Marketplaces Are Eating Firms

Editor’s note: Josh Breinlinger is a venture partner investing in technology startups at Sigma West. Josh was the fourth employee at global online freelancer marketplace oDesk, where he was in charge of sales, marketing, product marketing and business development.

If software is eating the world, then marketplaces are one of the agents of destruction.  Marketplaces are eating every type of firm on the planet. Let’s look at where the feasting is happening.

With the majority of the work going to individual freelancers rather than small agencies around the world, oDesk is killing the traditional outsourcing firm. UpCounsel is trying to consume the law firm, especially for small businesses that find the cost of lawyers to be offensive. RecruitLoop, which is innovating on the delivery model and providing hourly-based recruiters, is trying to displace the recruiting firm. Rev is gobbling translation and transcription firms with fast, affordable, and high-quality service that is beating traditional providers. Contently, which is providing high-quality original content, is biting off pieces of PR and marketing firms. And yes, AngelList syndicates are trying to kill VC firms.

Many startups are trying to disrupt the traditional “firm” structure. The biggest driver of adoption is the massive cost savings that these marketplaces provide. For example, a marketplace with low fees is a very efficient delivery mechanism. Typical markups in law firms or consulting firms might be 4x, e.g. a worker making $50 per hour would get billed out at $200. The same person on a marketplace might raise their rate to $75 to compensate for utilization, but the end price to the customer might end up at $85 – $95 per hour.

The simple reason for this cost savings is the reduction in overhead. Freelance labor marketplaces don’t have middle layers of managers and other support staff, they have independent contractors rather than employees, and they don’t have the cost of office space.  The cost savings are dramatic.

Turnaround time and quality are also key service attributes that marketplaces are providing. Uber is the greatest example of a marketplace delivering a step change improvement in turnaround time. With scale, marketplaces have the ability to understand supply and demand and ensure that the right resources are available at the right time. All of this can be done automatically in marketplaces versus manually in firms.

Quality is always difficult to define and measure, but customers know it when they see it. Many firms have had decades to refine their internal tools and processes to produce consistently high-quality results, whereas, marketplaces are much earlier in their evolution and are in a building phase.

Firms today are generally perceived to have higher quality than individuals through marketplaces, but times are changing. The constant focus on net promoter score (NPS) by the top marketplaces will yield marketplace brands that really stand for high quality.

Let’s now rewind and look at why firms exist in the first place and consider where marketplaces stand in relation to the benefits offered to buyers.

Shared Reputation. The reputation of McKinsey is excellent. There’s a saying, “Nobody has been fired for hiring McKinsey.” That saying is a result of a very good reputation of the firm built up over many decades. It is brand building.

Until recently, individual reputation was hard to know. With LinkedIn plus the five-star feedback system of nearly every marketplace, individual reputation is now well understood and well-curated marketplaces can build a similar reputation for quality.

Staffing. Many times buyers are looking for full teams of people to do work. Firms offer an easy way to on-board a large team of people who may know each other, have a preset process for completing tasks, and work well together.

Marketplaces need to do a better job of handling this issue. If you just need a single person, marketplaces do a wonderful job. However, most marketplaces don’t work as well as you try to scale up to a team. Marketplaces face two new challenges: 1) everyone is working independently and 2) availability is frequently unknown.

It will take some new thinking to address how to ramp up teams of workers in different locations that can work cohesively.

Guaranteed Quality. The guaranteed quality is a big benefit of turning to well-established firms.  Buyers know that firms will stand by their work.

In completely open marketplaces, quality is at the control of the buyer who makes the hiring decision. However, in many new marketplaces, there is a much higher degree of vetting and curating of the suppliers. Therefore, the marketplace is guaranteeing the quality, much in the same manner that a firm would.

It’s becoming a key part of the marketplace brand. And given the ever-increasing importance of and ease of tracking of an individual’s reputation, marketplace participants also aim to guarantee quality in order to further their good reputation.

Whether individual marketplaces are successful or not, the writing is on the wall that agencies and firms of any kind are in a precarious position. I believe the top firms in any industry will continue to thrive for decades to come, but there will be an overall shrinking of the bottom and middle tiers of firms as they yield to well-run marketplaces.

These marketplaces will largely consist of individual freelancers and this will power the rise of freelance nation and a wave of infrastructure to support more individual professional work.