Do Or Make Calculations

Determine whether to outsource (do) or produce in-house (make) with our comprehensive cost-benefit analysis tool. Get data-driven recommendations tailored to your business scenario.

Comprehensive Guide to Do or Make (Outsource vs In-House) Calculations

The “do or make” decision—whether to perform a business function in-house or outsource it to external providers—is one of the most critical strategic choices companies face. This 1,200+ word guide explores the financial, operational, and strategic considerations that should inform your decision-making process.

Understanding the Core Concept

The do-or-make decision (also known as the “make-or-buy” decision) evaluates whether your organization should:

• Make: Produce goods or services internally using your own resources
• Do: Perform business functions in-house with your own employees
• Buy: Purchase goods from external suppliers
• Outsource: Contract services to third-party providers

This analysis isn’t just about cost—it considers quality control, strategic importance, capacity utilization, and risk management.

The Financial Calculation Framework

Our calculator uses a modified total cost of ownership (TCO) approach that includes:

1. Direct Costs:
   • Unit production costs (materials, labor)
   • Setup/implementation costs
   • Outsourcing contract fees
2. Indirect Costs:
   • Management overhead
   • Quality control expenses
   • Transition costs
3. Opportunity Costs:
   • Alternative uses of capital
   • Focus diversion from core competencies
4. Time Value:
   • Discounted cash flow analysis
   • Breakeven timing

Key Quantitative Factors

Factor	In-House Considerations	Outsourcing Considerations	Weight in Decision
Unit Cost	Economies of scale at high volumes	Supplier pricing tiers and discounts	35%
Fixed Costs	Equipment, facility, training investments	Contract minimum commitments	25%
Quality Control	Direct oversight and immediate corrections	Contractual SLAs and audit rights	20%
Flexibility	Easier to adjust processes and priorities	Contract renegotiation may be required	15%
Strategic Value	Potential competitive advantage	Focus on core competencies	5%

Qualitative Considerations

While our calculator focuses on quantitative analysis, these qualitative factors often tip the balance:

• Core Competency Alignment: Does this function contribute to your competitive advantage? Harvard Business Review research shows companies that outsource core competencies lose 37% more market share over 5 years than those that don’t.
• Knowledge Protection: Will outsourcing expose proprietary processes or intellectual property? A 2022 MIT Sloan study found 62% of manufacturing firms experienced IP leakage from overseas suppliers.
• Supplier Relationships: Do you have existing trusted partners? Long-term supplier relationships can reduce costs by 12-18% through continuous improvement (Stanford Graduate School of Business).
• Capacity Utilization: Do you have underutilized resources that could handle this function? The average manufacturing facility operates at just 72% capacity (U.S. Census Bureau).
• Regulatory Compliance: Are there legal requirements that make in-house production mandatory? 43% of medical device companies cite regulatory concerns as their primary reason for insourcing (FDA report 2023).

Industry-Specific Benchmarks

Decision patterns vary significantly by industry. Here’s what the data shows:

Industry	Typical Outsourcing Rate	Primary Outsourced Functions	Average Cost Savings	Quality Tradeoff Risk
Technology	68%	Manufacturing, Customer Support, IT Infrastructure	22-28%	Low-Medium
Manufacturing	42%	Component production, Logistics, Packaging	15-22%	Medium-High
Healthcare	31%	Billing, IT, Facility Management	18-25%	High
Financial Services	57%	Back-office operations, Compliance, HR	25-35%	Medium
Retail	73%	Manufacturing, Distribution, Marketing	30-40%	Low

Source: 2023 Outsourcing Institute Annual Report

The Hidden Costs of Outsourcing

Many companies underestimate these significant but less obvious costs:

1. Transition Costs: Average 18-24 months of parallel operations during knowledge transfer ($1.2M for Fortune 1000 companies according to Deloitte)
2. Management Overhead: Requires 15-20% more management time to oversee vendors than internal teams (Harvard Business School)
3. Contract Renegotiation: 67% of outsourcing contracts require renegotiation within 3 years, adding 8-12% to original costs (Everest Group)
4. Exit Costs: Bringing functions back in-house costs 2.3x the original outsourcing savings on average (KPMG)
5. Opportunity Costs: Lost innovation potential when R&D is outsourced—companies that outsource R&D file 40% fewer patents (MIT Technology Review)

When to Definitely Keep It In-House

Some situations virtually always favor in-house production:

• When the function is core to your competitive advantage (e.g., Apple’s chip design, Coca-Cola’s formula)
• When quality control is mission-critical (e.g., aerospace components, medical devices)
• When you have excess capacity that can absorb the work at marginal cost
• When proprietary knowledge would be exposed (e.g., trade secrets, customer data)
• When supply chain risks are unacceptably high (geopolitical instability, single-source dependencies)

When Outsourcing Clearly Wins

Conversely, these scenarios typically favor outsourcing:

• For non-core functions that don’t differentiate your business (e.g., payroll, janitorial services)
• When you lack specialized expertise that would be costly to develop internally
• For highly variable demand where scaling internal capacity would be inefficient
• When capital requirements for in-house production are prohibitive
• For short-term needs where building internal capability isn’t justified

Implementing Your Decision

Once you’ve made your choice, follow this implementation checklist:

Expert Implementation Framework

From the U.S. Small Business Administration:

1. Conduct thorough due diligence on potential partners
2. Develop detailed service level agreements (SLAs)
3. Create a transition plan with clear milestones
4. Establish governance structures and performance metrics
5. Plan for knowledge transfer and documentation
6. Build contingency plans for supplier failure
7. Schedule regular performance reviews

Continuous Evaluation

The do-or-make decision isn’t permanent. Best practices include:

• Annual reviews of all outsourcing arrangements
• Cost benchmarking against market rates every 2 years
• Quality audits at least semi-annually
• Capacity utilization analysis quarterly
• Technology assessments to identify automation opportunities

A McKinsey study found that companies that actively manage their sourcing decisions achieve 15-25% better financial performance than those that don’t.

Case Studies: Real-World Examples

Success Story: Toyota’s Insourcing Strategy

Toyota famously insources most component production, which contributes to their industry-leading quality (just 0.8 defects per vehicle vs. industry average of 1.6). Their “just-in-time” production system requires tight integration that would be impossible with external suppliers. While their production costs are 8-12% higher than competitors, their quality advantage delivers 3x higher customer loyalty scores.

Cautionary Tale: Boeing’s Outsourcing Missteps

Boeing’s aggressive outsourcing of the 787 Dreamliner production (70% of components) led to:

• 3-year production delays
• $25 billion in cost overruns
• Multiple quality incidents including battery fires
• Significant brand reputation damage

The company has since brought back 30% of previously outsourced production.

Emerging Trends Affecting Do-or-Make Decisions

Several macro trends are reshaping the outsourcing landscape:

1. Reshoring Movement: 64% of manufacturers have brought some production back to the U.S. since 2020 (Reshoring Initiative)
2. Automation Impact: Robotics and AI are reducing the labor cost advantage of offshore production by 30-40% (BCG Analysis)
3. ESG Considerations: 78% of consumers will pay more for sustainably produced goods (Nielsen), making local production more attractive
4. Talent Shortages: 87% of companies report skills gaps, making it harder to build internal capabilities (ManpowerGroup)
5. Geopolitical Risks: Supply chain disruptions have increased 4x since 2019 (World Bank), making diversification critical

Academic Research on Sourcing Decisions

For deeper analysis, review these authoritative studies:

MIT Sloan: When Outsourcing Backfires (2023) Columbia Business School: The Dangers of Outsourcing Core Competencies (2022) Harvard Business Review: The Hidden Costs of Outsourcing (2021)

Final Recommendations

Based on our analysis and industry best practices:

1. Start with the numbers—use our calculator to establish the financial baseline
2. Layer in qualitative factors—consider strategic importance and risk profile
3. Pilot before committing—test outsourcing with a small, low-risk project first
4. Build flexibility—structure contracts with clear exit clauses
5. Monitor continuously—what’s right today may not be right in 2 years
6. Consider hybrids—many companies find success with partial outsourcing models
7. Invest in relationships—whether with internal teams or external partners

Remember that the optimal solution often isn’t all-or-nothing. Many leading companies use a selective sourcing approach, keeping core functions in-house while strategically outsourcing non-core activities to best-in-class providers.

For personalized advice, consult with a SCORE mentor (free business counseling from the SBA) or engage a management consulting firm specializing in operations strategy.