There are typical approaches to acquiring technology. There are two major factors which affect which of these is in the ascendant at any one time within a financial firm. The first is the ‘corporate philosophy' usually expressed as ‘what does the CEO want'. The second is at what stage in the macro-technology cycle is each of the options, expressed as ‘what is the in-thing' to do. You'll notice that neither of these factors has much to do with what the best solution is for the business. There are usually too many political issues clouding judgement to make the efficacy of any one method over any other a real factor. Financial firms are, for the most part, extremely conservative with a small ‘c'. Hence they do not like to be the first in the market with anything, particularly in the back office. This may seem unduly cynical, but it is just as well to be realistic. Building a technology solution has for the last ten years at least been the least favoured of the technology solutions. This is partly due to the Y2K effect which was originally caused by the programmers responsible in the early seventies for the mainframe computing systems which banks have historically favoured because of their high transactional capabilities.
With memory at that time being extremely expensive, the shortcut of using just two digits to represent the year was a logical one, but which was created because of their conservatism and lack of long-term planning capability. These two factors still persist in many financial firms and lead many of the new breed of IT director to focus on external solutions rather than an internal build. There are however some changes which are making this an option for the future. Each of the solutions in the cycle has different characteristics, ‘pros and cons'. The evolution of disruptive technologies makes it likely that the IPR gained by owning the solution in the twenty-first century will outweigh the costs of self-development. above shows how the cycle typically rotates. Building a solution is often favoured by older firms where there is great store placed on maintaining the entire value proposition in-house, even when this would dilute the company's core skills base. As competition increases in a market, third parties aggregate what they can learn of the dynamics of market and offer this as an off-the-shelf or customisable solution. As purchased solutions become more complex as markets mature and more difficult to maintain, niche or boutique providers crystallise in the market, automating particular process elements effectively and offering a unique solution combined with standardised connectivity.
As the markets mature further and the number of process elements become greater, purchased solutions become too complex to maintain and multiple bureau providers too complex to manage. Either though aggregation or some other method, third parties come into the market effectively creating a build solution surrounded by a ‘departmental' philosophy so that the offering is complete; that is, not a technological solution per se where internal staff use a ‘built' product, but where the third-party provider brings all the benefits of multiple cross-market practices, niche-level specialist technology solutions and a knowledgeable team to implement - outsourcing. Eventually, outsourcing stimulates concerns in financial services that competitive advantage is being lost or that the core brand values are being diluted and the firm returns to a ‘build-it-ourselves' philosophy. While the market generally can be at any one point in the cycle generally speaking, and currently it is at the outsource stage; individual firms in the industry can be at any one of the four stages depending on their history and management background.
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