Outsourcing And Make-Or-Buy Decisions

Outsourcing and make-or-buy decisions. What cost factors should influence the decision on whether to outsource the payroll functions?

Horngren, Sundem and Stratton (2004), say that "When managers consider the make-or-buy decision for services, it is often called outsourcing" [1, p255]. Outsourcing "(...) is often defined as the delegation of non-core operations or jobs from internal production within a business to an external entity (such as a subcontractor) that specialises in that operation" [2].

Globalization and increased competition have in a way forced the outsourcing concept into play. Managers strive on finding new ways to increase efficiency, reduce costs and raise profits to shareholders, and shareholders love it. Human resources is just one of the business functions that are traditionally outsourced and like human resources, functions like IT, administration, distribution and logistics, finance and others have been known to been outsourced successfully.

Even though "half of the companies in Outsourcing Institute's 2002 annual survey say they wanted to improve the company's focus and reduce operating costs" [1, p257] some authors point that outsourcing "(...) is a decision not to be made only on the basis of economic considerations, since acquisition or loss of core competencies may also be involved" [3]. For example at Satcom, we have hired an Indian company Bahrti Airtel, to run our satellite and ISP systems, effectively outsourcing our core business function. The business functions that remain within Satcom's control are administrative and financial, commercial, and within the technical department we run in conjunction with the Bharti team helpdesk and installations areas.

The contract with Bharti which was just renovated included also a clause on business intelligence and a commitment for both companies to work together in the offer of new services in the Mozambican market based on Bharti's experience. This will also create a larger bond between Bharti and Satcom than simply the outsourcing function of the operations agreed.

In Satcom's case nonetheless, for its outsourcing requirements, cost was not a primary factor when deciding to outsource, Galanaki and Papalexandris (2005) mentioned that "Another reason why some companies may turn to outsourcing is the requirement for know-how. Either they have not the necessary knowledge, or their know-how is so outdated that they need to make significant investments" [4, p383]. Know-how was indeed the major reason why Satcom decided to outsource. Whether as in Satcom's case, as Mozambique is still a very limited country in what concerns know-how and availability of skilled labour, or because of the superior know-how of companies where the business function is being outsourced, know-how is also one of the main reasons to outsource.

In respect to outsourcing in the human resources area, costs are also one of the primary reasons to outsource. According to Dickmann and Tyson (2005) economic gains in the HR function of companies are divided in three different categories. "The first (ex ante) is costs associated with forming and maintaining contractual and employment relationships. The second category is the unit price of the goods/service. The third is (ex post) costs associated with monitoring quality and performance" [5, p454].

Nonetheless,