MENU
April 25, 2006

Outsourcing and Technological Change

If your industry has a high rate of technological change, are you more likely to outsource?


If you owned a print shop 60 years ago, you might have hired an in-house repairperson to maintain your machines. Today, you’d probably rely on an outside repair service. The main reason for this shift is not that you now have fancier machines but that you replace them at much more frequent intervals. “If every two years you have to retrain the worker to fix your machines,” says Professor Nahum Sicherman, “maybe you’d better outsource the repair to some outside agency, because they do it on a larger scale.”

The dramatic growth of outsourcing — including the use of temp agencies and consultants — in the past 30 years has redefined the scope of firms in many industries. As outsourcing has moved up the value chain from cleaning and secretarial services to higher-skilled services, especially those related to information technology, firms are increasingly weighing the tradeoffs between hiring and outsourcing for a wide range of jobs.

To what extent is technology driving the outsourcing boom? Sicherman and Professors Ann Bartel of Columbia and Saul Lach of Hebrew University set out to answer this question by studying U.S. Census Bureau data from manufacturing firms. More specifically, they wanted to find out whether high rates of technological change tilt the balance toward outsourcing in particular sectors.

“We tried to examine the different channels by which technological change could increase the incentive of firms to outsource,” says Sicherman. “Some of it is tautological: if the nature of the technology is such that it makes it easier to outsource, then you see more outsourcing. But theoretically, just because you use more-sophisticated technologies, there is nothing that says why it should be easier to outsource. If instead of using a regular broom to clean the floor you are using an electric broom that allows you to do it faster, it’s not clear that you should now outsource it rather than doing it in-house.”

The study showed that technology reduces the relative cost of outsourcing and that firms with a more advanced technology infrastructure tend to outsource more. Such firms are more likely to outsource not just computer-related services but also other services — such as legal and accounting services — that rely on technology.

The researchers hoped to prove that firms in sectors with higher rates of technological change rely more heavily on outsourcing, but the survey data were not detailed enough to show the effect of technological change. “We were not able to distinguish between sectors that are more high-tech and sectors that just have more frequent changes,” Sicherman says. The researchers recently gained access to a Spanish data set with more detailed survey questions, which they hope will provide more conclusive evidence.

Through interviews, however, the researchers have found anecdotal support for the hypothesis that technological change — rather than technology per se — induces companies to outsource. One software company, for example, used consultants for database programming and employees for other types of computer programming. The company switched database programs frequently, and it was cheaper to swap out the consultants on a regular basis than to retrain employees on a new program.

Sicherman emphasizes that the impact of technological change on outsourcing is not limited to the information technology sector. “If you look at technological changes in the last 20 or 30 years, most of them have been in information technology and computers,” he says. “But my father is a carpenter and my brother is a carpenter. My father changed the machines every 20 years. My brother is changing them every five years. So I don’t think it’s mainly a story about computers. I think it’s mainly about the fact that you change the technology with which you do your product.”

 

Nachum Sicherman is professor finance and economics and Ann Bartel is the A. Barton Hepburn Professor of Economics at Columbia Business School.

 

Read the Research

Ann Bartel, Saul Lach, Nachum Sicherman

"Technological Change and the Make-or-Buy Decision"

View abstract/citation  Download PDF  


Have You Read Columbia Business?

Columbia Business School’s alumni magazine connects alumni with each other and the School; celebrates alumni milestones and accomplishments; and chronicles the impact of Columbia Business School alumni, faculty members, and students on the global business landscape.

Read Columbia Business>