Buy or build? How to make the best decision in an economic downturn

The economic downturn is here. From Alphabet to Meta and Amazon, Big Tech companies have led the news with substantial layoffs. 

“In this new environment, we need to become more capital efficient,” Mark Zuckerberg said when announcing the plan to let go of 11,000 employees in November 2022. “We’ve cut costs across our business, including scaling back budgets, reducing perks and shrinking our real estate footprint.”

But enterprises across sectors are responding to the uncertain environment with a renewed focus on efficiency, productivity and resiliency. They’re cutting costs, laying off employees and narrowing in on priority projects. 

With much of the attention on reducing cash burn, questions about technology investments have become ripe. Some think IT spending will take a hit (just like everything else), while others predict it will be recession-proof as technology is essential to every business and executives may increase spending on digital business initiatives to drive growth. Gartner, for instance, estimates IT spending will grow 5.1% to $4.6 trillion in 2023.

“Economic turbulence will (only) change the context for technology investments, increasing spending in some areas and accelerating declines in others, but it is not projected to materially impact the overall level of enterprise technology spending,” John-David Lovelock, distinguished VP analyst at Gartner, notes. 

Part of this change will be how teams approach the modernization of their tech stacks.

The big dilemma

As long as software has been commercially available, CIOs and IT leaders have had to choose whether to build out solutions that meet their functional needs or buy from a third party. Often the pendulum has swung between the two, as early adopters of new technology have typically needed to do more in-house before a full ecosystem developed in support of the innovation.

But there has generally been an upward spiral in technology sophistication that has blended the two. Open-source solutions are now more reliable and fully functional as components for more environments, and low-code and no-code artificial intelligence (AI) help make system modifications practical for more employees.

Still, the choice can be a difficult one and, now, with the economic downturn, it has gotten tougher as everyone wants to prevent overspending. 

Currently, when a company builds its own solution from scratch, it gets owner-specific flexibility and control, including the ability to make changes as and when needed, but has to bear all the responsibilities associated with the move, starting from the development of the software to deployment, support and maintenance. This becomes a resource-intensive effort.

“Building gives the CIO total control over data and functionality. But there are huge cost implications of taking on development and the risk that you’re just reinventing the wheel. Building also means you are responsible for planning the deployment, hosting and maintenance of the solution, which often dwarfs the initial development effort,” Matt McLarty, Salesforce MuleSoft’s global field CTO and VP of digital transformation office, told VentureBeat.

Buying a solution that already exists in the market and has been battle-tested, on the other hand, transfers the entire task of upgrading the stack to a third party. This eliminates implementation and operational complexity and is comparatively faster and more affordable. According to Kevin Gordon, VP of AI technologies at AI imaging company NexOptic, with buying, teams spend 10 times more in the first couple of years and then begin to save money. However, in this case, they get less control over the functionality of the solution (changes would be difficult) and have to deal with interoperability between components. 

“The benefits of ‘buy’ are that you’ll see faster, if not immediate, changes to your stack. You avoid a design phase. It can be installed and running in five minutes, and there’s already a support team in place. But, the drawback is you don’t own the ‘build,’” Gordon told VentureBeat.

Buy or build: How to pick the best option

While buying is the more affordable option and can easily be the preferred choice in the current economic conditions, teams should not make the decision solely on the basis of cost.

The ideal approach, as experts suggested, should be in terms of value creation or ROI perspective. One should look at the project in hand and see how core this capability is to their main business or customer needs. If the answer is “very” and the capability is critical to the business product/model, build efforts should be directed toward it. 

“If you’re a bank, should you spend time trying to build better software hosting infrastructure than major cloud providers? Focus your build efforts on the core capabilities in your organization that create, deliver and capture the value that drives your business, especially those that give you a competitive advantage,” McLarty noted. Investing time, capital and resources to build core capabilities from scratch – even in current times – can enable companies to create something unique, ultimately proving more rewarding.

A good example is the case of Uber and Lyft. Both benefited from building their own routing recommendation systems to support unique features that weren’t available with off-the-shelf solutions. 

Having that said, in case the concerned capability does not seem very relevant to the core business in the big picture, it should be seen as a commodity and treated as such  – meaning bought and managed via a third party.

“I’m a big proponent of buying as opposed to building, especially for companies that don’t have technology as its core business,” EY’s chief technology officer Nicola Morini Bianzino told VentureBeat. “Often, I see companies that are trying to build the perfect solution and think that, to accomplish it, they must build it themselves. However, in the long term, they may be better off having a solution that does 70 to 80% of what is needed but is easier to manage in their existing ecosystem. It is extremely expensive to build technology internally – you need to hire and retain talent who can keep up with rapidly evolving technologies. When you buy, you don’t have to spend as much money on upkeep, and you can avoid technical debt. Overall, it’s much simpler to manage and offers better value.”

When buying, businesses must also make sure that capability in question should evolve as the company grows and the cost of each piece to bring the capability to life should make sense. If either of the two does not fit well, this may not be the best vendor to go with.

Alternatively, teams can also go for the third option – open source. These libraries and applications are free to use and could be modified to suit business needs in some, if not all, cases. 

“Some come with certain license agreements, but with the right groundwork, your company may just find the perfect tool to modernize your tech stack by leveraging these high-quality solutions at a fraction of the cost,” Gordon said.

Smaller, agile projects are key to success

Regardless of building or buying, companies should make it a practice to invest in technology projects and programs with a shorter runway to business results. This, according to Bianzino,  will be the key to success in the current economic climate.

“When we’re looking at our financial vitality in the short term, a two-year time frame is too long. Investing in many smaller, agile projects is smarter as opposed to long-term projects. Companies need to be looking at areas where a project can make a big difference for their bottom line and be effective in a shorter time frame. Data and AI are going to be two important areas for incremental investment with higher returns this year,” he said.