Build-Buy-Partner Capability Test
Choose how to add a capability by testing advantage, scale, and fit.
- Difficulty
- Advanced
- Time to result
- ~weeks to results
- Steps
- 7
- Confidence
- 98%
The Build-Buy-Partner Capability Test begins with a customer need and then evaluates the strategic reason for owning the solution. An acquisition can enable a business-model pivot, create scale, or add a capability, but ownership should offer meaningful advantage and fit the firm’s core strengths. Building is preferable when existing assets can assemble the capability efficiently and distinctively. Partnering is preferable when an industry specialist can do the work better and an open platform can integrate it. The method guards against paying acquisition premiums merely to follow a trend and against spreading internal resources across too many domains. Cost matters, but the final choice also reflects strategic control, market leadership, speed, integration, and opportunity cost.
Origin
Tom Nally and Tim Hockey explained TD Ameritrade’s build, buy, and partner logic while discussing rebalancing technology, iRebal, and robo-advisors on Masters in Business.
Core principles
- 01Acquire only where ownership creates strategic advantage or necessary scale.
- 02Build within capabilities where the organization can deliver differentiated value.
- 03Partner when a specialist can outperform an internal solution.
- 04Open architecture preserves choice when ownership offers no advantage.
- 05Resources should remain concentrated inside deliberate strategic boundaries.
How to run it
- 1
Start with the need
Describe the unmet client problem and the outcome the capability must produce before considering a vendor or acquisition.
Pro tip Separate the need from the fashionable technology associated with it.
Watch out Starting with a target company encourages post-hoc strategic justification.
- 2
Classify the strategic purpose
Decide whether the capability enables a business-model pivot, creates scale, or adds a missing capability.
Pro tip Require one primary purpose even if secondary benefits exist.
Watch out A vague combination of purposes can conceal weak logic.
- 3
Test ownership advantage
Determine whether owning the capability could create industry leadership, control, differentiation, or valuable synergies.
Pro tip Compare ownership with a well-structured partnership, not with doing nothing.
Watch out Market popularity alone is not strategic advantage.
- 4
Test internal fit
Assess whether existing technology, talent, distribution, and operations can build the capability efficiently inside the firm’s strategic boundaries.
Pro tip Price the opportunity cost of diverting scarce teams.
Watch out Technical feasibility does not prove that building is the best allocation of resources.
- 5
Evaluate partners
Identify specialists that can deliver superior performance while integrating into the customer experience.
Pro tip Preserve architectural openness when customers have varied needs.
Watch out A partner can create dependency or fragment the experience if integration is weak.
- 6
Compare total economics
Compare acquisition premium, build cost, integration, speed, maintenance, strategic control, and expected value.
Pro tip Use scenario ranges rather than one precise forecast.
Watch out Do not ignore the cost of integrating an acquired organization.
- 7
Choose and bound the approach
Select build, buy, or partner, define the strategic boundary, and establish measurable outcomes.
Pro tip Revisit the choice when demand or market maturity changes.
Watch out Do not allow a capability addition to expand silently into unrelated domains.
In the wild
A platform sees that an established rebalancing provider holds a leading market position and fits the platform’s core advisor services. Ownership offers strategic advantage rather than merely replicating a commodity feature.
→ The acquisition adds a differentiated capability within the firm’s strategic lane.
A firm already possesses the components required to assemble automated investing. Rather than paying a large premium for a robo company with little in assets, it builds the capability for a fraction of the proposed acquisition price.
→ The firm gains the needed capability without paying for fashion-driven valuation.
A platform needs a specialist planning function but cannot create a leading internal product without spreading teams too thin. It integrates several strong providers through an open architecture and helps clients choose among them.
→ Clients gain access to strong solutions while internal resources stay focused.
Common mistakes
Buying the trend
Acquiring a fashionable company without a clear ownership advantage can produce an enormous premium for a capability that was cheap to build or partner for.
Building outside the swim lane
An organization may be able to build something technically while lacking the focus or expertise to make it competitive.
Comparing purchase price alone
The decision must include integration, maintenance, speed, strategic control, and opportunity cost rather than headline price only.
Is it for you?
Best for
It is best for product, technology, and corporate-development leaders deciding how to add a new capability.
Not ideal for
It is not ideal for decisions driven by an emergency where no viable alternatives or evaluation time exist.
From the transcript
“it's more it's a build by partner type arrangement.”
“we do try and be very focused around sticking within our swim lane”
“Really three types of decisions, three types of acquisitions you want to make. The first is when you need to do a strategic pivot.”
From the episode
Tim Hockey and Tom Nally Discuss Robo Advisors
Tim Hockey