As-a-service upstarts will KILL OFF THE CORPORATES?

Amazingly, economists have figured out a few things...even things that can help in this brave new digital world. One of these is the "marketplaces vs firm" debate. So I was surprised to find a fascinating little piece in TechCrunch singing the praises of all those "online freelance work marketplace" sites. You know the sort of …

[The Mole]

From the workers perspective

Of course there are also benefits of firms from a workers perspective. Being a lone trader is risky with an uncertain and unpredictable cashflow, a firm provide continuity of income spreading the risk across multiple workers. Firms can also much more efficiently get professional indemnity and other types of insurance and delegate tasks so the worker can do the work they enjoy and not the admin. Hence why lots of people prefer to work for a company rather than have higher but riskier income contracting.

[AMBxx]

Re: From the workers perspective

Spot on. I'm a freelancer. In a good month, my income is 10x that in a bad month. I'm fortunate that I can manage my finances around that. Not everyone can, nor would everyone want to.

[JetSetJim]

Economist @ techcrunch?

That'd be the site that waves the flag for internet startups then? So no conflict of interest there as they would like nothing more than for startups to disrupt established "firms" (to become "firms" in themselves, in some form of Ouroboros metaphor).

Business models need to change to adapt to the fact that it's very easy to provide a service in the age of the internet - that's all that's happening. Small stuff that needs doing quickly is very easy to farm out to some freelancer you find in a market place - although I suspect YMMV with regards to quality of work, but you could always hedge your bets and get three (or more) people to do the same thing until you can find your "stable" of reliable workers if you need skilled work (be it coding, writing PR fluff, or developing management strategy powerpoints).

Big multinationals did it with off-shoring, now the smaller outfits can get in on the game. Where it takes us, who knows.

BTW - were you hinting that you wanted a Nobel with this piece? Keep up the good work and I'm sure it'll come :)

[Tim Worstal]

Snigger

"BTW - were you hinting that you wanted a Nobel with this piece? Keep up the good work and I'm sure it'll come :)"

Good God no. I've one peer reviewed paper to my name, in a low impact journal, which has (so far as I know) been cited once in some geezer's M.Sc. paper. I'm about as likely to get a Nobel as Jeffrey Archer is to get the Literature one.

Less actually.

[Getriebe]

Re: Snigger

I take tea in the same place Archer uses occasionally - and whilst I hold my vomit in long enough to observe him - he is so old and doddery I think that Literature prize will allude him before he is pushing up the daises

[tony2heads]

@Getriebe

s/allude/elude/

[Otto is a bear.]

If only it were that simple.

Labour markets, like any type of market react to supply and demand, and indeed there are instances, even for skilled jobs where the contractor is paid less money than the permanent employee, using your example the $50 employee would get paid $40 as a contractor, so there is no uncertainty premium.

It's also true to say, the firm may well give you a discount based on length of engagement, which may not meet the $75 contractor, but won't be far off $100, making the choice less clear cut.

Startup tech. companies use the market model quite effectively, as a primary contracting vehicle. They do however, tend to use contractors they have worked with before and take on only those personally recommended by trusted partners. In my experience, it is very rare that they would take a risk with a total stranger.

[Cipher]

Another point on using contractual labor is that it is often used as a screen for prospective full time employees. Temp service firms will build in some protection for themselves, but they also know that that being the HR department by proxy itself attracts repeat business.

[Brewster's Angle Grinder]

What's new are geographically dispersed companies. I was found by my current employer in one of those markets and he's not asked me to move across the pond and work with him in a noisy, air-conditioned office. We recruit from anywhere in the world and don't have to worry about immigration papers, paying cleaners or business rates. There are handicaps to this approach, but it's the kind of firm that couldn't have existed in the 1930s.

[frank ly]

" ...the kind of firm that couldn't have existed in the 1930s."

Never underestimate the bandwidth of a packet steamer full of ribbon bound handwritten folio sheets.

Data latency would be a problem but that encourages a slower and more pleasant pace of life.

[Brewster's Angle Grinder]

There might also be a problem with packet loss - icebergs straying into the shipping lay. :P

But forget "...a slower more pleasant pace of life": in Victorian London there could be up to twelve postal deliveries a day.

[joeldillon]

Hm, the figures are dodgy from the off. In my experience a consulting place will generally try to bill you out at 3x salary rather then 4x, and it's about 1/3rd salary, 1/3rd company profit/general overhead, and 1/3rd company expenses for the employee (employer payroll taxes, office space, equipment). A freelancer has to pay that last part themselves so they're going to be at least 2/3rds the price of hiring a firm to do something, not 1/2.

[JacobZ]

Team forming is itself a big cost

One thing that often gets minimized or overlooked is that team forming is itself a major cost in any kind of knowledge work. There's also the soft stuff about adjusting to each others' personal styles and quirks, discovering each others' strengths and weaknesses, negotiating the division of work, ... In brief, the less the work is sharply defined, easily partitioned and clearly delimited, the harder it is to just bring a team of strangers together and allocate tasks to them.

This is why even in modern Hollywood, the ultimate "contractor market", you often find the same group of people -- director, actor, cinematographer, set designer, ... -- working together. And even in more prosaic fields such as construction, you find that people prefer to work as a crew with familiar people, even if the each have their own unique fields.

In other words, TechCrunch's thesis is the kind of thing that is most appealing to somebody who thinks that people are essentially like soft, squishy Web services that you can call for transactions whenever you need one.

[Anonymous Coward]

Deja vu all over again?

This whole concept seems to have strange echos of the Web 1.0 boom, when amateur economists told us that the Internet was going to disintermediate everything. In reality, of course, the biggest winners on the Internet turned out to be aggregators intermediaries like Amazon, Travelocity, and Netflix.

Fast forward to 2014, and I predict that firms will continue to exist and thrive for many of the same reasons that aggregators and intermediaries do.

Of course, you don't get published in TechCrunch by predicting that things will stay much the same.

[myhandler]

I'm a one man company and before that was freelance.

There are massive benefits to the firm structure - "firm memory" is important.. not just "where did you put that" but "how did we handle this three years ago". Sure people leave and things are forgotten - but some long term memory is beneficial.

(Ironically as a long term freelancer I did hold that role on some projects in a large company I was at for too long.. )

Pure outsourcing? Anyone tried it ? It can take as long to manage as to get the job done locally - the load on the manager is doubled, so it only becomes practical on larger projects - and you have to ensure the contractor is then re-contactable in the future - otherwise new person has to learn it all from scratch.

Only problem with firms is the required bureaucracy and nuber of people you may dislike

[SVV]

Aaaah, outsourcing......

Oh, we need this extra validation check....

Me working in-house : Sure, I'll just add it in now, then run the build and tests.

Outsourced contractor : That's not in the agreed specification, it'll cost you £xxx and I'll deliver it in the next 14 days when I have some spare time from my other customers' projects.

Been there, seen it, know that pure free market theory and real life don't ever seem to coincide on software projects.

[Zog_but_not_the_first]

Re: Aaaah, outsourcing......

A contractor giving that kind of response to a client might expect to look forward to a long cold winter. It's always a balance between being a doormat and running the risk of doing more and more work for lower returns, and insisting on your true level of reimbursement being high-and-mighty and getting kicked off the contractors list.

Unless, of course we're talking about one of the private companies who have grown fat off the public teat and seem to get whatever they ask for.

[Anonymous Coward]

I'd have thought limited liability status would also be a major benefit of the company approach - indeed some have argued that it has been the base on which our current commercial structures have developed (its also anti-capitalism, of course),

[Tim Worstal]

Sorta

Coase was more interested in "why not have a network of lots of organisations rather than one large centralised one" than the specific legal form. His musings till work whether we wonder about a network of one man Ltds or non-limited sole traders.

It's the network v the centralisation that he's really musing about.

[urbanpeer]

Commons Based Peer Production

Someone who could win a Nobel Prize in this area is Yochai Benkler, following Ostrom, Williamson , and Coase. In his seminal paper 'Coase's Penguin....' he describes the nature of Commons Based Peer Production and posits that it is more efficient than the market or the firm, in the circumstances of; 1) modularity of task, 2) divisibility of role, and 3) low cost integration. Open source to you and me.

http://www.yalelawjournal.org/article/coases-penguin-or-linux-and-the-nature-of-the-firm

This week we see the government espousing its merits in describing the sharing economy: https://www.gov.uk/government/publications/unlocking-the-sharing-economy-independent-review

[Michael Wojcik]

Re: Commons Based Peer Production

Benkler? A econ Nobel? Really?

Benkler "describes the nature of Commons Based Peer Production and posits that [it is full of rainbows and unicorns]". Yes, defining things you've just made up and positing wonderful attributes for them is easy. Rigorous argumentation is a little trickier. (And Benkler's most-cited thesis seems to be that incentives for production can be intangible. Zounds! He's discovered psychology!)

I've read The Wealth of Networks. As a piece of blue-sky handwaving for the technophiles it succeeds admirably; as an argument, not so much. His work might be a bit more substantial than that of, say, Nicholas Negroponte or Chris Anderson, but that ain't saying a lot.

[ekipa.co]

Disruption

Well, what if there are marketplaces that decrease all these costs mentioned. It is not about paint all firms black, it is making them more competitive. Marketplaces will never eradicate firms but they will increase competition and push firms to become more efficient and productive. And we will all benefit. At ekipa.co, we are proving that hiring software development teams is available for everyone, no need to manage, organize etc. The cost is minimal, you can go straight to building what you need.