Government Finance Officers Association article
Make or buy? Using cost analysis to decide whether to outsource public services.
Editor's note: This article is adapted from a new GFOA publication, Cost Analysis and Activity-Based Costing for Government.In this period of tight budgets, many governments are under increasing pressure to do more with less. One potential way to reduce costs is to outsource services to private firms, non-profit organizations, or other governments that can provide the services more efficiently. In some cases, outsourcing can result in significant cost savings over the long run. In other cases, however, outsourcing may actually end up increasing a government's total costs. How can a government know whether outsourcing a given service will result in a cost savings or a cost increase? This article answers this question by demonstrating how to perform a cost analysis. The decision as to whether to perform a service "in house" or outsource it to an external provider is commonly referred to as the "make-versus-buy" decision. This article walks through the steps involved in a make-versus-buy cost analysis. But first, two key points warrant emphasis: (1) a make-versus-buy cost analysis should use a differential cost perspective and (2) the analys...