Outsourcing can reduce overall costs, making it a good option for IT investments viewed through an EVA analysis. This example compares the cost of in-house versus outsourced applications:
Manitowoc’s application is expected to generate $180,000 in net benefits whether outsourced or in-house.
IN-HOUSE EVA SCENARIO:
The in-house option requires a $1 million capital investment with a 12 percent cost of capital:
$180,000 – ($1 million x 12%) = $60,000
(The in-house scenario also assumes a $50,000 annual operating expense.)
OUTSOURCED EVA SCENARIO:
The outsourced option requires no capital investment, but $80,000 per year in service fees:
$180,000 – ($0 – $80,000) = $100,000
Looking at both scenarios from a balance sheet basis, the company would choose to not outsource, since the presumed $50,000 annual operating cost for the in-house application is cheaper than the $80,000 outsourcing fee.
However, outsourcing eradicates the $1 million initial capital investment required to purchase the in-house application. So when considering both scenarios with an EVA analysis, the company would definitely choose to outsource since that saves the initial capital investment.