IT Enables Outsourcing

Brookings Institute released an important study on the effects on IT on regional economic development earlier this year. I wrote an earlier ED Futures article about it, but want to return to the study because of its relevance to the business outsourcing issue that nearly every US region is facing now. In a nutshell, what the Brookings study says is that IT has "enabled" economic growth in many communities nationally and globally, and is also "disabling" growth in those economies where business functions and jobs are being outsourced.

Information technology (IT) saturated American business in the 1990s, and countless new companies sprang up around Internet applications. In response, economic development officials across the country have tried to catch the "tech" wave by stimulating the growth of high technology companies and "clusters."

The IT revolution extends far beyond the technology sector, after all. All kinds of firms--not just "tech" companies--are finding ways to cut costs dramatically by automating tasks, outsourcing certain functions, and linking customers to the factory floor. IT is also accelerating the ongoing fragmentation of large firms into separately located functional units, and the establishment of strategic relationships with other firms to perform functions formerly kept in-house.

In view of these changes, this report seeks to give readers a look inside companies to see how they are using IT, and to begin a conversation about what regional leaders can do to support technology-based development. The study builds on interviews with the chief information officers (CIOs) and information architects of 28 firms located in five metropolitan areas--Atlanta, Cleveland, Minneapolis/St. Paul, Phoenix, and Seattle. Ultimately, it seeks to clarify the nature and direction of key trends in order to explore their implications for public policy.

Several key insights emerge from the Brookings' analysis that shed light on the impact of IT on regional economic development:

1. Both "new" and "old" economy firms are embracing IT, which means that both Sunbelt and Rustbelt cities and metropolitan areas can benefit from the technology revolution. Several U.S. metropolitan areas--such as Seattle, Austin, and Washington, D.C.--have become well-known centers for high technology companies, and others continue to emerge. However, success in the new economy does not depend solely upon attracting or growing high tech clusters. Traditional industries in diverse sectors of the economy are also integrating new technologies into their operations. Companies like Parker Hannifin, a Cleveland engineering firm, employ computers and computer-controlled tools to design and manufacture products, and they increasingly use web-based purchasing technologies. That means that even manufacturing regions need to recognize companies' shifting needs, and ensure that their economic development strategies respond to them.

2. IT enables the "fragmenting firm" to split off key functions throughout the U.S. and abroad, which presents both opportunities and challenges. The cluster phenomenon is still alive and well, but it increasingly revolves around portions of firms and functions within firms--from data processing to distribution--rather than whole companies and industries. Federated Department Stores, for example, maintains its headquarters in Cincinnati, but has located its design and product development operation in New York City, and its data and financial management group in Atlanta. Similarly, the Boeing Company recently moved its headquarters to Chicago, but left its commercial airplane production facilities in Seattle and Southern California--traditional sites for aerospace manufacturing. The upside of this trend is that metropolitan areas now gain an opportunity to specialize. All regions can now focus on and compete for key firm functions, whether they entail manufacturing, research and development, logistics, or sales. The downside: Cities like Seattle or Cleveland may lose high-powered intellectual capital--as well as beneficial civic leadership--as top executives move to headquarters meccas like New York and Chicago.

3. IT generates new criteria for firm locations, which may bring competitive advantage to some regions. Intel, for example, maintains a list of prerequisites when it chooses a site in the United States or abroad that includes a qualified, educated workforce; quality of life factors; infrastructure; availability of land; and tax incentives. Possessing extensive broadband capacity, a skilled labor force, and a good environment in which to live and work can give U.S. regions the edge they need to compete--not only domestically, but against developing countries that may have cheap labor, but lack technology infrastructure and other locational advantages.

4. IT helps firms go "global," increasing the need for U.S. regions to market themselves internationally. To be sure, the globalization of manufacturing has been taking place for decades. But IT has also enabled financial and other business services firms to go global. Companies are increasingly outsourcing key functions to obtain a higher level of efficiency, profitability, or competitiveness. This means U.S. metropolitan areas must compete with regions all over the world for firms, portions of firms, and employment. Regions with particular niche capacities, and the ability to market them globally, have an opportunity to cultivate linkages with corporations abroad and improve their ability to compete on the international playing field. These global relationships may facilitate specialization in higher skill/higher wage operations, while at the same time reveal new markets for companies-- products or services.

According to Brookings, cities or metropolitan areas can do relatively little to reduce the likelihood--accelerated by IT--that firms will globalize, fragment, or relocate headquarters. Regional leaders can, however, work to create a competitive setting for all business' survival and success in a high tech era. This means investing in IT infrastructure; providing the right education programs at adequate scale to meet new skill requirements of employers; supporting innovative firms with research and development programs at universities and institutes; and assuring adequate venture capital for startup companies. Leaders also need to insist that their own organizations lead in the effective use of new technologies, and that their metropolitan areas build strong relationships with regions abroad.

Those metropolitan areas that understand the changing nature of business--and respond nimbly to its demands--will create the best environments for firm and economic growth.

Download the Brookings study here.