A firm's make-or-buy choice is a well documented management problem that has
attracted the attention of academics and practitioners from diverse fields. The accountant's
role in this choice also has a storied past, one rooted in the desire to develop accurate in-
house production cost estimates to compare to external prices. The simple textbook
explanation of the role of accounting information is quite staid, despite the fact that the
information age has brought about a much more nuanced and strategic role of accounting in
most other decisions a firm makes. In this paper, we revisit the role of information in the
make-or-buy decision in light of the fact that firm decisions, and the information conveyed
therein, often have notable strategic repercussions. In particular, we note that a firm's
internal estimates of production cost are not the only estimates that prove crucial to the
make-or-buy choice. A firm's internal estimate of demand too can influence the decision of
25 whether or not to outsource, even when the demand itself is not affected by the sourcing
decision.
The reason for this result is that the information gathered about demand by a firm is
inevitably conveyed to a supplier by input quantities purchased by a firm. In particular,
with outsourcing, a supplier gleans information about both the firm's belief about its
demand and its intended strategic posturing from its input orders. While not all suppliers
care about this information, we show that the fact that such information is on the horizon
means a firm may prefer to buy from an input supplier who has "skin in the game" via a
presence in the output market.
By conveying information on its profitability to its supplier through its purchasing
decisions, a firm can soften competition with its supplier's output market arm. And, by
conveying information about its output market quantity choices through its input orders, a
firm can gain a first-mover advantage of sorts over its supplier (and even other rivals).
Both effects point to a strategic role of outsourcing, one rooted in information conveyance
and supportive of procurement from rivals. Admittedly, this point was made in a model
that excludes other traditional considerations in the make-or-buy choice (e.g., low balling,
investment incentives, quality concerns etc.) to highlight the novelty of the result. Future
work could layer in these other factors to better parse the critical features that promote
outsourcing as well as the determinants of who to outsource from and when to initiate
outsourcing.