Bill Gurley, a general partner with Benchmark Capital, takes a look at this strategy when it comes to setting what he calls the rake, or commission, between a platform owner and those using the platform. Examples of the rake include Apple’s 30 percent fee on apps in its App store as well as the service fees associated with oDesk or OpenTable.

Gurley’s article, which is well worth a read, explores the relationship between the rake and the spread of the platform through a series of anecdotes. I just wish he had some documented research; not because I think his conclusions are wrong, but because I think we’d learn even more about how the cost of doing business on a platform affects volume in more subtle ways.

For example, Gurley makes much of the benefits of having a low rake, which encourages developers/end users/merchants to use the platform and also prevents a newcomer from coming in and undercutting you on price. What he doesn’t dig into is how the benefits of scale in the digital world mean that undercutting people on price is a race to the bottom. This is one reason people are concerned that no one but Google can compete with Amazon Web Services when it comes to cloud computing, despite Microsoft saying it will match AWS pricing on its own Azure cloud.

Here’s Gurley’s take on competition and the set rake:

If your objective is to build a winner-take-all marketplace over a very long term, you want to build a platform that has the least amount of friction (both product and pricing). High rakes are a form of friction precisely because your rake becomes part of the landed price for the consumer. If you charge an excessive rake, the pricing of items in your marketplace are now unnaturally high (relative to anything outside your marketplace). In order for your platform to be the “definitive” place to transact, you want industry leading pricing – which is impossible if your rake is the de facto cause of excessive pricing. High rakes also create a natural impetus for suppliers to look elsewhere, which endangers sustainability.

And here he is discussing a favorite business model for digital platforms — a low rake with a mechanism for people who want to spend more to do so in exchange for better placement or the opportunity to get favorable placement on the platform:

You start with a low rake to get broad-based supplier adoption, and you add in a market-driven pricing dynamic that allows those suppliers who want more volume or exposure to pay more on an opt-in basis. This way no one leaves the network due to excessive fees, yet you end up with a higher average rake over time due to the competitive dynamic. And when prices go up due to bidding and competition, the suppliers blame their competition not the platform (part of the genius of the Google AdWords business model). This also allows you to extract more dollars from those suppliers who desire to spend more to promote themselves (without raising the tax on those that don’t).

The article is worth reading, and I hope that some MBA professor takes it into his head to start some rigorous research on the best commission structures across digital verticals, or perhaps the biggest factors that should influence your rake rates. Because while generally low is good, if one could manage to be an area where high or medium works — at least for a while — then why not start there and see what happens?

Or better yet, invest in tools that allow for dynamic pricing based on the user’s need or demographics. That’s something more easily done online and is utterly neglected in Gurley’s article. In a digital world, the cost of goods is lower, so the risk of playing with pricing is lower as well. I think we’re going to see a lot more of it.

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Consultancy Zinnov recently reviewed the entire online hiring market, looking in detail at 30 platforms like Elance and oDesk. They came to what may be a surprising conclusion for some – not only are women doing well with online work, they’re actually currently the majority of the online workforce. Of the approximately 4.5 – 5 million folks selling their services through these sites, 55 percent are currently women.

With women still carrying a larger share of childcare and household duties, this result makes intuitive sense in some ways. You’d expect those with greater time commitments outside work to be more keen on flexibility, and stay-at-home moms to be a significant portion of the online labor pool.  As VentureBeat reports,  ”Zinnov said its study showed women more willing to work virtually to give themselves a better work/life balance.” The study further predicts that going forward women will make up an even larger segment of the online hiring pool.

While the idea that women might desire flexibility seems reasonable (despite studies showing men want work flexibility just as much, if not more than, women), the image of online hiring as largely focused on technical jobs may have suggested to some that women, who are still relatively rare in these type of gigs, would be under-represented. But Zinnov’s data don’t back that up, though they did find online hiring is most mature in the tech sector. They report, however, that skills such as multimedia, writing and editing are growing rapidly.

As is the sector as a whole. In the next three years, ten to fifteen percent of the total workforce will be hired from online talent marketplaces, according to the research, which also claims the total online hiring marketplace will climb towards $1 billion by the end of the year. Zinnov also confirmed that small businesses are leading the way for larger firms when it comes to the practice of hiring online. If you’re interested in further details, check out the presentation below.

Are you surprised by these findings?

Image courtesy of Flickr user CarbonNYC.

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In conjunction with Genesis Research Associates, oDesk reached out to more than 7,000 clients, ranging from solopreneurs looking for some extra help to managers at medium and large enterprises, asking them about their views on online contracting and the future of sourcing talent through platforms like oDesk.

The results put a final nail in the coffin of the argument that increased interest in online labor platforms like oDesk is largely down to the troubled economy and firms’ short-term scramble to get by or their need to cut costs.

• A massive 76 percent of respondents told oDesk that their use of contractors was a long-term strategy.
• Only 24 percent characterized their remote hiring as a temporary solution to short-term problems.
• More than 80 percent either agree or strongly agree that remote hiring increases competitiveness and that the practice will soon be common.

“The CIO of AOL came to us and said: ‘Hey, I’m having a hard time finding and hiring enough technical talent,’” oDesk CEO Gary Swart told GigaOM to illustrate the point that, for many of his company’s customers, online contracting is about strategy and competitive advantage, not just cost pressure. “oDesk enabled engineers at AOL to hire, as [the CIO] calls it, ‘a brain extension,’ so the ability to get leverage by enabling any engineer to hire talent in order to get more work done.” Gene Zaino, the CEO of MBO Partners, made a similar point a few months ago, noting that his firm has seen more and more businesses touting their ability to be agile through the use of contracting talent as a competitive advantage.

Also of interest was what respondents told oDesk about the alternatives to remote hiring. When asked what they would have done had there not been a suitable oDesk contractor available, 50 percent said they would have found someone through another contracting source, 22 percent would have simply worked longer hours and nine percent would have delayed or canceled a project. Only 15 percent would have made a local hire, indicating that oDesk-style hiring isn’t replacing local jobs but creating new, if small-scale, gigs.

The company also announced a new CFO, Gregory Stanger, who formerly served in the same position at Expedia and Chegg.

Do you agree with Swart that enthusiasm for online labor platforms like oDesk outlive the tough economic times?

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At the start of each new year, jobs site CareerBuilder polls several thousand HR pros and hiring managers about their outlook for the year ahead when it comes to hiring contract and temporary workers. And just like the last three years, the survey this year found a steady uptick in the number of businesses planning on hiring contract staff, with 36 percent responding they will hire such workers in 2012. That’s up from:

• 34 percent for 2011
• 30 percent for 2010
• 28 percent for 2009

Certainly plenty of these temp positions may be traditional seasonal workers taken on to deal with the summer rush at a resort or as short-term fillers when an employee is out on maternity leave, for instance. But the steady rise in the number of contract employees firms plan to take on does support the argument that lean economic times are opening more and more business’s eyes to the advantages of agile hiring practices.

“Employers are relying on temporary and contract workers to support leaner staffs,” commented Eric Gilpin, president of CareerBuilder’s staffing and recruiting group in the release accompanying the survey. But he also noted that many firms plan to move contract workers to full-time roles if and when the economy picks up.

Do you foresee most employers reverting back to full-staff when the economy finally picks up?

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Cronin decided there must be a better way to match businesses in need of professional services with those able to help and ExpertBids was born. An online labor platform that aims to connect small- and medium-sized businesses looking for help with accountants, lawyers and consultants hoping to build independent practices, Chicago-based ExpertBids launched in November 2010.

A standard post on the site is free for companies (though a premium post which guarantees three bids within a week costs $50), while professionals pay small amounts to bid for work depending on the size of the project’s budget – larger projects have slightly higher fees. Quotes can be either a flat fee or hourly rate and the once the parties agree to a price, monitoring and billing for the work is entirely their responsibility. The site now has over 10,000 users, about 80 percent of which are US-based experts looking to sell their services and 20 percent are businesses hoping to hire.

Of course, ExpertBids is far from the only labor platform out there, with space leaders Elance and oDesk, reporting impressive growth. But Cronin feels his little site serves a need the big boys don’t by focusing specifically on professional services. “Some legal needs, you need to be able to go into the lawyer’s office and discuss with them, so we focus a little more on location than some of the other platforms,” Cronin says. But even in this relatively specialized niche, Cronin has company — oddly named Shpoonkle restricts itself to lawyers but aims to do basically the same thing.

Cronin acknowledges that there are hurdles for his fledgling business to overcome, including trust issues when clients are shopping for higher-end services. “For some people that’s their first hesitation with using the site,” Cronin concedes, but he notes, “the alternative is that you go through your phone book and you make a bunch of calls and you have less information.” ExpertBids also verifies the identity of the professionals who use it, checking bar numbers or CPA license numbers, as well as encouraging users to do their own research through relevant professional associations.

Perhaps a more troublesome objection is that sites like ExpertBids drive prices down for professionals. Cronin notes that pros on his site can’t see competing offers to discourage a race to the bottom. “We’re telling the experts to give whatever price makes sense for them, and if it’s not good for them then they shouldn’t be bidding that amount,” he says, though he also understands that, “if I was a professional, I would not like how cost conscious some of these companies are, but that’s a reality.”

Cronin sees the online labor platform model not as undermining professionals economically, but as empowering small operators to reach larger markets and give huge firms a run for their money.

Over the years, the legal industry and especially big firms just started to get so fat, inefficient and expensive, so there’s really an opportunity for solo and small firm lawyers to undercut these people without the high overhead of these humungous firms who have offices in all the downtown areas. If you can cut your overhead as a small firm, you’re going to be able to lower your prices significantly and still make a very decent profit.

Rather than view ExpertBids and the like as only a tool for businesses to drive down costs, Cronin paints a picture of platforms like his as arming professional David’s to take on complacent Goliaths. If he’s right, we should be seeing more of them popping up.

Do you think we’ll be seeing more niche online labor platforms as other industries embrace the model?

Image courtesy of ExpertBids.

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Elance’s look back at the year reveals that online hiring has soared more than 100 percent from 2010, and the number of professionals working on the site is up more than 120 percent. Cumulative earnings this year should surpass $500 million.

And like his oDesk counterpart Gary Swart, Elance’s CEO Fabio Rosati (who is speaking at Net:Work Thursday) doesn’t feel the economic doldrums are the sole cause of the growing attraction of online labor platforms. What is? Structural change to work, Rosati told us in an interview:

The state of [the] economy and unemployment is acting as a catalyst. It’s forcing a large portion of the workforce to look for alternatives. It’s forcing business to remain more flexible. But what we’re seeing is a change in how work is done and it’s similar to commerce. What caused e-commerce? Did the rise of e-commerce result from problems in the economy? Not really.

E-commerce started to be more effective in some categories than regular commerce, and I think that’s exactly what’s happening in the world of work. Working online in many ways is more efficient, more effective and more immediate than traditional employment. Businesses that use the flexible work model have distinct advantages over businesses that don’t, and there are some departments within these companies that have always used a flexible work model anyway. Creative departments, marketing departments [and] IT departments have always approached talent in a very flexible way on a project basis. They’re just doing it online now. So I don’t think we’re going back. I think this is really structural.

And while some may feel this shift towards global, online labor platforms undermine American workers by opening them up to competition from lower wage workers abroad, Elance is predicting in its report that professional services will become “America’s next great export.”

“The global demand for US talent has increased steadily over the past year and is set to grow even faster as online platforms like Elance break down global barriers,” says the release that goes along with today’s numbers. But Rosati is a little more understanding of those who feel the rise of these platforms is a mixed blessing for American workers.

When you create a global workplace and a global workforce, the dynamics are very different. Suddenly, you have a lot more competition cross-border. I know that is a very strong reality, and at the same time, there’s the other side of it, which is that for the first time, a very capable, talented, U.S.-based professional can access work and have clients all over the world, and we’re seeing exactly that on the U.S. platform. I feel that it’s an important side of what’s happening, because Americans have amazing talents. We’re seeing companies that may be hiring in some parts of the world for certain types of tasks, but for others, they love the opportunity to hire people based in the U.S.

I don’t doubt there are strong pressures when you compete with someone who is living in another part of the world. For example, it doesn’t even have to be someone who is in a lower-wage country. It could be simply someone who has access to public health insurance. So if you’re working in the U.S., and you have to pay for your own health insurance, you may be at a disadvantage to someone living in Norway who absolutely doesn’t because it’s all covered by the government. So that dynamic is definitely real and a challenging aspect of what is happening, but there are also many positive things.

You have to hand it to Rosati for acknowledging that, for all the psychological and lifestyle benefits of independent work, it does offload tasks and expenses ( (like obtaining health insurance, dealing with tax issues and building retirement savings) entirely onto the worker. Also to Elance’s credit is their partnership with eHealth to help U.S. community members compare health coverage options. “I wish I had the magic wand to address the problem, but I don’t,” says Rosati.

But health insurance isn’t the only external cost shifted from employer to worker in the paradigm shift these platforms are pushing. Though Elance clearly tries to make verifying work, billing for it and sorting out logistics as simple as possible with everything from an internal file management system to built-in virtual meeting facility, one can’t help but feel independent workers are more burdened with what Craig Lambert recently dubbed “shadow work” in the New York Times.

Lambert defines the term as “all the unpaid labor — including, for example, housework — done in a wage-based economy,” and muses that all of us, not just independent contractors, are being saddled with more and more of it in the name of corporate profits:

Science fiction novels of a half-century ago dramatized conflicts between humans and robots, asking if people were controlling their technologies, or if the machines were actually in charge. A few decades later, with the digital revolution in juggernaut mode, the verdict is in. The robots have won. Although the automatons were supposedly going to free people by taking on life’s menial, repetitive tasks, frequently, technological innovation actually offloads such jobs onto human beings.

The conventional wisdom is that America has become a “service economy,” but actually, in many sectors, “service” is disappearing. There was a time when a gas station attendant would routinely fill your tank and even check your oil and clean your windshield and rear window without charge, then settle your bill. Today, all those jobs have been transferred to the customer.

From automated airport check-in terminals and the near extinction of travel agents to understaffed retail outlets where we find our size ourselves, more and more places are shifting work, with all its attendant costs in time and energy, from companies to individuals, argues Lambert. In its well-intentioned way, Elance and its competitors appear to be doing the same.

Do the larger markets for our services and increase in lifestyle flexibility make up for these extra costs?

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They’re out there, and their stories aren’t all the same tales of solo practitioners earning the ability to work in their bathrobes and take home a comfortable but not impressive income. When we talked to oDesk CEO Gary Swart earlier this month, he shared examples of members of his platform who had built businesses by growing their client base to the point where they couldn’t handle all the available work on their own. Joshua Warren, a Dallas-based web designer, Swart told WWD, is a perfect example of this new breed of independent contractor turned mini-mogul. He started on oDesk at $15 an hour, then:

[W]ithin months he stair steps his way from 15, to 30, to $85 an hour, and even at $85 an hour he has got more clients than he can handle and he’s making more money than he was at his traditional brick and mortar job in Dallas. What he figures out is he’s an entrepreneur. He stops turning away business; he creates his own firm. So in March of this year he created a company by the name of Creatuity, and he expects to do over a million dollars in business this year. And he now is hiring on oDesk.

This idea of the million-dollar freelancer might seem unlikely, but Warren isn’t the only one to manage it. IT pro Sanjay Dange, in Nagpur, India, used various online labor platforms like Freelancer.com and oDesk to build a million dollar company. He recently spoke to Entrepreneur Journeys about how he built up his business using these sites:

I wasn’t very sure about venturing into the overseas market… Our Indian operations were yielding an annual revenue of around INR 10 million ($204,332). However the profit margin was going down and competition was increasing due to new players coming in. That’s why we also thought of expanding our reach by entering into the overseas markets. At that time, Freelancer.com was GetAFreelancer.com. We thought of bidding on it for three to four hours a day….

We started getting small value orders in 2005. The first major order was from ZZPerformance.com, a Grand Prix components manufacturing company in the USA. The order was to deliver a complete e-commerce site. We took it at a very low price of $1,000. The project was quite big in terms of technical requirements and it took us five, six months to complete it. It gave us a major breakthrough. Since then, we have worked on hundreds of dynamic content management sites and e-commerce applications.

We started with a small office of 200 square feet and three people… Today, we have a total office space of 6,000 square feet in Surat and 2,000 square feet in Baroda. We have 100 people on our payroll. We are on Elance.com. We are on PeoplePerHour.com. We are on various contest sites such as LogoGuru.com, Hatchwise.com, 99designs.com and a few others.

Curious to learn more about Dange? Check out the lengthy interview for a lot more detail. Or read our interview with Shane Pearlman, who turned too much freelance work into a sort of thriving freelancers collective, no online labor platform required.

Do many of us have outmoded and overly limited visions of what independent work can be?

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Today though online labor marketplace oDesk is announcing numbers that show this shift may be happening more quickly than many expect. The company released growth numbers showing contractors earned a record $22.3 million through the company’s website in October, which represents a 90 percent increase on last year. More broadly, they’re expecting the market for online work in general to grow to $1 billion in 2012.

We called CEO Gary Swart to find out what’s driving this growth, which is occurring across regions and sectors, and whether he expects it to continue, only to find him optimistic about the future of platforms like oDesk for three reasons:

• The economy. The lousy traditional job market means more people are searching for work in non-traditional ways, but the squeeze on companies is also good for online labor platforms. Services like oDesk, Swart says, “Enable startups to have a level playing field and get access to great talent.” In Silicon Valley at least that means they, “don’t have to compete with the likes of the local big players that can afford to give everyone a bus ride and three square meals a day at the office.”
• Globalization. “The globalization train left the station 20 years ago and more and more businesses want to take advantage of talent outside of the area,” says Swart. “We’re seeing a lot of growth from companies in Europe, Canada and Australia who want U.S. workers. It’s a global opportunity, so we think that the market will continue to grow.”
• Technology. According to Swart, “The availability of broadband in more rural geographies is creating opportunities for those not located around a metropolitan area. So while people in the San Francisco Bay Area have choices, people in Flint, Mich. do not.” That’s great for workers marooned in towns with less than vibrant job markets, but also good for the likes of oDesk as well.

Swart is particularly excited about the opportunities oDesk presents for those in out-of-the-way communities, noting that, “while most of our workers are located in metropolitan areas, we think there’s going to be explosive growth in rural geographies because the pain is more acute. Rural workers don’t have the options. Then broadband, the Internet and platforms like oDesk permeate into these geographies. We think there’s going to be even more growth on platforms like ours.” Already, per capita use of oDesk in small towns of under 15,000 people is growing to match metropolitan cities, according to Swart, and workers there are billing more hours than those in big cities like New York City and Los Angeles.

He also feels that interest in online labor marketplaces will come increasingly from big firms. “We had some large customers who came to us with the same challenge,” Swart explains. “They needed to instantly, hire, manage and pay a flexible online workforce. Over the last year we had a lot of large companies calling us looking for help, customers like Google, Facebook, Amazon, Microsoft, HP, Travelocity, and the phone continues to ring.”

While the advantages in terms of lowered cost and greater flexibility are obvious for the employers’ side of the equation, Swart batted down any suggestion that the deal wasn’t equally good for workers. Besides stressing his company’s ability to connect workers with open positions, Swart also explicitly answered criticism we’ve covered previously here on WebWorkerDaily that oDesk and similar platforms drive down wages for U.S. workers.

“In the U.S. alone, we’ve seen wages go from $19 an hour on average in 2007 to $30 an hour on average today,” he says.

Do you see a bright future for platforms like oDesk and location-independent contractors more generally? Do you think that will mean a better or worse deal for workers?

Image courtesy of oDesk.

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