Revisiting the Make-or-Buy Decision: Conveying Information by Outsourcing to Rivals

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



About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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