Make or Buy

We
Are young but getting old before our time
We'll leave the TV and radio behind
Don't you wonder what we we'll find
Stepping out tonight
--Joe Jackson

The make or buy decision involves whether to produce a good or service internally (insourcing) or to buy that good or service on the market (outsourcing).

Outsourcing, of course, has been increasing in popularity over the past few decades. There are several reasons why this has been so. Outsourcing increases degree of specialization which has long been recognized (e.g., Smith 1776) to increase efficiency and innovation thru learning-by-doing effects and lower switching costs.

Outsourcing, however, comes with some negatives. When a good or service is contracted out, the buyer loses control. Costs, quality, access becomes less predictable and subject to undesirable outcomes. Transaction costs also increase and come sometimes be substantial.

Outsourcing might also reduce adaptive capacity as task portfolios are less likely to include activities that enable the sensing the need for change, unlearning old habits, and learning new skills. As environments become more uncertain, then this lack of adaptive capacity is likely to matter more.

Insourcing, on the other hand, alleviates negatives of outsourcing. Of course, it takes on the burden of not featuring the positives of outsourcing.