Moderate Employment Growth in Service Sector due to IT Outsourcing

In public opinion, outsourcing is usually associated with job cuts. The findings of a current study conducted by the Centre for European Economic Research (ZEW) in Mannheim, however, indicate that this is not generally the case.

The ZEW study analysed the medium-term effects of IT outsourcing on employment growth. In the sample period, the employment growth rate was around three percent per year for firms in Germany. The study suggests that in the medium-term IT outsourcing firms in the service sector have a ten per cent higher employment growth rate per year than competitive non-IT outsourcing firms. For IT outsourcing firms in the manufacturing industries, however, neither this positive employment growth nor a decreased number of employees in the long run due to IT outsourcing can be observed. "Our study’s findings indicate that medium-term outsourcing, i.e. in a period of three years, does not necessarily lead to job cuts in firms which are outsourcing services,” Jörg Ohnemus, ZEW researcher who investigated the relation between IT outsourcing and employment growth, explains.

The ZEW study analysed a representative sample of 1,154 German firms in the manufacturing industries and the service sector between 2003 and 2006. In addition to firm-specific data such as economic sector, number of staff, turnover, age of firm, and usage of computers, the sample also contained information on a variety of IT services firms require for their business activities. By definition, outsourcing firms are firms that transfer at least one of the following basic IT services to external service providers: installation of hard- and software, system administration and maintenance as well as user support. 

The calculations by ZEW indicate that between 2003 and 2006 IT outsourcing firms had a slightly more positive employment growth than firms which were not outsourcing IT services. Throughout all economic sectors analysed in the study, the employment growth rate was around six per cent higher in outsourcing firms than in non-outsourcing firms.

However, the results vary when analysing firms in the service sector and firms in the manufacturing industries separately. The employment growth rate for IT-outsourcing firms in the service sector is 10.5 per cent higher than in firms in the service sector using internal IT services. On the other hand, the positive effect of IT outsourcing on employment cannot be verified for firms in the manufacturing industries. Moreover, long-term job cuts due to IT outsourcing cannot be confirmed either.

The effects of IT outsourcing on employment considerably vary in these two economic sectors. This is most likely due to the fact that IT services do not play such a major role in the manufacturing industries as in the service sector, and that there are considerably more PC workplaces in the service sector than in the manufacturing industries. 

One explanation for the positive effects on employment, which is confirmed by the study, could be that firms become more efficient when outsourcing services. “Outsourcing activities such as IT services, which are usually not the core competencies in firms, frees up resources that can be used elsewhere in the firms and thus they can now concentrate on the products and services offered on the market. This strengthens the competitiveness and helps improve the outsourcing firm’s position on the market,” Jörg Ohnemus says. Consequently, the firms’ number of employees will increase once again.

For further information please contact

Dr. Jörg Ohnemus, Phone +49 (0)621/1235-354, E-mail ohnemus@zew.de