Originally Posted by Arnie E
Isn't it true that if you do something internally you have an asset, but if you outsource you have a debt.
Maybe I am wrong, I am not a financial wizz like some here, it just seems that way to me.
You only have an asset if something remains, be it tangible (essentially you can touch it) or intangible (non touchables in the sense they are ideas, capabilities etc).
Tangible assets are easy - engines, planes, vehicles etc
Intangibles are much harder to define - what is the quantified value of the Qantas brand, what is the value of Intellectual Property etc. Many accounting games get played with this category and it is being tightened up as a result.
Outsourcing is only a debt until it is paid for. Most likely if you are thinking of a longer term contract (eg power by the hour for engines, maintenance services etc) then you're talking about a liability, not a debt.
One of the funny thiongs about the tax system is that outsourcing is a tax deductible immediately upon payment of the invoice, i.e. if I spend $10M a month on power by the hour engines I can claim it as an expense, reduce my profit accordingly and thus pay no tax on $10M of earnings.
On the other hand if I purchase the very same engines for $100M (or whatever) I cannot claim an immediate tax deduction, I must depreciate the engines over a period of time (whatever the appropriate schedule determines the usable life of the engine to be).
And that is one of the clear benefits of outsourcing, you get an immediate tax "refund" on your monthly spend without having to outlay all the cash for the engine either. So you theoretically have an extra $100M of cash flow in your pocket which means no borrowing costs (interest plus opportunity cost more or less = weighted cost of capital) etc. You also don't have the cost of all those pesky things associated with maintaining the engines such as engineers, tools, facilities, and associated costs such as staff travel, training, most of the compliance and QA work (beyond minimal external audit requirements), OH&S issues, greedy landlords etc.
Everything gets wrapped up into a nice easy invoice which means all your admin costs are minimised as well, you get rid fo everyone and replace them with a mid level (at best) manager who is called a "contract administrator" or somesuch.
Outsourcing has a lot of financial benefits, but the cost is almost always operational. You lose control of your operations, after all, that's exactly what outsourcing is. You can audit and have technical staff there but that's about it. For one of the worst scenarios in outsorucing refer to the 787 program. If that had worked it would have been brilliant but somehow it has become such a clusterf*ck that Boeing don't really know when they'll be in production. If you want to see outsourcing at its best look at Mazda at their prime, basically they counted the number of vehicles that rolled off the production line and paid each of their suppliers based on that. If 20,000 cars were produced then they paid for 100,000 tyres, no more no less as the supplier knew exactly what they had to deliver in what timeframe and order and it worked wonders.
So the benefits are there but they can be damn hard to realise in actuality because the bean counters have to realise that cost minimisation does not equate to overall optimisation.
Hope that helps
R