Make or buy: deciding where the company boundary sits

Compare avoidable cost, not allocated cost

The relevant internal figure is what would genuinely stop being spent if the activity ceased. Overhead that simply redistributes across remaining activities is not saved by outsourcing, so including it inflates the apparent internal cost and produces decisions that reduce reported unit cost while raising total spend. The external figure needs the same treatment in reverse: it must include the management, quality oversight, coordination and movement cost the arrangement will create.

Strategic weight of the capability

Some activities carry the differentiation the business sells, embed proprietary knowledge, or sit on the path of future development. Outsourcing those transfers learning to a supplier who may serve competitors and who will hold the capability if you later want it back. Activities that are standardised, widely available and not a source of advantage are far safer candidates. The test is not current cost but whether losing the capability would narrow future options.

Capacity, flexibility and the shape of the cost

Internal production converts variable spend into fixed cost and capital, which rewards high and stable utilisation and punishes volatility. External supply generally keeps cost variable and moves capacity risk to the supplier, at a price. Where demand is uncertain or seasonal, that difference in cost behaviour frequently outweighs the unit price gap, and the sensible hybrid is to make the stable base internally and buy the peak.

Reversibility and dependence

Buying is easy to start and can be difficult to unwind once tooling, knowledge and process have migrated. Before deciding, establish what returning would require: equipment, skills, qualification, and how long each would take. Protecting reversibility through tooling ownership, access to technical documentation and defined exit terms is cheap at the outset and effectively unobtainable once the supplier understands your position.

Review triggers rather than permanent answers

Volumes grow, technology changes the economics of small-scale production, and supply markets consolidate. A decision that was correct at low volume can be wrong once the activity is large enough to justify its own capacity. Recording the volume, cost and market assumptions behind the choice, and the thresholds that would reopen it, keeps the boundary of the firm under management rather than under inertia.

Frequently asked questions

Why do outsourcing savings so often fail to appear?

Usually because the internal cost included overhead that did not disappear, and the external cost excluded coordination, quality oversight, movement and the buffer needed for a longer supply line. Both errors point the same way, which is why the projected saving exceeds the realised one so consistently.

Can a capability be shared between internal and external supply?

Yes, and it is often the strongest position. Keeping enough internal production to retain knowledge and a cost reference, while buying incremental volume, preserves both flexibility and negotiating leverage at some loss of scale efficiency.

What should be protected contractually when outsourcing a process?

Ownership of tooling and designs, access to technical documentation and process records, the right to audit, data return, and a transition period on exit. These provisions determine whether the decision can be reversed at reasonable cost or only on the supplier's terms.