The key strategic factor to consider during the make-versus-buy decision is performance capability.  The decision to outsource involves evaluating which supplier is the most capable of performing the service at a best practice level.  This requires an evaluation of potential outsource services in terms of their contribution to a firms core and noncore activities.  Typically a firm will not want to run the risk of diluting core competencies by having external firms perform isolated, highly sensitive activities.  Once a firm has isolated those activities that are “core supportive” the balance of required activities or the noncore requirements become outsource candidates.

The most difficult step for most firms is to identify which activities are critical core capabilities.  The outsourcing decision should not be limited to asset investment. Instead, it must center on capabilities provided or achieved through the asset investment.  If the capabilities achieved by performing activities internally do not extend an enterprise’s core competencies, then such activities should be outsourced.

The desirability of outsourcing is based in part on the benefits of specialization.  If required service can be improved or an enterprise can reduce its overall investment or operating requirements, then outsourcing is an attractive alternative.

Make-versus-buy decisions involve trade-off analysis among economic and strategic factors. A large portion of such analysis examines cost to service elements.  Outsourcing is easily justified if visible costs decrease and service improves, as long as other economic and strategic requirements are satisfied.  Specialization can result in economies of scale enabling simultaneous achievement of reduced cost and improved service.