Revisiting the Make-or-Buy Decision: Conveying Information by Outsourcing to Rivals
February 24, 2014 Leave a comment
THE ACCOUNTING REVIEW American Accounting Association
Vol. 89, No. 1 DOI: 10.2308/accr-50579 2014 pp. 61–78
Revisiting the Make-or-Buy Decision: Conveying Information by Outsourcing to Rivals
ABSTRACT: The textbook make-or-buy decision is typically described as choosing the
cheaper of the two sourcing options. However, research in accounting has consistently
demonstrated that strategic and informational considerations often complicate such
seemingly straightforward criteria. In a similar vein, this paper shows that when a firm
becomes privy to accounting information pertaining to its profitability, its sourcing choice
has powerful informational reverberations. This is because input procurement from an
outsider serves to convey both profitability information and strategic positioning.
Conveying profitability information refers to the fact that the size of the input order
provides the supplier a credible signal of the firm’s internal accounting information and,
thus, its relative ability to compete in the marketplace. Conveying strategic positioning
refers to the fact that the upfront placement of the input order also informs the supplier
about the firm’s chosen strategic choices in the marketplace. We demonstrate that both
sources of information conveyance together can point to a firm preferring to buy inputs
from a retail rival even when it can make them internally at a lower cost. This penchant
for outsourcing to a rival is more pronounced the more accurate the firm’s accounting
system.
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