Marketplaces are Eating Firms (Unedited)

The following post is the complete, unedited version of a guest column that was recently featured on Techcrunch.  

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. 

oDesk is killing the outsourcing firm (or web design agency or BPO consultancy).  The majority of the work goes to individual freelancers rather than small agencies around the world.  

UpCounsel is trying to consume the law firm. And doing it quite well, especially for small businesses that find the cost of lawyers to be offensive. 

RecruitLoop is trying to displace the recruiting firm. They’re innovating on the delivery model and providing hourly-based recruiters.

Bench is tackling the traditional bookkeeping / accounting firm.  They’ve standardized their offering to make high-quality bookkeeping affordable for small businesses. 

Crew is attacking the traditional web design firm.  They have some of the highest quality designers and developers in the industry. 

Rev is eating translation and transcription firms.  They provide a fast, affordable, and high quality service that is beating traditional firms. 

Skillbridge is trying to eat up consulting firms like McKinsey.  And they’re using lots of former McKinsey consultants. 

Contently is killing off some marketing firms.  

Wonolo is gearing up to take on staffing firms. They provide on-demand temp labor via mobile devices.  

And yes, AngelList syndicates are trying to kill VC firms.  More thoughts on that here

There is a huge number of startups trying to disrupt the traditional “firm” structure.  The fundamental reason is a drive towards greater economic efficiency in the world.  If these new marketplaces did not offer a better overall service, then they wouldn’t be gaining any traction.   The biggest driver of adoption is the massive cost savings that these marketplaces provide.  Consider the following service attributes: 

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Service Attributes

Cost – a marketplace with low fees is a very efficient delivery mechanism.  Typical markups in law firms or consulting firms might be 4X, eg 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 and supplies.  The cost savings are dramatic. 

Turnaround Time – Uber once again is

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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.  In most firms, all of this is done manually based on the current team and resources. 

Quality – 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.  On the other hand marketplaces are much earlier in their evolution and are in a building phase.  I would say that firms today are generally perceived to have higher quality than individuals through marketplaces, but times are changing.  The constant focus on NPS by the top marketplaces will yield marketplace brands that really stand for top quality. 

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So — let’s rewind and look at why firms exist in the first place.  Firms or agencies have existed for centuries as partnerships of individuals that provide services.  

Firm Benefits to Buyers

In my mind, they serve several very good purposes for buyers. 

1) 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 5-star feedback system of nearly every marketplace, individual reputation is now well understood and well-curated marketplaces can build a similar reputation for quality. 

2) Staffing – Many times companies are looking for full teams of people to do work.  Firms offer an easy way to on-board a large team of people that may know each other 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 from there.  Marketplaces face two new challenges – everyone is working independently and availability is frequently unknown.  It will take some new thinking to address how to ramp up teams of workers in different locations.   

3) Guaranteed Quality – Or as Gary Swart liked to say, “One Throat to Choke.”  The guaranteed quality is a big benefit of turning to well-established firms.  Buyers know that they 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 curation of the suppliers, and therefore the company is guaranteeing the quality.  It’s becoming a key part of the brand.  And, given the ever-increasing importance of individual reputation, marketplace participants also aim to guarantee quality in order to guarantee their continued good reputation. 

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Firm Benefits to Workers

Firms also offer great benefits to the individuals that work there. 

1) Training – Many firms are big hirers of entry-level talent.  I started my own career at a consulting company and they do an excellent job of introducing people to the professional world and teaching critical-thinking skills and management skills.  

» Marketplaces are starting to pay more attention to this factor, but for most of them training is not really part of the equation.  This is ok for now, but as marketplaces want to grow and become a viable option for entry-level talent, more training programs will need to be instituted. 

2) Stability – Probably the single biggest advantage to joining a firm is the stability and job security that come with the position.  Being an employee brings benefits and confidence that you know where your next paycheck is coming from.  Many freelancers are at first terrified of making the jump to a freelance career because of the instability of freelancing in general.  

» As marketplaces mature and scale, they see the need for more stability in the work.  The number of full-timers is an essential metric.  The marketplaces must closely watch the utilization rates of their top workers. Firms are still far more stable, but marketplaces are catching up.  And when a marketplace reaches substantial scale, they can actually guarantee some increased stability since they are confident of the demand. 

3) Access to Clients – Firms also make it possible to separate the sales and client acquisition process from the service delivery component.  Typically, partners or sales reps in the firm might acquire clients and then assign the work to other professionals.  

» Marketplaces make it easy for talented professionals to acquire their own clients.  I would argue far easier than traditional channels.  A talented professional in a marketplace that rises to the top may have way more work than they could possibly handle.  Marketplaces do an excellent job at aggregating demand.  Similarly, a talented angel investor on AngelList has more access to “clients” than they ever could have achieved on their own. 

4) Career Path – Firms provide a clear career path for individuals.  Management consulting firms have the most clear-cut path as the best individuals rise through the ranks every 2-4 years and get significant compensation increases. 

» oDesk has one of the strongest career paths in the industry – the best of the best rise up.  The average worker on oDesk increases their wages by 190% over 2 years.  In addition, some freelancers have launched their own small firms on oDesk.  Unfortunately, most marketplaces do not have a clear-cut career path for individuals — this is a big opportunity going forward. 

Here’s my scorecard: 

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Whether these marketplaces are successful or not, the writing is on the wall and the 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 tier of firms as they yield to well-run startup 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 freelance work.