The Savings Don't Show Up—Because They Were Never Real

Business leaders don't make irrational decisions. But they make flawed ones constantly—because the measurement systems they inherit lie to them persuasively.

Nowhere is this more destructive than in make/buy decisions that promise cost savings based on accounting comparisons that don't survive contact with reality.

How False Savings Get Manufactured

The setup is familiar: An internal part costs $12 to produce. A vendor quotes $10. Procurement calculates $2 per unit savings. Finance confirms the math. Leadership approves the switch.

But that $12 internal cost includes fully loaded overhead—facility costs, depreciation, allocated administration. The $10 vendor quote never does. You're comparing a complete internal burden to an external marginal rate.

After outsourcing, the fixed costs remain. The factory is still there. Machines still depreciate. Insurance still gets paid. But now you're paying a vendor and carrying the overhead you thought you'd eliminated.

The "savings" were accounting fiction. You didn't reduce costs—you lost volume while keeping the infrastructure.

Why the P&L Never Improves

If projected savings don't translate to actual profit improvement, there's a reason: The cost never left the system. It just became invisible in the allocation.

Worse, you've increased the overhead burden on remaining internal production. Fewer units now absorb the same fixed costs, making internal production appear even less competitive. This triggers more outsourcing decisions, creating a predictable death spiral.

Every make/buy decision based on fully loaded internal costs versus marginal external quotes follows this pattern. The measurement system rewards decisions that systematically destroy internal capacity.

This Isn't Accident—It's Methodology

The tragedy isn't that this happens occasionally. It's that this logic gets taught as best practice and embedded in standard cost accounting systems.

The methodology is intellectually consistent and operationally logical. It's also systematically wrong because it ignores what happens to the capacity left behind.

Closing a factory saves money. Shifting work away from it without closing it does not. But the measurement system doesn't distinguish between these fundamentally different decisions.

The Real Damage

What appears as savings on spreadsheets quietly creates:

Rising unit costs for remaining internal production as fixed costs spread across lower volumes

Demoralized teams watching their work get outsourced based on flawed comparisons

Undermined capital investments as equipment utilization drops and ROI calculations deteriorate

Leadership confusion about why financial performance doesn't reflect the "wins" procurement keeps claiming

The numbers look clean. The logic appears airtight. But the business slowly bleeds value because the foundational measurement was wrong.

The Pattern Extends Beyond Manufacturing

This isn't just a factory problem. The same dynamic appears wherever organizations compare fully loaded internal costs to external quotes:

IT services that include infrastructure allocation versus cloud pricing that doesn't. Marketing functions with embedded overhead versus agency rates. Administrative services with facility costs versus outsourced alternatives.

Every time you measure internal work with full burden and external alternatives with marginal cost, you bias the decision toward outsourcing—regardless of actual economics.

What This Reveals About Inherited Systems

Make/buy decisions expose how measurement systems can be technically correct and strategically destructive simultaneously. The accounting is accurate. The comparison methodology is standard. The decision logic is defensible.

But the outcome systematically erodes internal capability while failing to deliver promised savings.

This is system degradation in action. Not through obvious failure, but through inherited logic that optimizes for metrics that don't align with business outcomes.

The Audit Question

If your organization consistently chases savings that never materialize in actual profit improvement, the problem isn't your vendors or your procurement team.

The problem is the measurement logic you've inherited—and the system that continues to reward decisions based on flawed comparisons.

Real cost analysis requires comparing like with like: marginal internal cost to marginal external cost, or total cost of ownership to total cost of ownership.

But that requires stepping outside the inherited system long enough to examine whether its foundational assumptions still make sense.

Most organizations discover they don't.