Tax Tech: To build, or not to build

Indirect tax technology is an essential yet non-core aspect of business operations for global businesses.

This is why just like in other parts of business, the buy vs build debate often comes up when companies are forced to make decisions on their global tax technology needs. In fact, this very topic came up once again in our recent e-invoicing webinar.

I come from an in-house tax background where ‘let builders build’ was a core cultural value, so I’m no stranger to the fun, excitement and possibilities of building tax technology in-house.

In my past, building was a perfect option. In fact, it was the only option as there were no fitting enterprise solutions for global companies with modern tech and performance needs. Moreover, in a marketplace business model you have the additional complexity of servicing third parties (think drivers, couriers, restaurants, creators), that also have tax (technology) needs and nobody had built anything remotely useful for that.

The outcome? We dedicated a ton of resources and built.

The consequence? Massive global teams (80+) working full-time to monitor and improve on custom solutions. Given the tax technology landscape back then, this was the only right decision.

If faced with the question to buy or build today - with modern tax technology and available alternatives available on the market - the conclusions would be different.

….In other words: to build, or not to build.

We want to help by sharing some best practices in approaching the build vs buy topic in the space of Tax Technology.

The takeaway? Build only if absolutely necessary. And create a framework for assessing build vs buy decisions. We have the template for you.

Why does the build vs buy assessment matter so much for tax technology?

Before we discuss the relevant factors to consider when making a build vs buy decision, let’s understand why it matters so much in the first place.

Commitment: Especially for tax technology, it’s often a long-term decision. It’s not very economic or feasible to change your approach much once you go down a path to build or buy given the time, resource and capital deployment.
Business impact: In many cases, while tax technology is not core to the business, it is business critical. Not being able to calculate the right taxes upon checkout, invoice or report transactions to the government periodically or in real-time can have serious (business) consequences.
Feasibility: The unique thing about tax technology is that it often combines the need for technological and tax/regulatory expertise. Not factoring in both leads to non-functional, or non-compliant solutions that are useless.

In short, because you are making a long term investment with far reaching business consequences, you want to make sure you are able to defend the decision you make, and support the approach you choose. So how do you choose the best route for your business?

The critical build vs buy factors

There are 8 critical factors to consider, and 1 major pitfall to avoid whenever you think about building or buying tax technology.

Problem

Consider if the business issue you are looking to solve is common, or unique to your business? If it is unique, there probably won’t be many external solutions available and building may well be your only option. On the flip side, if the problem you are solving is very common, you’ll probably find an external solution that you can buy that is better and cheaper than what you can build. Scale typically leads to higher quality and lower costs.

As a general recommendation: if the requirements you have are met by any external solution for 60% or more, buying is almost always the way to go.

Budget

Before deciding on your approach, make sure you assess the budget accurately. This sounds logical, but often goes wrong. Your cash budget (to buy) is not always accurate because of scope creep or just bad scoping to begin with. In other words, if you don’t know what you are looking to solve for exactly and what your requirements are, the chances of accurately budgeting for it are slim.

When thinking about budget or comparing build vs buy, consider how long you will need internal resources for? Factor in maintenance and knowledge as well.

Timeline

Start by asking yourself: Do you need a solution right now (business critical)? If the answer is yes, you have to buy.

If the answer is no, consider how business critical and investment heavy the solution is.

Consider the Eisenhower Matrix. If the problem/solution is not important, definitely don’t waste internal resources on it. If it is important but not urgent, schedule it later and assess the other factors to come to the right build vs buy solution.

Opportunity cost

This is the most overlooked factor in the build vs buy conversation. This is also where the ‘emotional’ factor (see below) creeps in most often.

When thinking about using internal resources to build tax technology, always ask yourself these 3 questions:

When you allocate internal resources to build this solution, are you taking them away from anything they are currently working on that has a more meaningful business purpose?
If not - is there anything that is more business relevant your resources should be working on?
Is your build planning aligned with the business and the most critical things on the roadmap for this year?

If the answer to any of the 3 questions is negative, don’t build.

Quality & Technical debt

General truth: We love building, we don’t necessarily love maintaining. While this is hard to prove, in practice it usually holds through.
When you build internally, you are often facing tight budgets and timelines. However, quick fixes under tight deadlines and budget typically end up becoming technical debt.
Because what you are building is not your core business, you will not be able to spend an equal amount of time and resources as dedicated developers can. The quality of your solution will likely reflect that.

None of the 3 are absolute truths. There are certainly exceptions. But you want to make sure you fully factor this into your decision making.

Data

The most compelling reason to build: data (privacy). If buying requires you to share proprietary information with unreliable third parties, then you should consider building. Or if you buy, be sure to understand how your data is used, where it will be hosted, and who can access it.

Understanding the sensitivity of your data is a prerequisite. If the data used for your tax technology is business critical (spoiler, it is often not), you may want to control & secure your critical data by building your own solution and keeping full control if you have that capability.

A good solution to be able to consider the impact of data on your build vs buy decision making, is to build an internal framework that allows you to label data and do (supplier) risk assessments based on what data you expose to solution providers. The more sensitive the data is that you may need to expose to your solution providers, the more critical your assessment of their data & cybersecurity capabilities will need to be.

Market risk

Whenever you’re exposing yourself to any external solution, you need to consider your third-party risk. I.e. your solution provider’s business health and longer term roadmap.

You want to understand if the solution provider you may want to work with has the same growth plans as your business. Can they help you both now and tomorrow? The (un)willingness to follow your current and future needs is a factor to consider when assessing your buy vs build strategy. Buying something that fits you now but will no longer be a solution for you tomorrow may still have you end up looking for a different solution or internal build at some point.

Talent

Build vs buy sounds like a choice. But in many cases you may have to critically look internally and consider if you have the right knowledge/skills and talent to build internally? And if you do, if you really want to use that talent for this purpose? Keep in mind that oftentimes your best product and engineering talent may not feel as excited about and attracted to working on ‘tax technology’ as you do. Although this is changing a bit, putting top engineering talent to work on internal tax technology is not usually a top talent retention strategy.

The Emotions Pitfall

Buyers tend to focus on the benefits of outsourcing, paying the cost of external solutions in order to focus on more value adding things.

Builders tend to focus on the ‘high cost’ of external solutions, seeing benefits in quickly building a homegrown solution

There are risks to both:

Buying poorly (‘unfitting’, incomplete solutions) may lead to delay, budget overrun and subpar solutions.
Building often comes with poor estimating real cost and work. This means building tends to take up more time and resources than planned, ending up being much more costly and with a higher time to value. Gallup reports one in six IT projects have an average cost overrun of 200% and a schedule overrun of almost 70%.

The initial positions people have on build vs buy often comes down to bias: e.g. what’s more fun or career rewarding. Or how does this impact my area of control? What is changing for me due to insourcing or outsourcing this? The arguments brought forward tend to lean towards the emotional side. That is to say, the conclusion is already reached before the arguments for it are even found. This is perfectly human.

Because of the emotional load and individual/team impact these decisions can have, it is smart to have a framework and process that weighs the critical factors in a more abstract and objective way.

How to decide?

Build only if absolutely necessary
Build a framework for assessing build vs buy decisions that answers number 1. (Reach out to us for a template)

Fonoa builds tax technology for enterprise businesses. We love to help you, if it fits your needs. We try to make materials available that help inform you on what’s possible and not, and like to share best practices on tax technology from some of the leading companies in the world.