Build versus Buy: 5 myths and realities (part 4)

18/09/2013

Over the past three weeks we have canvassing five myths and realities in that age old debate about whether an organisation should use their existing resources to "do it themselves".  This week we sum up on what it all means for you.  

In this series we observed that the valuation and risk management capabilities of all the major ETRM systems is recognized as their weakest functional area – a fact borne out by the sheer number of market participants who use their ETRM systems effectively solely for capturing deals, and for data and position management. We also noted that in many cases the preferred strategy to bridge this functionality shortfall, is to turn to internally developed solutions. Over the last three weeks we have looked at the five key myths in adopting this strategy:

  • Myth #1: It doesn't cost us anything
  • Myth #2: Risk and valuation is where our IP is
  • Myth #3: IP stays within the company
  • Myth #4: We have people to build this in-house
  • Myth #5: We can get away with spreadsheets

Recognise these?  What is the alternative?  This week we bring it back to what key questions your organisation should be asking before determining whether they will build or buy. 

 

Conclusion

Before embarking on an in-house risk and valuation application development project, organisations need to consider the entirety of costs associated with the scenarios described and ask themselves the following key questions:

  • Is risk and valuation system development really our core competency as an organisation?
  • Do we have the relevant resources and skill sets needed across several departments to build such an application properly?
  • What are the chances of this working and will it succeed?
  • How are we going to support and maintain the system in the long-term?

In our experience of working with energy organisations on solving complex risk and valuation issues, we have found that it is easy to underestimate the long-term effort and costs involved in building a comprehensive risk and valuation application that meets the specific functionality needs of trading, risk, structuring and valuation groups within an organisation. History shows the chances of a project of this nature running on time and on budget are slim.

The strength of internal resources is the detailed knowledge of the company’s portfolio and their ability to tailor analytics and analysis for that portfolio. There are significant benefits, therefore, to be attained in opting for a buy/build mix strategy to internal risk and valuation projects – leverage the internal modelling and valuation strengths on particular assets and contracts, with the risk framework strengths from a 3rd party vendor.

 

This concludes our four part series canvassing the myths and realities of build vs buy.  Do you agree? Perhaps you disagree?  We would love to hear your comments.  To comment or to find our more about Lacima Analytics, please contact us on info@lacimagroup.com.

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