Question

Gizmo, Inc. is a diversified multinational manufacturer. The CEO is considering

outsourcing the marketing research function to a global consulting firm. The

consulting firm would charge a fixed annual fee of $1,100,000. At present, the

costs of operating the marketing research department are $1,315,000 per year, as

follows:

Director salary $130,000

Staff salaries 800,000

Travel 105,000

Occupancy 75,000

Consultants 80,000

Executive VP 60,000

Overhead 20,000

Miscellaneous 45,000

The outsourcing firm would perform all duties currently performed by Gizmo

personnel, as well as those of the external consultants. Miscellaneous expenses

(supplies, etc.) would be eliminated. Travel costs would decline 90%.

Occupancy costs reflect internal charge for office space in corporate headquarters.

Cost for Executive VP reflect a charge for 15% of that individual’s time.

Overhead is an allocation of general corporate overhead.

Required: Discuss the factors that the CEO should consider in deciding whether

to outsource the marketing research function.

Answer 1

Scenario 1 : Own Marketing research team

Scenario 2: Outsourced Marketing research function

Seeing the costs are lower in Scenario 2 , it is beneficial to outsource the function to an outside agency at a fee of $ 1,100,000.

However , it should be seen that quality standards are not compromised by the agency as marketing is a sensitive function on which business strategies majorly are based.

Oversight mechanisms over the outsourced agency should be increased.

For that , the Executive VP may be required to devote more time and this shall also increase our cost estimate sin Scenario 2.

Secondly, the allocation basis of general corporate overhead should be revised post outsourcing.

Thirdly, It has been assumed that after outsourcing , the space previously occupied by the marketing team shall no more be needed. And internal charge shall no more be levied. We can lease it off or occupy for other function.