HOI research | Subcontracted labor boosts project profit margins

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Introduction

Today’s dynamic work environment has made it standard for complex project-based operations, such as new product development and professional services, to use subcontracted labor, often as a tool to cope with variability in demand. However, despite its prominence, its effect on the project's performance is vastly unclear. Research in operations management suggests an inverted U-shape relationship between the use of subcontracted labor and store sales and profits in retail. However, whether these findings apply to complex project settings remains an open question. Compared with repetitive operations such as retail or an assembly line, project settings are characterized by more skilled workers, complex tasks, and fluid teams. The study, "The Effect of Subcontracted Labor Mix on Financial Performance: Evidence from High-Tech Project Teams," delves into integrating subcontracted with permanent workers on knowledge-intensive project outcomes in settings with solid labor protective law practices. 

Key findings

The study conducted by analyzing projects of a European high-tech firm for ten years reveals that increasing the use of subcontracted workers, working hand-in-hand with permanent workers, can lead to higher project profit margins due to the higher motivation of subcontracted workers to exert extra effort to ensure future employability. Specifically, an increase of 10% in the subcontracted labor mix (i.e., the number of subcontracted divided by the number of permanent team members) is associated with an increase in the project margins in the studied setting by 5.83%. Interestingly, this positive effect is more pronounced in larger teams. However, it diminishes in scenarios involving significant project scope changes or when higher-skilled workers are subcontracted. An additional critical finding is that the benefits of subcontracting are more substantial when these workers are engaged in more technical roles than administrative ones. Moreover, subcontracted workers contribute more effectively when they join the project in the later stages. 

These findings show that subcontracting should be considered a critical factor in project performance rather than merely a tool to cope with demand variability. It makes sense to staff part of the project teams with subcontracted personnel, even during periods of low demand.

Insights for practice:

These findings offer project managers actionable strategies to enhance project performance in settings where protective labor law practices are in place.

1. Balanced team composition: To optimize profit margins, consider staffing projects with subcontracted workers to work together with permanent workers, especially for larger projects.
2. Role allocation: Assign subcontracted workers to technical tasks with a more pronounced impact.
3. Timely inclusion: Bring subcontracted labor on board during the project's later phases for maximum effectiveness.
4. Scope stability: Be mindful of the possibility of significant project scope changes, as the positive impact of subcontracted labor is reduced in projects subject to substantial scope changes.

Implications and future directions

This research not only sheds light on the strategic use of subcontracted labor in projects, but also challenges pre-existing notions about subcontracting, particularly in high-tech and complex project environments. By understanding these dynamics, project managers can make more informed staffing decisions, ultimately driving better financial outcomes for their projects. 

While the study offers a fresh perspective on the use of subcontracted labor in project environments, the researchers emphasize that their findings are specific to the context of high-tech firms in settings with strong labor protection laws. Further research is needed to explore the applicability of these findings to other sectors and project types.

Meet the researchers

• Antoaneta Momcheva, Assistant Professor at the House of Innovation, Stockholm School of Economics.
• Fabrizio Salvador, Professor in Operations Management and Technoloy at IE Business School, IE University.
• Emmanouil Avgerinos, Associate Professor in Decision Sciences at IE Business School, IE University.