The Effect of Subcontracted Labor Mix on Financial Performance: Evidence from High-Tech Project Teams

Abstract

Problem definition: We investigate the effect of using subcontracted workers together with permanent workers on project financial performance. Academic/practical relevance: It is widespread practice, across disparate businesses, to staff project teams with subcontracted workers—and yet, despite the prevalence of this phenomenon, there is scant research on how subcontracted workers impact project performance. Investigating such an effect is important because past findings on the effects of subcontracting in retail or assembly lines cannot be hastily extrapolated to the more qualified workers and more demanding tasks normally associated with project environments. Methodology: Building on previous findings about the higher motivation level of subcontracted versus permanent workers when the latter are protected from individual dismissal by the law, we develop hypotheses to conceptualize how and under what conditions subcontracted workers positively impact project performance. We then test our hypotheses by analyzing 413 projects of a European high-tech firm. Results: We find that with increased use of subcontracted workers comes increased project profit margins. This positive effect is stronger for larger teams and weaker when large project scope changes occur or when higher-skilled workers are subcontracted. We also find this effect to be stronger when subcontracted workers are involved in technical rather than administrative roles and when subcontractors join in the later stages of the project. Managerial implications: This study offers guidelines on how project managers can use subcontracting to increase project margins, highlighting strategic and tactical factors that affect the benefits of using subcontracted labor.