Private markets technology - Buy or Build?

August 1, 2023

Luke Hinchliffe

Marketing Director

It’s the 64-million-dollar question that still hounds many financial institutions, should we hire the right people and build a bespoke solution in-house, or outsource to a dedicated solution provider?

The situation usually arises when a specific business problem fuels the idea that a purpose-built solution could be developed in-house, possibly cheaper than buying software ‘off the shelf’. Private markets organizations are rarely equipped with teams of developers in-house, so this invariably means outsourcing projects to a third party. The build vs buy conundrum can apply to anything from AML (Anti-Money Laundering) software to fund accounting and portfolio management applications.

The harsh reality for most large internal IT projects is that they end in failure. The reasons vary from grossly underestimating the time and resources involved, to mistakenly treating a project as a one-off initiative rather than a long-term, ongoing project, which is often the reality.

So, what are the common arguments for build vs buy for private equity firms?

Costs

Buy

Enterprise SaaS can be expensive for large teams with hefty annual license fees, implementation costs and sometimes additional costs for onboarding and training. Sometimes off-the-shelf solutions don’t quite fit the requirements and need further product changes to be negotiated which can increase costs further and delay implementation. The disparity between expectations and reality also requires investment in change processes, potential job description changes as well as challenges with retaining existing talent or finding new talent.

Build

Whether there is an existing IT department or not, the cost of building a custom solution is always underestimated. Even companies who solely focus on digitalization projects experience challenges in estimating time and resources, so for a ‘non-expert’ organization the chances of failure with no useful outcome are far higher. The costs are not limited to the search and placement of talent to understand, document, build and test the in-house solution, but increase further with the need to maintain a solution, and cover for the time while it is being developed.  

Expertise  

Buy

When you purchase a solution in a known market, you are not only buying the expertise of that solution provider, but also expertise from the clients of that bespoke solution. It is the effect of division of labor which increases efficiency by pooling expertise. The bought product essentially channels all lessons learnt into one and allows everybody to profit from the margin between applying the lesson and learning it themselves. But even if you buy a solution, you will need to build up expertise in-house. The solution needs to be used effectively and the organization will need to adapt in ways to position the newly needed expertise at the right points.  

Build

You know what your organization needs, so it feels only right to utilize that expertise and experience and build a dedicated solution that does exactly what you need it to do. You may also have plans to monetize a unique, proprietary solution either in full form or via API.  

The flip side of this is if you succeed in building a bespoke solution, you will never be able to hire anyone with the relevant experience using the application, since it will be fully proprietary to your company. There is an added danger of key person risk, when staff with crucial experience leave an organization taking proprietary knowledge with them.  

The biggest risk is that you use your expertise for the wrong thing. Building an application to automate or digitize a process has a specific value. The resources with the right expertise are needed to get this built and maintained – but during that time the same resource and expertise cannot be used for what it was intended for. Therefore, either you are sure that the added value of building is higher than the loss of the expertise in your organization where it was used before, or you can multiply that expertise fast enough to avoid having a gap in either the digitization project or the business.

Functionality  

Buy

It’s true that many SaaS solutions do not offer a one-size-fits-all approach, and in fact there are a multitude of niche providers that perhaps only deal with one aspect of a wider business challenge. But the beauty of outsourcing to a technology provider is that you often have the ability to request custom features and functions, and even shape that application’s road map. Most tech companies greatly value customer input and, providing the requested feature/functions can be a valid revenue stream and made available for other customers, then they often do make it into the software without additional cost of building contrary to an in-house project.  

Build

Private market companies who survey the SaaS landscape may still feel that the solutions on offer do not quite match their very specific requirements and expectations when it comes to features and functions. Therefore, an in-house project might feel like the only option to meet those specifications. But an additional factor you need to consider when building your own functionality; it will take time. Often so much time that the functionality will already be outdated compared to your competition who just bought it instead of building it. Your efforts to keep up will always be more expensive than you want them to be, but you'll have no choice.

Conclusion  

If you can buy, don’t build. If there are options to buy, then there is a market for it, which indicates that your competition is already ahead of you and is using a solution today. Why would you want to wait until you build it yourself to catch up with your competition?  

If you still want to build, then you should choose to do so only if it becomes your mission, and all your efforts are focused on it – otherwise the costs will greatly outweigh the value created, weakening your business and losing you opportunities due to a half-hearted investment in your own ‘perfect solution’.  

Work with vendors who speak your language  

Many software solutions are built by experts from the industry they sell in to – this provides a huge advantage to those looking to buy a solution, since the vendor will immediately understand your requirements. Private market institutions need to have confidence in a vendor solution is not only about the technical delivery, but whether they provide assurance in meeting regulatory demands such as audit functions and other compliance related issues.  

qashqade is no different in this respect, since being founded by private markets experts in 2018, Oliver and Gregor created a solution that replaces manual and error-prone waterfall calculations that are typically managed using Excel. Although qashqade sell solutions to GPs, LPs and Fund Administrators we also offer deep domain expertise through our Services for Private Markets team, much like a tech-enabled service where much of the value comes from humans and not machines.

A Jumble of Waterfalls: Making sense of distribution calculation models
Get one step ahead with qashqade: speak to our team today