As technology has removed the importance of distance in organizational work, it has supported the growth in outsourcing in recent decades as firms farm out the things that aren’t so strategically important to focus on what really powers their competitive edge.

That’s the finding of a new paper from the London School of Economics, which examines the issue through the lens of the rollout of high-speed broadband in France between 1999 and 2007.  The rollout of the technology was comprehensive in large cities, but more remote areas waited almost a decade to receive similar coverage.

This allowed the researchers to assess the behavior of firms that had high-speed broadband and those that did not.  The researchers used the appearance of “personnel expenses outside the firm” in a company’s accounts to understand how much they invested in outsourcing.

Connectivity and outsourcing

They found that firms with newly connected up broadband would increase their outsourcing by 4% after four years.  Ordinarily, this would be accompanied by a refocusing of personnel towards areas of more strategic importance.  The researchers tested this via the construction of what they refer to as the “Herfindhal Index”, which is a measure of the concentration of employees performing a particular activity within a firm.  If the figure is nearer to 0 it suggests that employees are deployed on a wide range of activities, whereas if it’s nearer to 1, it suggests there is a high concentration of employees on the same activities.

The data showed that when firms had access to broadband, they did indeed become more specialized around their core skills, with a shift of around 1.6% in this direction.  While the researchers don’t believe that the provision of broadband created the outsourcing trend, it did nonetheless accelerate it.

The findings echo those from other works that suggest that the provision of technology tends to benefit highly-skilled workers by automating low-skilled tasks but increasing the demand for higher-skilled workers to both maintain the technology and to capitalize on the productivity gains it provides.

Access to broadband produced a similar shift, with the demand for skilled workers rising in areas that were connected, which in turn corresponded with a rise in the average wage of around 3%.  The picture for those to who the work is outsourced is more mixed, however, with low-skilled workers seeing wages fall by around 1% and higher-skilled workers seeing income rise by 4%.

With the Covid pandemic sparking a wave of investment in digital technologies, the authors ponder whether it might also trigger a shift in the nature of the labor market, especially as they believe the rise in remote working shares many similarities with that of broadband internet.  Whether it triggers a similar rise in outsourcing is something we will have to wait and see.