Opinions expressed by Entrepreneur contributors are their own.
Key Takeaways
- Building internally makes sense when a capability is sufficiently important to competitive differentiation and management wants to control how it evolves.
- Buy when time or existing capability matters more than invention. Determine what advantage buying produces and how quickly it can be absorbed and transitioned into an operating advantage.
- Partner when access matters more than ownership. This can be particularly useful when the capability matters to the customer proposition but doesn’t need to become a core institutional competency.
The challenge of when a company needs to develop a capability it doesn’t currently possess poses a management question. The analysis starts with a financial comparison. Management calculates the cost of developing internally, compares it with the price of purchasing an existing solution and selects the option with the more attractive projected return.
The analysis, however, runs the risk of reducing a strategic decision to a procurement exercise. In practice, companies can choose to build the capability themselves, buy it through a product, platform or acquisition, or partner with another organization that already possesses it.
I’ve encountered versions of this problem across banking, fintech, technology, construction and financial services, including technology modernization and system conversions, M&A work and the development and pricing of financial products.
The details and economics widely vary, but the strategic question underneath is consistent. Companies should assess what they actually need and then work towards the best answer to fulfill that need based on a larger strategic vision.
Build when the capability helps define the company
Building internally makes sense when a capability is sufficiently important to competitive differentiation that management wants to control how it evolves.
This can apply to technology, intellectual property, operating processes or specialized expertise. If a capability determines why a customer chooses the company over competitors, then an outside provider may limit the ability of the company to differentiate. Internal development allows the company to shape the capability around its strategy rather than shaping its strategy around what the market offers.
Leaders, however, generally underestimate what “build” entails. Building does not end when a system launches, the new steam is assembled or the capability becomes operational. The organization has also chosen to maintain it, staff it, improve it and keep it relevant as the business changes. A company may have the capital to build a function, but it requires continued management attention, technical talent and operating discipline.
Buy when time or existing capability matters more than invention
Buying can compress years of development work. In simple terms, that means purchasing an established technology platform or service rather than creating one internally. At the other end of the spectrum, it can mean acquiring a company because the desired capability, people, intellectual property, customers, volume, distribution or market position can be difficult to produce organically.
The financial analysis of an acquisition naturally focuses on purchase price, expected return, opportunity cost and integration challenges. Strategically, management should also determine exactly what it is buying and why. What value is the company trying to solve through inorganic growth or acquisition?
The second stage of buying includes integration. A company can acquire an asset immediately without immediately acquiring the ability to use the new asset well. Systems may have to connect, processes may change, and employees may need to adopt an entirely new operating model. The objective is to determine what advantage buying produces and how quickly it can be absorbed and transitioned into an operating advantage.
Partner when access matters more than ownership
The third option is partnership. This approach allows companies to access expertise, distribution, technology or operating capabilities without assuming full ownership. That can be particularly useful when the capability matters to the customer proposition but does not itself need to become a core institutional competency.
Financial services provide many examples of this logical framework. Banks and finance companies frequently leverage technology providers, payment systems, capital providers, third-party complementary products or specialized services. Creating these components internally would consume enormous resources without necessarily improving what makes the company distinctive.
The same logic applies beyond financial services. A manufacturer may partner for logistics. A technology company may rely on specialized infrastructure. A growing business may use an outside provider for a function that would be expensive to build but does not meaningfully distinguish the company in the market.
Partnerships work best when companies have clearly defined value propositions and can find mutually beneficial arrangements that add value.
Evaluate the capability, not just the transaction
A disciplined build-buy-partner decision can be organized around several questions.
First, how important is this capability to differentiation? The closer it sits to the reason customers choose the company, the stronger the argument for ownership or significant control.
Second, how quickly does the organization need it? Build may produce a better long-term fit but arrive after the market opportunity has passed. Buying or partnering can create speed when timeliness matters.
Third, does the company possess the talent to own it? Capital alone doesn’t create capability. Management has to attract, retain and lead the people who operationalize ideas.
Fourth, what is full economics? Build costs include maintenance and continued development. Acquisition costs include integration. Partnerships may require recurring payments.
Fifth, how much control does the business actually need? Leaders sometimes demand ownership when contractual rights, service standards or a well-designed partnership would provide sufficient control at a substantially lower organizational cost.
Finally, what does this choice require the company to become? Every internal capability creates another area that leadership must manage well. Every acquisition adds complexity. Every partnership creates an external dependency that must be governed.
Each of the three options has pros and cons that largely depend on the functional needs of the business. There is no right option when costs and opportunities coexist, depending on the company’s strategy and fundamentals. The main point is that all three options require careful analysis and thought before operationalizing.
Key Takeaways
- Building internally makes sense when a capability is sufficiently important to competitive differentiation and management wants to control how it evolves.
- Buy when time or existing capability matters more than invention. Determine what advantage buying produces and how quickly it can be absorbed and transitioned into an operating advantage.
- Partner when access matters more than ownership. This can be particularly useful when the capability matters to the customer proposition but doesn’t need to become a core institutional competency.
The challenge of when a company needs to develop a capability it doesn’t currently possess poses a management question. The analysis starts with a financial comparison. Management calculates the cost of developing internally, compares it with the price of purchasing an existing solution and selects the option with the more attractive projected return.
The analysis, however, runs the risk of reducing a strategic decision to a procurement exercise. In practice, companies can choose to build the capability themselves, buy it through a product, platform or acquisition, or partner with another organization that already possesses it.
I’ve encountered versions of this problem across banking, fintech, technology, construction and financial services, including technology modernization and system conversions, M&A work and the development and pricing of financial products.