OUTSOURCING.

If a firm does not want to use its own internal resources to build and operate information systems, it can hire an
external organization that specializes in providing these services to do the work. The process of turning over an
organizations computer central operations, telecommunications networks, or applications development to
external vendors of these services is called outsourcing.
Outsourcing information system is not a new phenomenon. Outsourcing options have existed since the dawn of
data processing. As early as 1963, Petrots Electronic Data Systems (EDS) handled data processing services for
Frito-Lay and Blue Cross. Activities such as software programming, operation of large computers, time-sharing
and purchase of packaged software have to some extent been outsourced since the 1960s.
Because information systems play such a large role in contemporary organizations, information technology now
accounts for about half of most large firms capital expenditure. In firms where the cost of information systems
function has risen rapidly, managers are seeking ways to control those costs and are treating information
technology as a capital investment instead of an operating cost of the firm. One option for controlling these
costs is to outsource.
ADVANTAGES OF OUTSOURCING:
Economy: Outsourcing vendors are specialists in the information systems services and technologies they
provide. Through specialization and economies of scale, they can deliver the same service and value for less
money than the cost of an internal organization.
Service Quality: Because outsourcing vendors will lose their clients if the service is unsatisfactory, companies
often have more leverage over external vendors than over their own employees. The firm that out-sources may
be able to obtain a higher level of service from vendors for the same or lower costs.
Predictability: An outsourcing contract with a fixed price for a specified level of service reduces uncertainty of
costs.
Flexibility: Business growth can be accommodated without making major changes in the organizations
information systems infrastructure. As information technology permeates the entire value chain of a business,
outsourcing may provide superior control of the business because its costs and capabilities can be adjusted to
meet changing needs.
Making Fixed Costs Variable: Some outsourcing agreements, such as running payroll, are based on the price
per unit of work done (such as the cost to process each cheque). Many outsources will take into account
variations in transaction processing volumes likely to occur during the year or over the course of the
outsourcing agreement.Clients only need to pay for the amount of services they consume, as opposed to
paying a fixed cost to maintain internal systems that are not fully utilized.
Freeing up Human Resources for other Projects and Financial Capital: Scarce and costly talent within an
organization can refocus on activities with higher value and payback than they would find in running a
technology factory. Some agreements with outsource include the sale for cash of the outsourced firms
technology capital assets to the vendor.

DISADVANTAGES OF OUTSOURCING :
Loss of Control: When a firm farms out the responsibility for developing and operating its information systems
to another organization, it can lose control over its information systems function. Outsourcing places the vendor
in an advantageous position where the client has to accept whatever the vendor does and whatever fees the
vendor charges. If a vendor becomes the firms only alternative for running and developing its information
systems, the client must accept whatever technologies the vendor provides. This dependency could eventually
result in higher costs or loss of control over technological direction.
Vulnerability of Strategic Information: Trade secrets or proprietary information may leak out to competitors
because a firms information systems are being run or developed by outsiders. This could be especially harmful
if a firm allows an outsourcer to develop or to operate applications that give it some type of competitive
advantage.
Dependency: The firm becomes dependent on the viability of the vendor. A vendor with financial problems or
deteriorating services may create severe problems for its clients.
MAKE OR BUY DECISIONS
Outsourcing is closely related to make or buy decision. The corporations made decisions on what to make
internally and what to buy from outside in order to maximize the profit margins.
As a result of this, the organizational functions were divided into segments and some of those functions were
outsourced to expert companies, who can do the same job for much less cost.
Make or buy decision is always a valid concept in business. No organization should attempt to make something
by their own, when they stand the opportunity to buy the same for much less price.
This is why most of the electronic items manufactured and software systems developed in the Asia, on behalf
of the organizations in the USA and Europe.
Four Numbers You Should Know
When you are supposed to make a make-or-buy decision, there are four numbers you need to be aware of. Your
decision will be based on the values of these four numbers. Let's have a look at the numbers now. They are
quite self-explanatory.

The volume

The fixed cost of making

Per-unit direct cost when making

Per-unit cost when buying

Now, there are two formulas that use the above numbers. They are 'Cost to Buy' and 'Cost to Make'. The higher
value loses and the decision maker can go ahead with the less costly solution.
REASONS FOR MAKING

There are number of reasons a company would consider when it comes to making in-house. Following are a
few:

Cost concerns

Desire to expand the manufacturing focus

Need of direct control over the product

Intellectual property concerns

Quality control concerns

Supplier unreliability

Lack of competent suppliers

Volume too small to get a supplier attracted

Reduction of logistic costs (shipping etc.)

To maintain a backup source

Political and environment reasons

Organizational pride

REASONS FOR BUYING

Following are some of the reasons companies may consider when it comes to buying from a supplier:
Lack of technical experience
Supplier's expertise on the technical areas and the domain
Cost considerations
Need of small volume
Insufficient capacity to produce in-house
Brand preferences
Strategic partnerships
THE PROCESS
The make or buy decision can be in many scales. If the decision is small in nature and has less impact on the
business, then even one person can make the decision. The person can consider the pros and cons between
making and buying and finally arrive at a decision.

When it comes to larger and high impact

decisions, usually organizations follow a
standard method to arrive at a decision.
This method can be divided into four main
stages as below.

1. Preparation
Team creation and appointment of
the team leader
Identifying
the
product
requirements and analysis
Team briefing
destitution

and

aspect/area

2. Data Collection
Collecting information on various aspects of make-or-buy decision
Workshops on weightings, ratings, and cost for both make-or-buy
3. Data Analysis
Analysis of data gathered
4. Feedback
Feedback on the decision made
By following the above structured process, the organization can make an informed decision on make-or-buy.
Although this is a standard process for making the make-or-buy decision, the organizations can have their own
varieties.
CONCLUSION
Make-or-buy decision is one of the key techniques for management practice. Due to the global outsourcing,
make-or-buy decision making has become popular and frequent.
Since the manufacturing and services industries have been diversified across the globe, there are a number of
suppliers offering products and services for a fraction of the original price. This has enhanced the global
product and service markets by giving the consumer the eventual advantage.
If you make a make-or-buy decision that can create a high impact, always use a process for doing that. When
such a process is followed, the activities are transparent and the decisions are made for the best interest of the
company.
THE MAKE-OR-BUY DECISION is the act of making a strategic choice between producing an item
internally (in-house) or buying it externally (from an outside supplier). The buy side of the decision also is
referred to as outsourcing. Make-or-buy decisions usually arise when a firm that has developed a product or part

or significantly modified a product or partis having trouble with current suppliers, or has diminishing
capacity or changing demand.
Make-or-buy analysis is conducted at the strategic and operational level. Obviously, the strategic level is the
more long-range of the two. Variables considered at the strategic level include analysis of the future, as well as
the current environment. Issues like government regulation, competing firms, and market trends all have a
strategic impact on the make-or-buy decision. Of course, firms should make items that reinforce or are in-line
with their core competencies. These are areas in which the firm is strongest and which give the firm a
competitive advantage.
The increased existence of firms that utilize the concept of lean manufacturing has prompted an increase in
outsourcing. Manufacturers are tending to purchase subassemblies rather than piece parts, and are outsourcing
activities ranging from logistics to administrative services. In their 2003 book World Class Supply
Management,David Burt, Donald Dobler, and Stephen Starling present a rule of thumb for out-sourcing. It
prescribes that a firm outsource all items that do not fit one of the following three categories: (1) the item is
critical to the success of the product, including customer perception of important product attributes; (2) the item
requires specialized design and manufacturing skills or equipment, and the number of capable and reliable
suppliers is extremely limited; and (3) the item fits well within the firm's core competencies, or within those the
firm must develop to fulfill future plans. Items that fit under one of these three categories are considered
strategic in nature and should be produced internally if at all possible.
Make-or-buy decisions also occur at the operational level. Analysis in separate texts by Burt, Dobler, and
Starling, as well as Joel Wisner, G. Keong Leong, and Keah-Choon Tan, suggest these considerations that favor
making a part in-house:

Cost considerations (less expensive to make the part)

Desire to integrate plant operations

Productive use of excess plant capacity to help absorb fixed overhead (using existing idle capacity)

Need to exert direct control over production and/or quality

Better quality control

Design secrecy is required to protect proprietary technology

Unreliable suppliers

No competent suppliers

Desire to maintain a stable workforce (in periods of declining sales)

Quantity too small to interest a supplier

Control of lead time, transportation, and warehousing costs

Greater assurance of continual supply

Provision of a second source

Political, social or environmental reasons (union pressure)

Emotion (e.g., pride)

Factors that may influence firms to buy a part externally include:

Lack of expertise

Suppliers' research and specialized know-how exceeds that of the buyer

cost considerations (less expensive to buy the item)

Small-volume requirements

Limited production facilities or insufficient capacity

Desire to maintain a multiple-source policy

Indirect managerial control considerations

Procurement and inventory considerations

Brand preference

Item not essential to the firm's strategy

The two most important factors to consider in a make-or-buy decision are cost and the availability of production
capacity. Burt, Dobler, and Starling warn that "no other factor is subject to more varied interpretation and to
greater misunderstanding" Cost considerations should include all relevant costs and be long-term in nature.
Obviously, the buying firm will compare production and purchase costs. Burt, Dobler, and Starling provide the
major elements included in this comparison. Elements of the "make" analysis include:

Incremental inventory-carrying costs

Direct labor costs

Incremental factory overhead costs

Delivered purchased material costs

Incremental managerial costs

Any follow-on costs stemming from quality and related problems

Incremental purchasing costs

Incremental capital costs

Cost considerations for the "buy" analysis include:

Purchase price of the part

Transportation costs

Receiving and inspection costs

Incremental purchasing costs

Any follow-on costs related to quality or service