We had a quarterly all hands meeting at my office today. It was a GM and below level meeting. At the end during the question session, a relatively new employee, a Russian immigrant with improving English, bravely asked, "What about outsourcing - are we going to get it?" (sic) Yeah, you go guy! Stick that outsourcing to us baby!

Our GM deferred the question to my immediate boss, who indicated he was going to delegate it on to me, then he suddenly decided to answer it himself. To my dumbfoundment he then uttered one of the most profound statements I've heard on the topic. So good in fact that I quote it for you now - only slightly paraphrased.

We will outsource when there is no knowledge associated with an activity, such as repetitive execution of test plans. We will not outsource where there is knowledge to be gained and retained such as writing test scripts or programming automated tests. We will also outsource when we have resource issues. We will look at each case in turn. When it makes commercial sense we will outsource to elevate a bottleneck.

It's a textbook answer. It combines Donald Reinertsen's information theory ideas - in this case, the knowledge to be gained - with the Theory of Constraints and Throughput Accounting -  the bottleneck and the commercial sense - which suggest that investment should be focused on constraints. When there is a temporary bottleneck, a temporary investment is needed to alleviate it. That's when outsourcing makes sense.

When to outsource is discussed in "Agile Management..." in Chapter 13 Staffing Decisions.