Build versus Buy: 5 myths and realities (part 2)

04/09/2013

Last week Lacima weighted into the age old debate about whether an organisation should use their existing resources to "do it themselves", covering the first of five myths.  This week we look at Myths #2 and #3.  Check back next week for Myths #4 and #5. 

Myth #2: Risk and Valuation is where our IP is

This is probably the number one reason given to Lacima for justification for in-house developed applications and, for the vast majority of organizations, this is where the biggest difference lays between the myth and reality. There is a perception that by internally developing risk and valuation functionality, intellectual property (IP) is retained within the organisation and models are built to bespoke requirements. It’s a fact that internally developed valuation and risk functionality is almost always built by very smart people. It is also almost always a fact that hardly anybody else in the organization knows what these very smart people are doing.

Lacima’s experience is that, just because they are smart, and you don’t know what they are doing, doesn’t necessarily mean that they are developing IP. Often, what has been done is that the developer has taken books and papers written over the last 12 years by Les Clewlow, Chris Strickland, and others, and coded up standard algorithms available in standard commercial applications such as Lacima Analytics – and they have spent the last 12 months doing it.

In addition and in reality, the typically 1 or 2 key individuals (see myth #4), involved in the development of the application can only bring their own experience to the table, which further limits meaningful customisation.

Myth #3: IP stays within the company

In the energy industry, it is also common in organisations that opt for internal build projects, for such projects to be led by just one or two individuals with specialist knowledge. An organisation must ask itself what will happen when these key individuals leave the company?   

What will happen when these key individuals leave the company?

A lack of adequate documentation and knowledge transfer amongst team members is a prevalent problem in energy trading organisations largely due to the time and effort involved for a few key individuals to put this type of information together as well often their lack of inclination to do so for personal reasons. Once these key individuals leave, they essentially take the IP with them and the people that replace their roles are left with little no record of the algorithms, models and methodologies on which such internal solutions are based on and are stuck with inflexible internal applications that do not meet current or future requirements.  

For most companies, the reality is that the company doesn’t have any IP, it’s in that guy’s head, it goes home every night, and will, almost surely, walk into another company one day.

 

Check back next week for Myths #4 and #5.

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