Make-or-Buy Decision Analysis

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Framework Primer
Make-or-Buy Decision
Analysis
Presentation created by
Strategy
Risks
Economics

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Contents
Overview
1. Strategy
2. Risks
3. Economics
Templates
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Make-or-Buy Decision Analysis maximizes long-term financial outcome
for a company
Presentation Overview
While the choice to keep an activity in-house or outsourced may be cross-functional and
strategic, it is the role of the CPO to make outsourcing decisions work.
As organizations are being put under increasing pressure to cut expenses and improve return on
assets, the dilemma of whether to keep key functions in-house or outsource them has taken center
stage.
Manufacturing units are being identified with Make-or-Buy Decisions as third-party suppliers in Eastern
Europe, China, Southeast Asia, and other low-cost regions hold out a promise of significant advantage
that companies in developed countries can’t offer.
The Make-or-Buy Decision extends beyond manufacturing. It encompasses human resources,
information technology, maintenance, and other fundamental business functions. Chief Procurement
Officers are now expected to play a key role in helping business units make decisions given the skills
and objective perspective the teams bring to the effort.
This presentation thoroughly discusses the dynamics of Make-or-Buy Decisions and the framework to
guide companies make the right decisions. The framework is built on 3 key pillars.
The Make-or-Buy Decision should not be made without careful analysis. The analysis should be
conducted in the most diligent and objective manner.
This deck also includes slide templates for you to use in your own business presentations.
1 Strategy 2 Risks 3 Economic

Make-or-Buy Decision is the act of making a strategic choice between
outsourcing and in-house
Make-or-Buy Decision – Overview
Companies have realized the importance of the Make-or-Buy Decision to overall business
strategy and its implications.
Make-or-Buy Decisions usually arise when a company with a new product has problems with suppliers, has
diminishing capacity, or faced with changing demands. Make-or-Buy analysis is conducted at the strategic and
operational level.
To achieve the highest possible level of quality and
productivity in overseeing and managing third-party
suppliers, the company must have the right questions to
make these determinations.
If our manufacturing or HR capabilities are below global
benchmarks, can they be improved to reach maximum
performance and efficiency, and would the benefits of
those capabilities surpass the benefits obtain from
outsourcing?
What resources are required and how long would it take to
reach noticeable improved performance?
Are technology innovation and alignment necessary to
have a competitive edge?
Do customers expect a high level of service and response,
must greater than what can be offered if outsourced?
To achieve the highest possible level of quality and
productivity in overseeing and managing third-party
suppliers, the company must have the right questions to
make these determinations.
If our manufacturing or HR capabilities are below global
benchmarks, can they be improved to reach maximum
performance and efficiency, and would the benefits of
those capabilities surpass the benefits obtain from
outsourcing?
What resources are required and how long would it take to
reach noticeable improved performance?
Are technology innovation and alignment necessary to
have a competitive edge?
Do customers expect a high level of service and response,
must greater than what can be offered if outsourced?
Chief Procurement Officers (CPO) plays a key role in
helping business units make decisions given the skills
Lead business units in conducting detailed analyses
that thoroughly evaluate the costs, benefits, risks, and
rewards of outsourcing and the implications of keeping
the activity in-house.
Assess of core competence and measure them against
world-class standards.
Challenge the organization to make more objective and
informed make-or-buy decisions.
Ensure that all the right trade-offs have been evaluated
and all possibilities considered.
Chief Procurement Officers (CPO) plays a key role in
helping business units make decisions given the skills
Lead business units in conducting detailed analyses
that thoroughly evaluate the costs, benefits, risks, and
rewards of outsourcing and the implications of keeping
the activity in-house.
Assess of core competence and measure them against
world-class standards.
Challenge the organization to make more objective and
informed make-or-buy decisions.
Ensure that all the right trade-offs have been evaluated
and all possibilities considered.

The Make-or-Buy Decision Framework is anchored on 3 Key Pillars to
simplify decision process
3 Pillars of the Make-or-Buy Decision – Overview
The 3 Pillars of Make-or-Buy Decision makes the choice cross-functional and strategic.
The decision of in-house versus outsource should not be made without careful analysis. Analysis should be
initiated and conducted diligently and objectively.
The 3 pillars of the Make-or-Buy Decision is structured to simplify the decision.
Source: Make or Buy, Booz & Company, 2011
Establishing the strategic importance
to the company of the product or
service that is being considered for
outsourcing, as well as the process,
technologies, or skills required to make
the product or deliver the service.
Strategy
Risks
Economics
Identifying the risks involved in terms
of quality, reliability, and predictability
of outsourcing solutions compared with
in-house manufacturing or services.
Determining impact of outsourcing on
capital expenditures, return on
invested capital, and return on assets,
including possible savings acquired
through outsourcing

Contents
Overview
1. Strategy
2. Risks
3. Economics
Templates

Business Strategy is essential in the face of competition and in
anticipation of future change in environment
Strategy – Overview
Outsourcing arrangements must ensure continuous quality and cost improvement over the
life of the contract so as not to deliver disappointing results.
DESCRIPTION
The strategic importance to the
company of the product or
service that is being considered
for outsourcing, as well as the
process, technologies, or skills
required to make the product or
deliver the service.
PILLAR Strategy
DECISION
RULE
Choose in-house capabilities when a product or a function is
critical to a company’s performance or is considered a core
operation.
ROLE OF
CPO
Lead the discussion among senior management aimed at
resolving which aspect of the organization rise to such a level of
strategic importance that they must not be outsourced.
Use knowledge of supply base to compare potential
outsourcers’ technologies, product development and supply
chain management capabilities, and ability to work in
partnership.
Evaluate whether the company has the skills and resources
needed to manage outsourcers.

The Decision Criteria are parameters for evaluation in making
Make-or-Buy Decisions
Strategy – Decision Criteria
As a rule, it is desirable to choose in-house capabilities when a product or a function is
critical to a company’s performance or is considered a core operation.
The 4 Decision Criteria must be measured and evaluated within respect to the organization’s Corporate Strategy.
Attractiveness of the
process/business
Decision Criteria
Critically for overall
business success
Proprietary processes
Product differentiation
Industry dynamics and
competitive positioning
Dynamics of the
technology or capability
Rate of change
Risk to core capabilities
Make (in-house) Buy (outsource)
In-house process differentiates the
product or service
Process/business is unattractive (e.g., hard
to find workers, strict regulatory environment)
Capability has synergies across the
business
Materials or processes are not critical to end
products or marketing efforts
Supply market is hostile or controlled by
competition
Supply market is suitable for building close
partnerships
Need to push the technology or
capability envelope
Suppliers are willing and able to meet
innovation needs
VS
1
2
3
4

Identifying strategic, core, and outsourcing potential is better
facilitated by using a systematic process
Strategy – Strategic/Core/Outsourcing Assessment
If moving production or management to a third party does not give rise to significant risk
to the company’s strategy, outsourcing could be a perfect solution.
The strategic value of the services and manufacturing process under consideration for outsourcing are sorted
into their respective categories: strategic, core, and outsourcing candidates.
Process
Future competitive
advantage and/or
emerging
technology?
Core criticality
ranking
Preexisting
commitments?
Renegotiate
Yes
No
Yes
No
High
Low
Strategic
Ensure adequate
investment
Core
Ensure world-
class capability
Outsourcing
Unwind/manage
Investment

Contents
Overview
1. Strategy
2. Risks
3. Economics
Templates

Mitigating risks is important in outsourcing where failure of service
could be devastating
Risks – Overview
The CPO plays multiple roles in managing risk.
DESCRIPTION
Includes lower quality, reliability,
and predictability of outsourced
solution as compared with in-
house manufacturing or
services.
Includes risks inherent in the
process of identifying and
selecting the right supplier and
structuring a workable ongoing
relationship
PILLAR Risks
DECISION
RULE
Crucial to the mitigation of risk is the supplier selection process.
It must be based on a clear understanding of the supplier’s
strategy, operations, and cost structure.
ROLE OF
CPO
Encourage the organization to view the supply chain or service
providers as partners that deliver an entire product or manage
an entire function.
Oversee risk assessment during a make-or-buy evaluation with
much more diligence than would be necessary in traditional
sourcing.
Supervise the writing of the contract so that it protects the
organization from the outsourcer’s deficiencies.

The Make-or-Buy Decision Criteria evaluates options and direct
decisions where risk is of lesser degree
Risks – Decision Criteria
Undertaking a risk assessment minimizes chances of failure and incurring financial loss.
The 4 Decision Criteria must be measured and evaluated based on identified risk of Make-or-Buy Decisions.
Decision Criteria
… Holdup risk is low or sufficiently managed
through contract of broader business
relationship
Hold up risks
Few or no alternative sources of supply Low switching costs and easily accessible
alternative sources of supply
Availability of alternative
sources and switching costs
High supply market risks …Supply market risks (if
foreign-sourced)
Political stability
Exchange rate volatility
Imperative to couple supply and usage
(real-time/short lead time) for quick
response or quality
Uncoupling the supply chain has little impactTransportation risks
Lead times
Supply disruptions
Sensitive intellectual property involved in
process/product
No sensitive intellectual property involvedIntellectual property
protection
Make (in-house) Buy (outsource)VS
1
2
3
4
5

Advantages Disadvantages
Holdup Risks are risks that a supplier will exploit a customer’s
highly dependent relationship
Risks – Holdup Risks
Holdup risks can be managed with external solutions.
Outsourcing contracts can be difficult to amend or break. It is critical to consider the options and determine the
best alternatives before commitments are made with the supplier.
VSOption
Control production through
direct ownership or joint venture
Have multiple suppliers for each
product or service with
significant holdup potential
Select only one supplier for each
product or service, but split
overall volume among suppliers
to stimulate competition
Create situation with similar
incentives for customer, original
equipment manufacturer, and
supplier
Highest level of control over operations
Potential backup for contingencies
Strong competition
Easy supplier assessment/comparison
No capital requirements
Competition through prospects of
gaining future/additional business
No capital requirements
Truly strategic partnership
Partner’s interest in long-term success
keeps total costs
Capital requirements
Management efforts
Higher cost through redundant operations, lower volume
with each supplier
Potential for inconsistent quality
More supplier coordination/management required
Need enough products or services with similar capability
requirements to split total volume among suppliers
Potential loss of economies of scale if volume is small
and suppliers cannot leverage additional volume
No alternatives/backup for contingencies
May require close-to-exclusive relationship and thus loss
of scale
Supplier may charge premium for possible exclusivity
agreement

Contents
Overview
1. Strategy
2. Risks
3. Economics
Templates

Possible top-line gains are best calculated when economic factors
are integrated in the Make-or-Buy Decision Analysis
Economics – Overview
A successful outsourcing relationship includes the sharing of savings from productivity
improvements so that both parties have an incentive to collaborate.
DESCRIPTION
Impact of outsourcing on capital
expenditures, return on invested
capital, and return on assets, as
well as the possible savings
achieved through outsourcing.
PILLAR Economics
DECISION
RULE
Shift the discussion from the price of a finished product to the
overall cost of providing the product or service.
ROLE OF
CPO
Identify the supplier’s cost drivers.
Design a pricing mechanism that reflects the current underlying
costs and how the costs might change in the future.
Make sure that ongoing improvements in costs are covered in
the contract and are shared between the outsourcer and the
CPO’s organization.
Find an effective gain-sharing mechanism that properly rewards
the supplier for taking action but passes the ongoing
improvements to the buyer.

The Economics Decision Criteria focus on economic and operating
performance, capital requirements, and level of skills and expertise
Economics – Decision Criteria
The use of 3 Economics Decision Criteria enables companies to come up with more
informed and sound decision.
The use of 3 Economics Decision Criteria is a tool in making accurate assessment of economic or cost
parameters essential in making Make-or-Buy Decisions.
Decision Criteria
Internal cost advantage or cost parity,
high quality
Suppliers have lower costs or better quality
Significant recent investment in process
technology that cannot be recovered
Major new investment are required.
Relative economic and
operating performance
advantage
Scale and utilization
Efficiency
Reliability
Factor costs
Quality
Investments meet required return on
invested capital
Suppliers have low ROI targetCapital requirements and
financial returns
Capital has strong defensible skills base. Insufficient or weak in-house skills/
capabilities; skills are difficult to acquireLevel of skills and expertise
Make (in-house) Buy (outsource)VS
1
2
3

Contents
Overview
1. Strategy
2. Risks
3. Economics
Templates

Insert headline
3 Pillars of the Make-or-Buy Decision – TEMPLATE
Insert bumper.
Strategy
Risks
Economics
• Insert filler text, filler text, filler
text, filler text, filler text.

Insert headline
3 Pillars of the Make-or-Buy Decision – TEMPLATE ALTERNATE
Insert bumper.
Strategy Risks Economics
Establishing the strategic
importance to the
company of the product or
service that is being
considered for out-
sourcing, as well as the
process, technologies, or
skills required to make the
product or deliver the
service.
Identifying the risks
involved in terms of
quality, reliability, and
predictability of
outsourcing solutions
compared with in-house
manufacturing or services.
Determining impact of
outsourcing on capital
expenditures, return on
invested capital, and
return on assets, including
possible savings acquired
through outsourcing

Insert headline
3 Pillars of the Make-or-Buy Decision – TEMPLATE ALTERNATE
Insert bumper.
Establishing the strategic
importance to the company
of the product or service
that is being considered for
out-sourcing, as well as the
process, technologies, or
skills required to make the
product or deliver the
service.
Strategy
Identifying the risks
involved in terms of quality,
reliability, and predictability
of outsourcing solutions
compared with in-house
manufacturing or services.
Risks
Determining impact of
outsourcing on capital
expenditures, return on
invested capital, and return
on assets, including
possible savings acquired
through outsourcing
Economics

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Flevy (www.flevy.com) is the marketplace
for premium documents. These
documents can range from Business
Frameworks to Financial Models to
PowerPoint Templates.
Flevy was founded under the principle that
companies waste a lot of time and money
recreating the same foundational business
documents. Our vision is for Flevy to
become a comprehensive knowledge base
of business documents. All organizations,
from startups to large enterprises, can use
Flevy— whether it's to jumpstart projects, to
find reference or comparison materials, or
just to learn.
Contact Us
Please contact us with any questions you may have
about our company.
• General Inquiries
support@flevy.com
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press@flevy.com
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