Sometimes, a choice has to be made between providing a service internally or outsourcing it. This type of decision forces the company to do things a certain way for a number of years. Providing the service in-house involves major investments that must be amortized over several years. On the other hand, outsourcing requires a serious commitment, as well as an agreement that spans several years. This choice therefore requires much thought. Here are some aspects that must be considered in the thought process.

Required level of control:

• The more strategic the activity for the company, the greater the degree of control needs to be. In a northern airport, for instance, snow removal on runways is critical because of the potential consequences of having to shut down one or more of the runways.

Impact on customer service:

• Greater involvement sometimes increases a company’s capacity to offer high-quality services by placing a greater proportion of the added value under its control. For instance, daily maintenance at a cultural or recreational site such as a circus or amusement park can be done internally if cleanliness is considered to be a key element of the service. However, in other sectors characterized by complex and frequent change, customer service is better provided through outsourcing, which is natural given the flexibility provided by such a type of management. To change technology or approaches you need only change suppliers (depending, however, on the term of the agreement).

Management requirements:

• Managing an activity internally means that it will fully reflect corporate objectives and performance requirements. Conversely, when an activity is outsourced, these requirements need to be negotiated with an independent entity. On the other hand, certain activities are not compatible with a company’s structure or collective agreements, which results in higher costs if they are handled within the company. For instance, airlines generally outsource cargo handling and catering services precisely because their cost structures do not enable them to provide such services.

Financial issues:

Cash control:
Certain cash-heavy activities are difficult to control when managed by third parties. Parking lots in high-traffic areas (such as stadiums) are therefore managed internally, not outsourced.

Fixed costs:
If the company subcontracts a service to a third party, the cost of the service is 100% variable. When the service is handled internally, the company must assume the fixed costs associated with the service, and thus expose its earnings to greater cyclical fluctuations. This is why car manufacturers outsource a large portion of car components and sub-assemblies.

Need for capital:
Vertical integration requires internal investments, while an agreement with an independent entity uses outside capital.

Potential gains:
The potential gains associated with the decision to outsource must necessarily be high. Otherwise, there would be little incentive to set out on an endeavour that is quite risky in many respects.

Moreover, it is worthwhile to analyze such a decision based on the necessary prerequisites.
Vertical integration requires that the company have the following prerequisites:

• The company must have a competitive edge.
• The skills are available internally or externally.
• Capital is available.
• Performance is satisfactory.

With respect to outsourcing, here are some of the desirable prerequisites:

• The agreement between the company and the subcontractor must be flexible enough to allow for changes, so that the company is able to adapt to its customers’ constantly changing needs.
• The subcontractor must have intimate knowledge of the company’s needs.
• The term of the outsourcing contract must be long enough for the subcontractor to make a financial and moral commitment.

The purpose of this analytical framework is solely to aid in the decision-making process, given the complex nature of the issues involved.