal provider Money.Net has begun building its own “next-generation” news service, leveraging a combination of journalism and artificial intelligence to identify and break market-moving corporate news faster than traditional wires. The vendor chose to build the service itself—as it does with other aspects of its platform—because it feels this gives it more control over creativity, quality, build speed and costs, says CEO Morgan Downey.

On the other hand, data inventory monitoring and cost control software vendor The Roberts Group has acquired Priory Solutions, a provider of similar services for the legal industry, in no small part because of Priory’s ability to provide detailed usage tracking around content delivered over the internet. This isn’t to say that TRG couldn’t build that functionality itself, given time, but the acquisition allows the vendor to start using it right away, benefitting from an advantage that its competitors might not have.

Ultimately, the buy-vs.-build decision will come down to your firm’s individual circumstances at a specific point in time, regardless of your in-principle stand on the matter. There will be some times when it makes obvious sense to buy, even if your firm typically prefers to build, and vice-versa, and there will be times when building in-house will give an advantage not available elsewhere. The challenge is figuring out when to go with the passing fad, and when you can get a greater advantage from bucking the trend.