To outsource IT, or not to outsource IT, that is the question. Or at least it’s a significant consideration for many new businesses. For some, farming out one’s IT infrastructure could be a means to grow quickly. For others, building IT in house could allow for more customization. Yet while new research suggests that outsourcing IT definitely has its benefits for young firms, the full answer is not so simple, says study co-author Kristina McElheran, an assistant professor of strategic management at the University of Toronto.

“It’s a much more nuanced, and – from the point of view of a young firm – an optimistic story about what digitization has to offer,” she says.

That story began to unfold after McElheran took a deep dive into U.S. Census Bureau microdata with her co-author Wang Jin, a research scientist at Stanford University’s Digital Economy Lab. They looked at the IT choices of more than 26,000 manufacturing plants in the U.S. operating between 2006 and 2014. Their analysis, set to appear in the Management Science journal, is believed to be the largest, most detailed, and most recent study of IT strategy to date, she says.

One of their main findings was that when IT services were outsourced, young firms and nascent units of existing firms saw significant and disproportionate productivity returns on their investments compared to firms and units that were more established. These returns were most pronounced in the first five years of a firm’s life but dropped off quickly soon after.

But here is where some of the nuance comes in. When McElheran and Jin looked at the productivity of firms that developed their IT capital up from within (that is, insourced it), those returns consistently increased - even among firms in existence for fewer than five years. However, this depended on firm survival, which was enhanced by outsourcing IT services and impaired by insourcing IT early in a firm's life.

The lessons to take from this are equally nuanced. Yes, the flexibility and speed capabilities that outsourced IT offers young firms can be substantial and worth the added costs, says McElheran. But, she adds, those outsourced services are not always tailored to the specific needs of firms. That tailoring can come from insourced IT, and that can pay off both early and late.

In other words, as she and Jin write in the paper: “A key takeaway is not to preference outsourced IT exclusively early in life. The early investment and gains from owned IT among the young, point to a need for a balanced digital strategy that considers both short-term performance and survival, as well as longer term learning and resource accumulation.”

McElheran says that another key point is that size and scale aren’t everything when it comes to IT productivity. As she and Jin show, young and small firms can get big productivity gains from their IT too.   

“If you read the business press without a critical lens, you might think that all these large firms are running the table and that they will win forever in the digital age,” says McElheran. “But these findings present something very different. And it rests on having a more complete view of what IT resources look like, where they come from, and how firms learn how to use the IT in different ways.”

The rise of cloud computing over the past 15 years could be one reason why young firms have seen significant productivity gains from their IT, says McElheran. Although the researchers couldn’t isolate cloud-only outsourcing spend in their data, they did find that the returns to outsourced IT services among the young firms were insignificant until after 2009. This coincides with the time when enterprise-ready, cloud-based services began to gain popularity.

Still, despite the gains that cloud computing has given the young, the study’s data shows that nascent firms have to stay vigilant for one particular reason: the speed of technological obsolescence.  

“New technologies are emerging so quickly right now, and that’s a real challenge for newer, smaller organizations to keep up with without a really savvy technology team or awareness at the top,” says McElheran. “Up to a point, they have an advantage because they don’t have legacy IT to deal with, but that period of time seems to be shrinking.”

This makes outsourcing IT more attractive, she adds, but in general the lesson here is to stay open and to stay nimble.

“Staying focused on experimentation and openness and learning in the face of uncertainty is really the best approach,” she says. “Leaders of firms need to keep that spirit alive because I think it’s really the only thing we can rely on when everything else is changing so quickly.