DEGREE PROJECT IN THE FIELD OF TECHNOLOGY MECHANICAL
ENGINEERINGAND THE MAIN FIELD OF STUDY INDUSTRIAL MANAGEMENT, SECOND CYCLE, 30 CREDITS
STOCKHOLM, SWEDEN 2020
Build, Buy or Partner –
Digitizing Securities Trading in Swedish Retail Banking
SEBASTIAN CABALLERO
KTH ROYAL INSTITUTE OF TECHNOLOGY
SCHOOL OF INDUSTRIAL ENGINEERING AND MANAGEMENT
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3
Build, Buy or Partner
Digitizing securities trading in Swedish retail banking
by
Sebastian Caballero
Master of Science Thesis TRITA-ITM-EX 2020:295 KTH Industrial Engineering and Management
Industrial Management SE-100 44 STOCKHOLM
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Bygga, Köpa eller Partner
Digitalisering av värdepappershandeln i den svenska banksektorn
av
Sebastian Caballero
Examensarbete TRITA-ITM-EX 2020:295 KTH Industriell teknik och management
Industriell ekonomi och organisation SE-100 44 STOCKHOLM
i Master of Science Thesis TRITA-ITM-EX
2020:295
Build, Buy or Partner – Digitizing securities trading in Swedish retail banking
Sebastian Caballero
Approved
2020-06-04
Examiner
Tomas Sörensson Supervisor
Tomas Sörensson
Commissioner Contact person
Abstract
Rapid rate of digitalization, emerging financial technology and changes in consumer behaviour have begun to transform the existing paradigm in the financial industry. Incumbent banks have found it difficult to keep up with this change however and are now faced with the challenge of deciding on what digital financial services build internally, buy externally or develop through partnerships.
This study attempts to get a general overview of what factors traditional Swedish retail banks need to consider before deciding on a build, buy or partner strategy in order to digitize their financial services offering. This is done through a case study, where the empirical data consists of interviews with the retail division of a Swedish bank looking to digitize their securities trading offering as a response to a transforming industry. A few interviews were also conducted with people outside of the bank to increase the generalizability somewhat.
The findings of the study identified 16 factors to be considered by traditional banks when faced with the challenge of deciding on whether to build, buy or partner in order to digitize their securities trading offering. Out of these, 9 factors were deemed to be especially important;
Sustainable Competitive Advantage, Flexibility, Uncertainty, Supplier/Partner Relationship, Economies of Scale, Specialized Resources, Integration, Asset Specificity and Regulation.
Several of the factors identified were shown to influence the build, buy or partner decision both positively and negatively and their impact should therefore be carefully evaluated and weighed against each other by managers before making a final decision on a build, buy or partner strategy.
Key-words: Build vs Buy, Build Buy Partner, Securities Trading, Retail Banking, Transaction Cost Econonics, Resource Based View, Production Cost Theory
ii Examensarbete TRITA-ITM-EX 2020:295
Bygga, Köpa eller Partner – Digitalisering av värdepappershandeln inom den svenska banksektorn
Sebastian Caballero
Godkänt
2020-06-04
Examinator
Tomas Sörensson
Handledare
Tomas Sörensson
Uppdragsgivare Kontaktperson
Sammanfattning
Ökad digitaliseringstakt, ny finansiell teknologi och förändringar i kundbeteenden driver på en transformering inom finansindustrin. Traditionella banker har haft svårt att följa med i denna utveckling, och ställs nu inför utmaningen att bestämma vilka digital finansiella tjänster de bör bygga internt, köpa in externt eller utveckla tillsammans med en extern aktör genom ett partnerskap.
Denna studie syftar till att få en generell överblick över vilka faktorer som svenska storbanker behöver överväga innan de beslutar sig för en bygg-, köp- eller partnerstrategi för att digitalisera sitt erbjudande av finansiella tjänster. Detta görs i form av en case studie, där den empiriska datan till största del består av intervjuer med nyckelpersonal från en svensk bank som ingår i ett projekt att försöka digitalisera deras värdepappershandelserbjudande som ett svar på en industri i förändring. Ett fåtal intervjuer genomfördes också med personer utanför banken för att öka generaliserbarheten av studien något.
Resultatet av studien identifierade 16 faktorer som bör övervägas av traditionella banker som ställs inför beslutet om att bygga, köpa eller ingå i ett partnerskap för att digitalisera sitt värdepappershandelserbjudande. Av dessa anses 9 faktorer vara särskilt viktiga; Långsiktiga Konkurrensfördelar, Flexibilitet, Osäkerhet, Leverantörs-/Partnerrelation, Stordriftsfördelar, Specialiserade Resurser, Integration, Funktionsspecificitet och Regelverk. Resultatet indikerar också att flera av de identifierade faktorer kan påverka beslutet om en bygg-, köp- eller partnerstrategi både positivt och negativt. Deras påverkan bör därför utvärderas noggrant och jämföras mot varandra innan ett slutligt beslut tas gällande en bygg, köp eller partnerstrategi.
Nyckelord: Transaktionskostnadsekonomi, Produktionskostnadsteori, Resursbaserad Organisationsteori, Värdepappershandel, Retail Banking
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Acknowledgements
I would like to thank all of the fantastic interviewees who contributed to this thesis with their valuable time, knowledge and insights into the researched topic. Further, I want to send a special thank you to my supervisor at the case company for the support, commitment and resources you put into helping me conduct this study.
I would also like to express my appreciation and gratitude to my supervisor Tomas Sörensson at KTH for his support, guidance and feedback throughout this semester. Furthermore, I want to thank all of the students in my seminar group for the continuous feedback and constructive criticism they have provided.
Lastly, I would like to thank my family, my girlfriend and my friends for all of their support during the time spent working on this thesis.
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List of figures
Figure 1 - Deposits from Swedish households, share of the total, December 2018
(Copenhagen Economics, 2019) ... 8 Figure 2 - The securities trading value chain, showing activities that are purchased by retail investors, adapted from Chan et al (2007). ... 9 Figure 3 - Steps to conduct data analysis according to Creswell (Creswell, 2009). ... 11 Figure 4 - Key constructs of the transaction cost theory framework, including asset
specificity, transaction frequency and uncertainty (Schmidt and Wagner, 2019). ... 17 Figure 5 - VRIN-criteria, indicating factors needed for a resource to generate a sustainable competitive advantage according to Barney (1991). ... 19 Figure 6 - Typology of governance structure, adapted from Bello, Dant & Lohtia (1997). .... 20 Figure 7 - Sourcing Decision Framework (Lammers, 2004). ... 21
List of tables
Table 1 - List of interviewees ... 13 Table 2 - Factors to consider when faced with the build, buy or partner decision identified within literature. Dark blue cells are factors that have also been identified in RBV, TCE and PCT. ... 24 Table 3 - Summary of identified factors by each respondent. ... 38 Table 4 - Identified factors in literature and the empirical data. Darker blue cells are factors that were identified in the empirical data but not found in literature while grey cells are factors found in literature but not in the empirical study. ... 47 Table 5 - Factors to consider before deciding on a build, buy or partner strategy in order to digitize securities trading. ... 51
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Nomenclature
AUM
Asset Under Management FinTech
Financial Technology, used as an abbreviation for “Financial Technology Company”
PCT
Production Cost Theory RBV
Resource Based View SME
Small & Medium Enterprises TCE
Transaction Cost Economics
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Table of Content
Abstract ... i
Sammanfattning ... ii
Acknowledgements ... iii
List of figures ... iv
List of tables ... iv
Nomenclature ... v
1. INTRODUCTION ... 4
1.1 Background ... 4
1.2 Problem Formulation ... 5
1.3 Purpose ... 6
1.4 Research Question ... 6
2. INSTITUTIONAL SETTING ... 7
2.1 The Universal Banks ... 7
2.2 Foreign Banks and Other Banks ... 8
3. METHODOLOGY ... 10
3.1 Methodological Approach ... 10
3.2 Research Design ... 10
3.3 Data Collection ... 10
3.4 Interviewing ... 11
3.5 Interviewees ... 13
3.6 Research Quality ... 13
4. LITERATURE REVIEW & THEORY ... 14
4.1 Build, Buy or Partner ... 14
4.1.1 Strategy ... 14
4.1.2 Costs ... 15
4.1.3 Technology ... 15
4.1.4 Function characteristics ... 16
4.2 Transaction Cost Economics ... 16
4.3 Production Cost Theory ... 18
4.4 Resource Based View of the Firm ... 18
4.5 Combining RBV, TCE and PCT ... 20
4.6 Build, Buy or Partner in Banking ... 22
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4.7 Summary of Literature Review ... 23
5. EMPIRICAL FINDINGS ... 25
5.1 Organizational Context ... 25
5.2 Strategic Factors ... 25
5.2.1 Core Competences ... 25
5.2.2 Quality ... 27
5.2.3 Uncertainty & Flexibility ... 27
5.2.4 Speed-to-market ... 28
5.2.5 Supplier / Partner Relationship ... 29
5.3 Cost factors ... 30
5.3.1 Economies of Scale ... 30
5.3.2 Resource Requirements ... 31
5.3.3 Experience Effect ... 31
5.4 Technology ... 32
5.4.1 Loss of technical capabilities ... 32
5.4.2 Specialized Resources ... 32
5.5 Function Characteristics ... 33
5.5.1 Complexity ... 33
5.5.2 Integration ... 34
5.5.3 Asset Specificity ... 34
5.5.4 Regulation ... 35
5.6 Sustainable Competitive Advantage ... 35
5.7 Summary of results ... 37
6. ANALYSIS ... 39
6.1 Strategy ... 39
6.1.1 Core Competence/Sustainable Competitive Advantage ... 39
6.1.2 Quality ... 40
6.1.3 Uncertainty & Flexibility ... 40
6.1.4 Speed-to-Market ... 41
6.1.5 Supplier/Partner Relationship ... 41
6.2 Cost factors ... 42
6.2.1 Economies of Scale ... 42
6.2.2 Resource Requirements ... 43
6.2.3 Experience Effect ... 43
6.2.4 Frequency ... 43
6.3 Technology ... 44
6.3.1 Loss of technical capabilities ... 44
6.3.2 Specialized Resources ... 44
6.4 Function Characteristics ... 44
6.4.1 Complexity ... 44
6.4.2 Integration ... 45
6.4.3 Asset Specificity ... 45
6.4.4 Regulation ... 45
7. DISCUSSION ... 48
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7.1 Discussion on the findings ... 48
8. CONCLUSION ... 51
8.1 Research Question ... 51
8.2 Managerial Implications ... 52
8.3 Limitations of the study ... 52
8.4 Future Research ... 53
8.5 Sustainability ... 53
9. REFERENCES ... 54
10. APPENDICES ... 62
Appendix A – Interviewee Details ... 62
Appendix B – Interview Questions ... 64
4 1.
INTRODUCTION
This section begins by providing the reader with a brief background to the studied subject.
The reader is then presented with the problem formulation, explaining why the subject of this thesis is of interest. Finally, the purpose of the study is introduced along with the research question
1.1 Background
Digitalization is transforming industries across the globe, changing how individuals and organizations operate, and the banking industry is no exception (Ruotsila, Ekdahl and Vitali, 2015). Often identified as one of the most traditional and conservative sectors in the economy, the banking industry has recently been increasingly confronted with potentially disruptive innovations driven by technology (Navaretti et al, 2018). Although the industry has been on a digitalization journey for a number of years, the relatively recent technological development of mobile devices has dramatically accelerated the rate of change (Ruotsila et al., 2015). This is especially evident in Sweden, as the Swedish banking sector is one of the most digitized banking sectors in Europe (Copenhagen Economics, 2019) and internet banking is used by more than 85 percent of the population (Eurostat, 2018).
The introduction of digital technology in the financial industry has resulted in digital solutions that emphasize user friendliness and customer orientation. These are often developed by FinTechs or niche actors and have the potential to transform, or crowd out, some of the business activities of incumbent banks (Kohtamäki, Parida, Oghazi, Gebauer, and Baines 2019).
Consumers are now demanding increased simplicity and expect interactions to be seamlessly interconnected across digital and physical touchpoints (Ruotsila et al., 2015; Angelshaug and Saebi, 2017; Gural, Malik and Taraporevala, 2019).
Technological developments have created new business models and helped break down several barriers that previously hindered new players from entering the banking industry (Angelshaug and Saebi, 2017). As the traditional value chain in banking starts to open up, the possibilities for cross-selling could potentially become limited, making it more difficult to sell additional financial products or services to existing banking clients (Copenhagen Economics, 2019).
Rather than competing on providing the best package of financial services, each product and service will instead compete individually (Copenhagen Economics, 2019). Additionally, the one-on-one relationship between retail banks and its customers is beginning to dissolve (Gural et al., 2019). It is becoming increasingly common for customers to use multiple banks to cater to each of their financial needs (Gural et al., 2019), partly due to reduced switching costs enabled by digitalization (Copenhagen Economics, 2019). Such a decline in consumer loyalty has presented the perfect opportunity for new players to enter the financial industry by focusing on the most profitable market segments (Gural et al., 2019).
Incumbent banks have been slow in adopting these new business opportunities, which instead have been heavily exploited by Fintech companies (Angelshaug and Saebi, 2017). These new entrants are often oriented towards a specific niche product or market segment where they can compete on providing a high-quality customer experience in combination with an aggressive pricing strategy (Gural, Malik and Taraporevala, 2019). With customers becoming more price
5 sensitive, competition within financial services has intensified (Copenhagen Economics, 2019).
When the zero-commission online broker Robinhood launched, it completely disrupted the American brokerage industry by forcing incumbent firms to rewrite existing business models by abolishing commissions (Egan, 2019).
The potential entry of Big Tech platforms such as Google, Facebook or Amazon pose an additional threat to the banking industry, should they use their well-known envelope strategies in order to marginalize traditional banks and monopolize the origination and distribution of the more profitable banking businesses like lending and mortgages (Padilla and de la Mano, 2018).
For many of the new entrants, their long-term ambition is to fully own the banking relationship, gradually expanding their product offering and broadening their banking services (Gural, Malik and Taraporevala, 2019). Swedish digital disruptors like Avanza and Nordnet are prime examples of this, as they both started out as niche banks with a focus on investment services and gradually began to grow their product portfolio to include mortgages and other banking products (Avanza, 2019; Nordnet, 2019). Operating in the Swedish savings market, known for having one of the highest proportions of fund and equity investors in the world, these fully digital banks have challenged traditional banks in their niche segments (Avanza, 2019; Nordnet, 2019). While these fully digital banks might not yet have sufficient customer bases to compete with traditional banks, they are growing fast (Pollari and Ruddenklau, 2019). Incumbent banks should be careful with overlooking the growth potential of digital challengers as they could, over time, win increasingly larger market share (Pollari and Ruddenklau, 2019).
As a response to the threat of digitally driven firms, financial institutions have taken various approaches to respond to the threat of fully digitally challenger banks, often choosing between a build, buy or partner strategy (Pollari and Ruddenklau, 2019). Some banks have begun to engage in strategic partnerships with new entrants (Jacobides and Billinger 2006; Borah and Tellis 2014). These types of alliances enable banks to benefit from FinTech innovations in a new manner (Jacobides and Billinger 2006; Borah and Tellis 2014). A second approach is to simply purchase a digital bank, as demonstrated by Nordea’s acquisition of Gjensidige Bank in 2019 (Nordea, 2019), to expand their digital offering. Goldman Sachs decision to build a digital bank from scratch is another viable route (Goldman Sachs, 2019).
1.2 Problem Formulation
Rapid rate of digitalization, emerging financial technology and changes in consumer behaviour have begun to transform the existing paradigm in the financial industry. Many incumbent banks are struggling to keep pace with this change however, as many of them lack sufficient measures to respond to these new market conditions and are often hindered by legacy IT infrastructures (Gural et al.,2019). In addition, developing the necessary capabilities in-house could potentially prove to be a slow and costly process (Angelshaug and Saebi, 2017). Further, many of the digital solutions developed and delivered by banks are still outperformed by challenger banks and FinTechs (Aubrey and Tushar, 2016; Saal et al., 2017). However, the few banks that have been successful in catering to this new market demand have been able to generate higher growth than their peers by strengthening relationships with existing customers and by attracting new ones (Gural et al., 2019). In order to respond to the digital threat from challenger banks and new entrants, traditional banks are faced with the challenge of deciding what digital services to
6 acquire, develop in-house or provide through partnerships (Zachariadis and Ozcan, 2017).
Further, the lack of consistent frameworks that support the sourcing decision process in the banking industry provides an additional challenge (Lammers et al, 2004)
1.3 Purpose
The purpose of this thesis is to identify the main factors that incumbent banks need to consider when deciding on whether to buy, build or partner in order to digitize their securities trading offering. The study will be conducted in collaboration with the savings department of a Swedish retail bank, which is currently investigating a suitable strategy to expand their savings and investment offering digitally.
1.4 Research Question
In order to fulfil the purpose of this study, the thesis aims to answer the following research questions:
“What are the main factors for incumbent banks to consider when deciding on whether to buy, build or partner to digitize their securities trading offering?”
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2. INSTITUTIONAL SETTING
The purpose of this chapter is to provide the reader with an overview of the state of the Swedish banking sector and its current competitive landscape as well as an overview of the securities trading value chain.
2.1 The Universal Banks
The credit market in Sweden is dominated by four universal banks, that are represented in most parts of the financial market and provide a wide array of financial services (Swedish Bankers’
Association, 2019). These include the three large Swedish banks - SEB, Swedbank and Handelsbanken, as well as the previously Swedish but now Finnish bank Nordea (Swedish Bankers’ Association, 2019). These four actors almost make up 70 percent of the Swedish credit market (Copenhagen Economics, 2019). In the Swedish credit market, Swedbank and Handelsbanken are the two largest banks with approximately 21 percent of the total market share (Copenhagen Economics, 2019). Since the 1990s, Handelsbanken has expanded into the Nordics by the opening of branch offices as well as via acquisitions. The bank also has a presence in the Netherlands as well as a subsidiary in the UK. In Sweden, Handelsbanken has over 420 branch offices and extensive operations within the fund management sector. (Swedish Bankers’ Association, 2019). Swedbank has approximately 218 branch offices in Sweden as well as major activities in the Baltic region. Additionally, Swedbank has an extensive network with independent savings banks and partly owned banks that they work in close cooperation with. Sweden’s largest fund management company and one of the largest mortgage finance institutions, Swedbank Robur and Swedbank Hypotek respectively, are included in the group.
(Swedish Bankers’ Association, 2019).
Nordea is the largest of the universal banks and holds a strong presence throughout the Nordic countries, however, with a market share of 12 percent in Sweden it is the smallest of the four universal banks (Copenhagen Economics, 2019). Apart from its bank branches, Nordea’s Swedish operations include major actors in mortgage credits and fund management as well as one of the largest finance companies (Swedish Bankers’ Association, 2019). SEB has a strong position on the Swedish fund management and life insurance market, as well as in the mortgage sector (Swedish Bankers’ Association, 2019). Further, SEB is a strong actor in currency trading, international payments and on the stock market as well (Swedish Bankers’ Association, 2019).
Since 2010, SEB is the only of the four universal banks to succeed in increasing its market share (Copenhagen Economics, 2019).
8 2.2 Foreign Banks and Other Banks
From the late 1990s, other foreign and commercial banks have increased their market shares on Swedish household’s deposits. Figure 1 shows the deposits from Swedish households as of December 2018. In addition to Nordea, Danske Bank is another foreign bank with presence on the Swedish market. (Swedish Bankers’ Association, 2019)
Figure 1 - Deposits from Swedish households, share of the total, December 2018 (Copenhagen Economics, 2019)
The commercial banks include Ikano Banken, SkandiaBanken and Länsförsäkringar Bank.
These banks established Internet and telephone banking in the mid 1990s (Swedish Bankers’
Association, 2019) and have enjoyed strong growth through lending since 2010 (Copenhagen Economics). Although their range of services has been expanded gradually their main focus is still on household retail banking (Swedish Bankers’ Association, 2019).
Another category of banks active on the Swedish market are those with a background in brokerage and securities who mainly focus on asset management and trading, like Nordnet och Avanza (2019, Swedish Bankers’ Association).
The savings banks consist of independent savings banks and limited company savings banks, with operations on regional or local markets. They hold more than 10 percent of Swedish households’ deposits. (Swedish Bankers’ Association 2019.
Swedbank 20%
Handelsbanken 18%
Nordea filial 13%
SEB 12%
Other commercial banks 25%
Savings banks 7%
Foreign bankbranches (excl.
Nordea) 3%
Other institutions 2%
9 2.3 The Securities Trading Value Chain
Three main activities characterise the securities trading value chain. Securities need to be traded, the trade has to be confirmed and cleared, and the delivery of money and securities to the involved parties (buyer & seller) need to be settled (Serifsoy and Weiß, 2007). A simplified version of the securities trading value chain is shown in Figure 2, adapted by Chan, Fontan, Rosati and Russo (2007) that only focuses on activities that are purchased by retail investors.
The pre-trade phase, also called the information stage, is where information is researched and collected by investors to make investment decisions (Knieps, 2006). The trading stage, where the actual execution of the trade occurs, a suitable counterpart is found, and the price is set for a specific trading volume. The trade can occur with newly issued securities, i.e. primary market, or with securities that already have been placed, i.e. secondary market. It can take place within or directly between credit institutions and securities service providers or through a stock exchange. Lastly, the post-trade stage, which consists of custody services as well as securities finance and collateral management (Chan, et al, 2007).
Figure 2 - The securities trading value chain, showing activities that are purchased by retail investors, adapted from Chan et al (2007).
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3. METHODOLOGY
This chapter introduces the methodology used to provide a transparent understanding of the research process. It begins by introducing the methodological approach, followed the research design and an explanation on how the data was collected. Thereafter, the interviewees are introduced and lastly a section on the research quality is included.
3.1 Methodological Approach
This thesis is conducted using an abductive approach by combining inductive and deductive research methods. Combining two research approaches in this manner has proven to be advantageous (Saunders, Lewis and Thornhill, 2009) as it enables the researcher to identify plausible explanations for an observed phenomenon through an iterative process of moving between inductive and deductive research methods (Blomkvist and Hallin, 2015). This is demonstrated by the initial use of the inductive approach to narrow down the problem formulation and scope, the deductive approach used to analyse the empirical data and finally the iteration back to the inductive approach by generating new hypotheses for testing using the empirical findings.
3.2 Research Design
The research design of this thesis is intended to be a qualitative case study. Case studies are deemed to be especially valuable for practice-oriented fields like management, which suits this thesis well (Biba, 2013). In addition, a research design that involves a case study is appropriate for the investigative nature of this research, as the large amount of empirical data collected improves and facilitates the comprehension of the studied problem (Eisenhardt, 1989). As the case study mostly will focus on one specific bank, the research is designed as an in-depth case study. However, interviews with another niche bank and an external consultant will be conducted as well, in line with Eisenhardt and Grabner (2007), to increase the generalizability of the study.
Some of the criticism towards qualitative studies concerns subjectivity, as the interviews are only done with a handful of selected respondents that can’t represent a whole industry (Hedin
& Martin, 2011). However, others argue that qualitative methods let researches get a direct knowledge of the research area as they get closer to the environment and the people that serve as the basis of the study (Ahrne & Svensson, 2015).
3.3 Data Collection
The primary empirical data will mainly consist of data collected from interviews with one universal bank. The purpose of the interviews is to gain an understanding of how incumbent banks are working with digital solutions and what factors they deem vital to consider when facing the dilemma of build, buy or partner in order to offer these digital solutions.
The interviews will follow a semi-structured approach. Semi-structured interviews include a combination of closed and open-ended questions, which are complemented by follow-up how or why questions. The interview length is intended to be one hour, in alignment with Adams (2015) maximum length recommended for semi-structured interviews to avoid the sensation of
11 fatigue for both the respondent and the interviewer. Further, choosing a semi-structured approach suits this thesis well as it gives researchers the time to identify and follow up potentially useful leads that emerge during the interview process. (Adams, 2015)
3.4 Interview Coding
The analysis of empirical data gained from the interviews will follow Creswell’s (2009) steps for conducting data analysis, as illustrated in Figure 3.
Figure 3 - Steps to conduct data analysis according to Creswell (Creswell, 2009).
The raw data will take the form of transcripts of the recorded interviews. These are then organized and prepared for data analysis. In order to make the data clearer and easier to use (Cope, 2010), data coding was performed. The coding will be done by narrowing down parts of the empirical data and categorizing and aggregating it into themes, while other parts of the data is disregarded (Creswell, 2009). This increases both the transparency and the replicability of the research (Agunis et al., 2018). The data will be hand coded, meaning that it will be manually analysed rather than using a coding software program. According to Creswell (2009) hand coding is often relatively time consuming in comparison with using a coding software program and as such is not suited for studies with an extensive number of interviews. However, based on the relatively low number of interviews to be conducted, compared to a quantitative research method, hand coded was deemed suitable for this thesis.
3.4 Interviewing
Interviewing is the most commonly used format for collecting data in qualitative research (Jamshed, 2014; Gill et al, 2008). Oakley (1998) explains qualitative interviews as a sort of framework that not only records standards and practices, but also achieves, challenges and reinforce them. The purpose with conducting a research interview is to explore and investigate
12 experiences, views and motivations of individuals on specific topics (Gill et al, 2008).
Qualitative interview methods provide a deeper understanding of a social phenomenon compared to what could be obtained from a fully quantitative research method (Silverman, 2000). Hence, Gill et al (2008) argues, that interviews are especially well suited for research where there is little previous knowledge about the specific phenomenon or where more detailed insights are necessary from individual interviewees.
Qualitative research interviews often take on either a semi-structured, lightly structured or in- depth approach (Crotty, 1998). For long-term field work however, an unstructured approach is generally used to provide respondents with opportunity to express themselves in their own ways and at their own pace (Ellis et al, 1992).
Semi-structured interviews are characterized by several key questions that aid in defining what areas to be explored, while also enabling both the interviewer and the interviewee to pursue ideas or response in detail (Britten, 1999). This flexibility, especially when compared to structured interviews, also allows for exploration, discovery and elaboration of information that is important for the study but may not have been identified as pertinent by the researchers previously (Gill et al, 2008). The interview questions used for this study can be found in Appendix B.
In a qualitative interview, it is generally best to begin with questions that can easily be answered by the interviewee and then continue with more difficult topics. This can help with making the respondents more comfortable (Gill et al, 2008). Further, good interview questions are open- ended, neutral, sensitive and understandable. (Britten, 1999)
13 3.5 Interviewees
In order to maintain anonymity, the interviewees and the organizations where they are employed are given code names. The banks are addressed as “Bank A” and “Bank B”, while the interviewees will be addressed as “Interviewee A1”, “Interviewee A2”, “Interviewee B1”
etc. to indicate which bank each interviewee represents. “Bank A” refers to an incumbent bank while “Bank B” refers to a niche bank focused mainly on online trading. One interviewee, C1, is an external consultant hired by Bank A. The interviewees are shown in Table 1. A more thorough description of the interviewees and their backgrounds is found in Appendix A.
Table 1 - List of interviewees
Code Name
Title Organization Division
A1 Digital Offering Manager Bank A Merchant Banking A2 Product Owner, Savings Bank A Business & Retail
Banking
A3 CIO Representative Bank A Group CIO
A4 Savings Operations Bank A Merchant Banking
A5 Business Development Manager,
Savings Bank A Business & Retail
Banking B1 Product Owner, Execution Bank B Retail Banking C1 Strategy Consultant Consultancy Firm, hired
by Bank A
External Strategy Consulting Firm
3.6 Research Quality
To ensure that the findings of this thesis are of high quality, the research process aims to achieve reliability and validity in several ways. (Saunders et al., 2009)
Reliability is achieved by using appropriate methods for the specific research area and type, to enable and facilitate potential replication studies. In addition, the collection and analysis of empirical data, and the methods used, is required to be transparent in order to generate accurate and reliable results. (Saunders et al, 2009; Blomkvist and Hallin, 2015). Further, all interviews are recorded and transcribed to create a case study database, as documentation is key to achieve reliability (Creswell, 2009).
To achieve validity, the research findings have been constantly reflected upon and analysed critically, by the researcher and externally through peer-reviews, to ensure the generation of accurate and reasonable findings (Saunders et al., 2009). Further, a triangulation was achieved through the use of various different sources (academic articles, consultancy reports, case study interviews etc) to increase validity (Yin, 1994; Creswell, 2009). Lastly, as reliability is also a requirement for achieving high quality research, validity can be ensured by achieving high reliability (Blomkvist and Hallin, 2015). It is also worth noting that as the thesis is built on a case study on an incumbent Swedish bank, the validity, reliability and generalizability of the findings of this study are thus limited to similar actors in a comparable setting.
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4. LITERATURE REVIEW & THEORY
The chapter intends to identify and present relevant research within the context of
existing literature and to create a guide for the empirical study. The subjects covered include Transaction Cost Theory, Resource Based View and Production Cost Theory as well as general outsourcing literature.
4.1 Build, Buy or Partner
The build-or-buy dilemma is a fundamental multidisciplinary strategic outsourcing challenge faced by organizations that has been studied from various different perspectives including accounting (Bassett, 1991), human resource management (Greer et al, 1999), software development (Shahzad et al, 2019), manufacturing (Sillanpää, 2015) etc. One of the most classical and well know theoretical approaches to the build-or-buy dilemma is Transaction Cost Economics (TCE) (Ketokivi and Mahoney, 2020) developed by Williamson (1979), which has been widely used in relevant literature (Yang et al, 2012; Bigelow et al, 2008; Aubert et al, 1996; Lammers, 2004). In addition to the traditional build-or-buy decision, a third alternative that involves the establishment of a partnership relationship with an external actor to co-develop new products or activities is added to the sourcing analysis (Lammers, Loehndorf and Weitzel, 2004; McIvor et al., 1997). For the scope of this thesis, build refers to the production of an activity should be executed via in-house production, buy refers to an activity being performed by an external supplier and Partner refers to a joint production between two of more actors of an activity (Bello, Dant & Lohtia, 1997).
Another commonly used theoretical approach to the build-or-buy dilemma is the Resource- Based View (RBV) of the firm (Sims, Powell and Vidgen, 2016; Neves, Hamacher and Scavarda, 2013; Fabrizio, 2012; Gewald and Lammers, 2006), incorporating resources and capabilities as well as costs into the sourcing decision (Penrose, 1959; Barney, 1991).
Within the existing literature, the discussion on factors affecting the outsourcing decision is often divided into three different categories: Strategy, Cost, Technology (Loh, L. and Venkatraman, N, 1992; Lee et al., 2000; Kremic, Icmeli Tukel and Rom, 2006; Gewald, 2010):
4.1.1 Strategy
Core competence is a strategic factor that has gained much recognition as crucial factor to consider when facing the build, buy or partner dilemma (Quinn and Hilmer, 1994; Gottfredson, Puryear and Phillips, 2005). There is some debate on what truly defines a core competence, but there is a general perception that it enables firms to sustain a competitive advantage and are therefore less probable to be outsourced (Kremic et al., 2006). Consequently, areas that are not deemed to be core are more likely to be outsourced, allowing firms to focus on activities that generate a sustainable competitive advantage (Quinn, 1999; Gottfredson et al., 2005). For the context of this study, core competences are competences that fulfil Barney’s (1991) VRIN- criteria explained in detail in section 4.4.
Quality improvements is another strategic factor that appears frequently in outsourcing literature as a reason for why firms decide to outsource activities (Anderson, 1997; Dibbern et al., 2004; Kakabadse and Kakabadse, 2005; Gewald, 2010). Anderson (1997) notes however,
15 that organizations that are recognized for their high level of quality ought to be cautious when outsourcing an activity, as it may cause concerns from customers that performing the activity externally might harm quality.
Flexibility is also identified as a strategic factor that can influence the outsourcing decision, both positively and negatively (Jennings, 2002). Large organizations with a high level of bureaucracy could potentially improve their demand, operations and resource flexibility by contracting external actors to perform their business activities. However, outsourcing long contracts on a limited market has been proven to decrease flexibility (Bryce and Useem, 1998).
In addition, outsourcing might also cause a loss of flexibility to alter the extent, nature or scope of the outsourced activity (Tan and Sia, 2006).
Supplier/Partner selection is another critical strategic factor when deciding to outsource (Wadhwa and Ravindran, 2007). The right supplier/partner is one who is able to meet and complement the firm´s needs, including long-term future needs and corporate culture (Robinson and Kalakota, 2004). In order to succeed with outsourcing an activity, the outsourcing firm must be able to maintain a strong relationship with its suppliers and be able to rely on their financial stability, technical competence and production capability (Wadhwa and Ravindran, 2007).
4.1.2 Costs
The Cost category is often perceived as the most important, as firms are eager to reduce their overall costs (Ang and Staub, 1998; Hecker and Kretschmer, 2010). This is based on the assumption that suppliers are able to realize economies of scale and benefit from specialization to help them perform an activity more efficiently than the firm that currently performs it (Kakabadse and Kakabadse, 2000; Roberts, 2001). This requires that the in-house costs for the specific activity are higher than the estimated costs for buying the product or service (Kremic, Icmeli Tukel and Rom, 2006). Literature suggests however that the cost benefits expected to be gained from outsourcing are difficult to estimate (Kremic et al., 2006). Further cost factors are discussed in section 4.2 and 4.3
4.1.3 Technology
The access to specialized resources falls under the Technology category and include specialized providers and IT capabilities that the firm is unable to attract on its own (Dibbern et al., 2004).
Through learning curve effects, the supplier develops unique skills for performing specific activities that cannot be acquired internally (Lammers, 2004). This could allow firms to take advantage of emerging technologies without having to make the internal capital investments (Gilley & Rasheed, 2000) and access capabilities and resources from industry experts without having to actually own them (Mudambi & Tallman, 2010).
Choosing to contract an external actor to perform an activity could, however, also lead to a loss of technical capabilities which could negatively affect both business operations and performance (Adeleye, 2011). This is especially evident in cases where employee transfer is part of the contract (Adeleye, 2011). Further, it could also result in the outsourcing firm becoming unable to recognize technological breakthroughs that could otherwise lead to sustainable competitive advantages (Kakabadse & Kakabadse, 2005).
16 4.1.4 Function characteristics
Apart from the three categories mentioned above, Kremic et al. (2006) also identified function characteristics as important factors to consider when deciding to outsource or not. Function characteristics refers to the characteristics of the functions themselves. These include complexity, integration and asset specificity. (Kremic et al., 2006)
Activities with a high level of complexity are often surrounded by variables and interactions that are difficult to understand (Kremic et al., 2006). Therefore, it might be more difficult for an organization to specify and explain the requirements and terms of complex activities to a supplier (Kremic et al., 2006). In addition, complex activities also demand greater investments from the suppliers’ side in order to learn and perform them. Similarly, an activity that is heavily integrated, i.e. linked into other activities and systems within the firm, often requires more interactions and communication channels which need maintenance and monitoring. This makes activities that are heavily integrated less suitable for outsourcing (Paoli & Prencipe, 1999).
Asset specificity refers to the scenario where there is little value for the equipment and products generated via an outsourced activity outside of that specific activity (Williamson, 1981;
Lammers, 2004; Kremic et al., 2006). It is explained further in section 4.2 4.2 Transaction Cost Economics
Transaction Cost Economics (TCE) aims to explain the existence of firms and how the boundaries of firms can be determined (Coase, 1937; Williamson, 1989; Pitelis and Pseiridis, 1999). Further, TCE specifies the conditions under which a firm should manage economic exchanges internally within the boundaries of the firm (Sillanpää, 2015) and aids organisations to decide on which activities to develop in-house and which activities to source externally (Williamson, 1985). TCE is vital when analyzing the efficiency of different governance structures such as market (Buy), hierarchy (Build) and hybrid managerial patterns like strategic alliances, franchises and joint ventures (Partner) (Williamson, 1991).
From the build-or-buy perspective, TCE predicts that firms will choose the governance structure that minimises transaction costs (Van Hoek, 2000). Williamson (1991) defines transactions as transfer of services or goods across interfaces. The more friction taking place during a transaction, the higher the transaction costs. If a transaction entails high costs the transaction should be internalized within a hierarchy, i.e. built in-house, and vice versa for low transaction costs, i.e. bought externally (Williamson, 1991). Williamson (1975) developed three variables for characterising transactions: asset specificity, frequency and uncertainty.
Deemed the most important variable for characterising transactions (Williamson, 1981), Asset specificity refers to investments made in human or physical assets dedicated to a specific business partner, where a rearrangement of business partners would involve significant switching costs (Ellram et al., 2008; Erramilli and Rao, 1993). It characterises the necessity of adapting assets to firm-specific requirements and its related one-time setup costs (Lammers, 2004). To exemplify, the production of a specific product might require investments in a highly specialized machine while the delivery of a service might be based on a rare set of skills and know-how. In order to induce these asset specific investments, a contractual safeguard is often necessary to avoid post-investment bargaining or termination of the contract (Klein et al, 1978).
Consequently, this entails complex contracts as well as high negotiation, monitoring and
17 enforcing costs which implies that a high level of asset specificity favours in-house production (Poppo & Zenger, 1998; Lamminmaki, 2007).
Frequency refers to the occurrence of transactions within a firm, where transactions that occur more frequently are expected to favour in-house production (Poppo & Zenger, 1998;
Williamson, 2008). Initially, several scholars were unable to empirically confirm the thesis that the frequency of a transaction can be associated with the choice of governance structure (e.g.
Malz, 1993; Anderson, 1985). Later research has found a correlation between frequency activities and outsourcing however (Everaert, Sarens and Rommel, 2010; Hsieh, Huang and Lee, 2016).
The third variable, Uncertainty, claims that higher uncertainty implies higher transactions cost and is to be expected in scenarios where the transaction is long-lasting, or information asymmetries exist. It can either take the form of behavioural uncertainty or environmental uncertainty (Williamson, 1985; Slater and Spencer, 2000).
Behavioural uncertainty negatively affects performance evaluation due to opportunist exchange partners creating hidden costs by inefficient and ineffective performance (Williamson, 1985).
This leads to increased monitoring and enforcement costs necessary for evaluating partner performance (Williamson, 1975). Further, behavioural uncertainty impacts the cooperative relationship, potentially leading to incompatibility between the involved parties (Langfield- Smith, 2008). In order to minimise transaction costs generated by behavioural uncertainty, it is therefore more likely for firms to favour an internal governance structure (Williamson, 1985;
Anderson, 1985).
Environmental uncertainty relates to the difficulty of predicting changing circumstances and writing market contracts that cover these changes (Holcomb & Hitt, 2007; Klein et al, 1990;
Williamson, 1991). Consequently, partners could potentially act in an opportunistic manner when circumstances change, leading to increased communication, negotiation and coordination costs for firms (Rindfleisch & Heide, 1997; Kabadayi, 2011). Similar to behavioral uncertainty, when environmental uncertainty is high firms are expected to favour an internal governance structure (Williamson, 1985; Klein et al, 1990).
These three variables can be used as indicators by firms facing the build, buy or partner dilemma (Lammers, Loehndorf and Weitzel, 2004). High asset specificity, frequency and uncertainty indicates high transactions costs for activities sourced externally, i.e. buy, and lower transaction costs for in-house production, i.e. build (Lammers, Loehndorf and Weitzel, 2004). Schmidt &
Wagner (2019) provide a figure of the key constructs identified in TCE in Figure 4.
Figure 4 - Key constructs of the transaction cost theory framework, including asset specificity, transaction frequency and uncertainty (Schmidt and Wagner, 2019).
18 4.3 Production Cost Theory
Some researchers argue that managers should include production costs when evaluating an activity (Poppo & Zenger, 1996; Bello, Dant & Lohtia, 1997). By making a trade-off analysis between production costs and transaction costs, firms can better decide on whether the production of this activity should be executed in-house production (Build), by an external supplier (Buy) or via a joint production (Partner) (Cheon et al, 1995). Production costs refer to the direct costs involved in creating the product or service (Bello, Dant & Lohtia, 1997) and includes resource requirements, scale effects and the experience effect.
Resource requirements refer to the amount of resources necessary to perform an activity and includes capital, technical, know-how and human resources. Activities requiring a large amount of resources can thus create entry-barriers for firms as they become obligated to acquire the relevant technical, human and capital resources in order to perform them. In addition, this also creates entry-barriers related to risks of failure and inflexibility (Bello, Dant and Lohtia, 1997).
Outsourcing activities with high resource requirements can therefore help reduce the overall production costs (Holcomb & Hitt, 2007).
Scale effects refer to the potential realization of lower average production costs through scale of operations. Large-scale production enables specialization of technology, labor and managers (Harvey, 1983). As a result, scale economies are often identified as a main reason for firms to outsource an activity (Wüllenweber, Beimborn and Weitzel, 2008). Further, Wüllenweber et al (2008) argue that standardization of activities can potentially increase scale benefits.
The experience effect concerns the decline in costs related to performing a task with increasing experience (Bello, Dant and Lohtia, 1997). As a firm accumulates experience at performing an activity, the firm consequently learns how to perform it better which leads to a reduction of average production costs (Kotler, 1991; Gewald, 2010).
4.4 Resource Based View of the Firm
The resource-based view (RBV) of the firm is based upon the works of Penrose (1959) who identified the importance of heterogeneous firm resources. Building upon these assumptions, Barney (1991) further extended research within RBV by examining the connection between firm resources and sustained competitive advantage. Several researchers have used Barney’s conceptual framework to investigate outsourcing decisions (Sims, Powell and Vidgen, 2016;
Neves, Hamacher and Scavarda, 2013; Fabrizio, 2012; Gewald and Lammers, 2006).
Consequently, Barney’s findings provide the foundation for the RBV approach used in this thesis.
RBV refers to a framework used to understand how firms can gain, and sustain, competitive advantages through superior resources (Barney, 1991). It states that resources are distributed heterogeneously across organisations and are transferred imperfectly between organisations (Barney, 1991), and can take the form of assets, capabilities and organisational processes (Wernerfelt, 1984). In order to generate sustainable, competitive advantage, a resource must fulfill the “VRIN”-criteria; it needs to be Valuable, Rare, Imperfectly Imitable and Non- substitutable (Barney, 1991). Each individual criterion is explained below and shown in Figure 5.
19 Valuable (V): Valuable resources enable firms to generate and implement strategies to increase efficiency and improve effectiveness (Wernerfelt, 1984). Resources provide value by exploiting market opportunities or by reducing market threats and leads to increased revenue or decreased costs. If a resource does not add, or enhance, value to the firm then there is no advantage in possessing it. (Barney, 1991)
Rare (R): Resources need to be rare or unique in order to offer competitive advantages, as resources possessed by several firms in the marketplace will be unable to design and implement a unique business strategy to compete with competitors (Barney, 1991).
Imperfect Imitability (I): Resources can be imperfectly imitable if they involve social complexity or a unique history (Dierickx & Cool, 1989) and making copies of the resources are not feasible (Barney, 1991). Resources can only provide a sustained competitive advantage if firms that lack them are unable to acquire them. (Barney, 1991)
Non-Substitutability (N): A Non-Substitutable resource, as the name implies, cannot be substituted by an alternative resource (Barney, 1991) by another firm to implement the same strategies (Watjatrakul, 2005).
The RBV can be applied to a specific activity to analyse whether or not actual resources can provide a competitive advantage within an activity (Lammers, 2004). This analysis could then serve as a first step toward a decision on building, buying or partnering for this activity (Lammers, 2004) where the decision to buy entails acquiring the desired resources and capabilities externally (Stevensen, 1976).
Figure 5 - VRIN-criteria, indicating factors needed for a resource to generate a sustainable competitive advantage according to Barney (1991).
20 4.5 Combining RBV, TCE and PCT
Medina Serrano et al (2018) argue that the build-or-buy dilemma cannot be explained nor resolved by one single theory. Instead, a combination of two or more theories is necessary to complement each individual theory (Medina Serrano et al, 2018). This is strengthened by Holcomb & Hitt (2007) as well as McIvor (2009) who further argues that RBV and TCE are complementary for sourcing decisions and that neither of the theories can alone explain the build, buy or partner dilemma fully. Accordingly, several researchers have used a combined approach of both TCE and RBV when assessing build-or-buy decisions (Medina Serrano et al, 2018; Lammers, 2004; Verwaal, Commandeur & Verbeke, 2008, McIvor, 2009).
The research conducted by McIvor (2009) supported the view of using both TCE and RBV to completely understand and explain the outsourcing decision. However, the findings also identified limitations when analysing build, buy or partner decisions from the TCE and RBV perspectives (McIvor, 2009). Both of these theories are heavily based on economic rationale while the organisation politics of the firm receives little attention (McIvor, 2009). The political context of the firm involves strategies implemented by individuals to gain power to influence firm goals to cater to their own ambitions and needs (McIvor, 2005).
Verwaal, Commandeur & Verbeke (2008) combined the RBV with TCE to create a framework that proved to be valuable for analyzing inhibitory and facilitatory factors in strategic outsourcing decisions, i.e. build, buy or partner decisions.
Bello, Dant & Lohtia (1997) provide a model for the sourcing decision, shown in Figure 6, that combines production cost theory and transaction costs economics and gives an overview of the typology of the governance structure.
Figure 6 - Typology of governance structure, adapted from Bello, Dant & Lohtia (1997).
Lammers (2004) provides a sourcing decision framework, shown in Figure 7, that begins by using the RBV to analyse whether an activity provides a sustainable competitive advantage.
Based on the RBV, an activity that provides a sustainable competitive advantage should always be produced internally which leads to a “Build”-decision. For activities that are unable to generate a sustainable competitive advantage, firms need to evaluate whether these activities can be sourced through the market or via a joint venture more efficiently than if they were to be produced internally. The decision to source an activity externally requires an efficient market or the possibility to partner with an external actor. An efficiency analysis is then performed using TCE and PCT to identify which of the alternatives are most efficient. However, if these
21 alternatives fail to provide an efficiency improvement, the activity should be performed internally. If both alternatives lead to efficiency improvements, the most efficient alternative will be chosen. (Lammers, 2004).
Figure 7 - Sourcing Decision Framework (Lammers, 2004).
22 4.6 Build, Buy or Partner in Banking
There is extensive research on factors to consider when facing the build, buy or partner dilemma in a general context. However, when narrowing the scope to focus on digital securities trading services, the literature is less prevalent. It could be argued that the factors to consider when deciding on a sourcing strategy for digital banking services should also be applicable for securities trading. Therefore, research that focuses on the outsourcing of digital banking services is deemed relevant for this study as well.
Several banks choose to outsource all, or parts, of their operations related to digital banking services because of a lack of in-house expertise or to cut costs (Shah & Clarke, 2009). In order to successfully develop or implement digital banking services with external help, high levels of technical and project management competence are required (Shah & Clarke, 2009). If successful however, it can allow banks to access state-of-the-art technology faster and more cost effectively than if they were to maintain the operations in-house (Shah & Clarke, 2009).
Hanafizadeh & Ravasan (2017) investigated the effect of environmental, technological and organisational attributes on the outsourcing decision of online banking services in the Iranian banking sector. The study found that the following nine factors affected the outsourcing of e-banking services: perceived complexity, perceived cost service observability to the client, cultural fit between client and supplier, perceived loss of organizational knowledge, prior outsourcing experience, external pressure, market volatility, and suppliers' power.
(Hanafizadeh & Ravasan, 2017)
Hitt et al (1998) studied the build-or-buy dilemma in banking by investigating several banks’
strategies for developing their websites. Most banks argued that they lacked the necessary skills to develop an online website and that the use of outside contractors would speed up the development process (Hitt et al, 1998). Jennings (1996) also identified increased speed as a factor influencing the outsourcing decision. Further, he found that financial institutions were able to introduce new financial products more flexible through buying in products and services externally. This also affected the development of a wider range of products positively (Jennings, 1996).
23 4.7 Summary of Literature Review
Findings from the literature review identified TCE, RBV and PCT as three main theoretical perspectives used when deciding on a build, buy or partner strategy. Further, several researchers supported the idea of combining these to help firms decide on what activities to build, buy and partner.
Build
Based on TCE, activities that are characterized by high asset specificity, high frequency and high uncertainty generate high transaction costs. Consequently, if these same activities also are characterized by low resource requirements and few scale and experience effects which incur low production costs, these activities are more likely to be performed in-house. In accordance with RBV, the same sourcing decision will be reached if an activity fulfills the “VRIN”-criteria.
Buy
Contrary to the Build decision, a decision to buy will be taken when the transaction costs are low, and production costs are high. Similarly, the RBV perspective encourages a decision to buy when an activity does not fulfill the VRIN-criteria.
Partner
The final alternative is favoured in situations where an activity neither provides any real lasting competitive advantage nor any competitive disadvantage. A partnership relationship could potentially lead to increased efficiencies if the cooperation enables the involved parties to realize economies of scale that would otherwise not be possible. This is especially true in situations where there are no suppliers of the service. This could then enable an activity to fulfil the VRIN-criteria through economies of scale.
Through the combination of these theoretical perspectives as well as existing outsourcing literature, several factors were identified as important to consider for the build, buy or partner dilemma. These are presented in Table 2 below, where the darker blue cells are factors included in the three theoretical perspectives RBV, TCE and PCT. Some of them are relatively close related; Resource Requirements and Specialized Resources for example. However, Resource Requirements are more focused on the underlying costs in requiring an activity or resource while Specialized Resources refers to the actual access to specific technology or industry knowledge. Similarly, resources with high Asset Specificity could make the outsourcing firm heavily dependent on a supplier, impacting the buyer/supplier relationship. However, the focus still lies on the activity in itself. The supplier/partner relationship factor on the other hand, focuses on more so on how to select a supplier/partner and maintain a healthy relationship.
24
Table 2 - Factors to consider when faced with the build, buy or partner decision identified within literature.
Dark blue cells are factors that have also been identified in RBV, TCE and PCT.
25 5. EMPIRICAL FINDINGS
This section presents the findings from the empirical study. It begins by providing the reader with an organizational context of the studied organization. Thereafter, the factors identified in the empirical study are presented, following the structure of the categories identified in the literature review; Strategy, Costs, Technology and Function Characteristics.
5.1 Organizational Context
The study was conducted at a Swedish bank that offers a broad range of financial services to private individuals, small and medium sized enterprises, large corporations and financial institutions. This thesis focuses on the Business & Retail Banking division, which offers financial advice and a wide range of financial services to SMEs and private customers in Sweden. Historically, the division has enjoyed high assets under management (AUM). In recent years however, there has been an increasingly negative outflow of capital, with customers transferring their savings related to stocks from the bank to niche actors. In addition, while the bank´s current infrastructure is robust, the rapid rate of digitalizing and technological development could potentially lead to it becoming outdated in the near future. As a response to this, the division is now investigating how they could approach the classic build, buy or partner dilemma if they in the future face the challenge of replacing or updating their infrastructure and IT-platforms.
5.2 Strategic Factors
Throughout the interviews, several important strategic factors were identified when deciding on a build, buy or partner strategy for a digitized securities trading offering. Several of these were identified in the literature.
5.2.1 Core Competences
When discussing the build buy or partner decision regarding digitizing securities trading, a focus on core competences appeared in all of the interviews.
[A2] and [B1] reasoned that firms should strive for ownership of their own core business, arguing that having knowledge of your own products is key. [A5] and [C1] agreed and further added that there is value to be captured in keeping activities related to the banks’ core competence inhouse, while activities that do not could, and often should, be bought or performed through partnerships. If not, firms might be unable to focus on the activities that provide them with a sustainable competitive advantage in the first place. [A3] also points to this, arguing that focusing on basic activities, where the bank is unable to add any extra value, will only result in an unnecessary workload rather than a competitive advantage.
[A2] argues that the battle of the customer will take place in the front end, and thus that’s where the bank´s main focus should lie. [A2] further adds that when deciding on what digital channels to focus on, the bank should be where their customers are. Seeing as 98% of all interactions occur through the mobile phone, [A2] therefore argues that the bank should focus its resources in terms of developers to the mobile app rather than the internet bank. [A4] agrees with [A2] in
