The debate continues to rage across financial services: is it ‘better’ to build solutions internally, or buy them from an external solutions provider?
A recent survey commissioned by Asset Control, polling decision-makers in financial services organisations in the US and Europe, found firms cautiously optimistic about ROI timescales for internally-developed solutions. While just 19% of respondents said they typically expect to see return on investment for internally-developed solutions within a month, a further 47% said, ‘within a quarter’; and 26% more said ‘within a year’.
However, the reality is less positive. 94% expected to run into challenges of some sort when building a solution in-house. These often lead to greater costs. Skills/resourcing was the biggest challenge respondents expected to encounter when building a solution in-house, highlighted by 62% of the sample. Interestingly, 54% cited ‘scope change: having to adapt the solution to meet changing regulations or business requirements’.
This points to one of the biggest problems with the in-house approach. Internal solutions are often approached as a one-off cost not an ongoing concern. This may look attractive at first. However, the subsequent maintenance costs to keep the lights on, and evolve features to meet emerging requirements, are large.
Also, with costing often done as a project, some operational costs are hidden until an organisation wants to change something. Indeed, 73% of the sample overall had experienced additional unforeseen costs after implementing an internal solution.
The likelihood of costly changes occurring to in-house development programmes and the difficulty of making them points to the need for a different approach to the cost-benefit equation to chart the real costs and benefits of internally-built solutions.
To obtain a proper ROI analysis and a true representation of likely costs, firms must consider all the direct costs, such as license fees, and indirect costs, including the ramifications of poor data, regulatory fines and increased operational risk. Today, these hidden costs often impede progress and businesses are failing to deliver ROI from internally-built solutions.
That’s why more firms are opting for outsourced or third-party solutions. Some are attracted by the opportunity to tap into broader industry knowledge, others by a more straightforward drive to save costs. When asked: ‘if you use a third-party solution what are the main reasons for this, the top answer, cited by 49% of respondents was ‘we prefer to use qualified experts’. The next two most popular were: ’a third party has productised industry knowledge that we can benefit from’, referenced by 48% and ‘it is more cost-effective’, referenced by the same percentage.
Moreover, financial services firms are keen to opt for flexible solutions in light of uncertain future requirements and focus on keeping the overall costs of implementation and maintenance of systems as low as possible.
There is also an expectation businesses can achieve faster ROI with an outsourced solution than an in-house one. 20% of respondents said they would expect to achieve RoI from an outsourced solution within a month; 47% said within a quarter; 31% said within a year and 1% said ‘more than a year’. A further 1% said ‘N/A- No particular time / I don’t know’.
The benefits of an external provider approach were further highlighted when decision-makers in financial services organisations were asked where they looked first for data management solutions. The most popular answer was ‘externally bundled with complete services offering (e.g. hosting, IT ops, business ops) as part of business processes outsourcing deal’ (28%), followed by ‘externally bundled with tech services offering (e.g. hosting, IT operations) as part of IT outsourcing deal’ (21%).
The answers show that rather than just following the data flows and having to install and maintain local custom integration, businesses are increasingly looking for a broader managed data services offering, which allows them to tap into the expertise of a specialist provider.
Firms today also increasingly want to tap into the benefits of a full services model. They are looking to join forces with a hosting, applications management or IT operations approach and often that is in a bid to achieve a faster cycle time and a faster ROI into the bargain.
Reaping the rewards of a third-party approach
Ultimately, there are many benefits to be gained by financial services organisations from third-party solutions. Keeping costs down and predictable is key. Third party solutions typically do this through improved time to market and post-project continuity. So-called one-off inhouse projects are in reality rarely just that. Operational costs mount as firms make changes to cope with evolving regulatory and market requirements and significant internal resource is required to keep that effort on track.
By opting for a third-party approach and placing the addressing of their data management requirements in the hands of specialists, firms also reduce risk as the repercussions of errors in internal applications have grown drastically. Whether post-trade, pre-trade or capital adequacy related, the data-intensity of the processes has gone up and the potential cost of inconsistent and erroneous data has risen.
With an increased scrutiny on data management, there is a price to pay for data inconsistencies and errors, in the form of fines, financial losses and falling short of the competition and customer expectations. Fortunately, using software from external providers reduces risk in these areas as the solution is tried and tested and already widely used in the industry. Banks and asset managers can rest assured the greater emphasis on data quality and data governance will pay long-term dividends.
Ultimately, opting for a fully-tested third-party data management solution as opposed to pursuing in-house technology development is likely to profoundly impact any financial services business. Not only will it result in lower, more predictable costs, but there will also be increased capabilities, a reduced risk of financial penalties and the chance to benefit from external expertise. It will also free the IT department to focus on bringing added-value in terms of business user enablement and finding the right infrastructure to ensure the organisation is running as efficiently as possible and making the most of its data.