estimated reading time: 5 minutes

Why freelancing didn’t work 10 years ago, and why it does today.

Projected future freelance workforce

When you look back ten years ago, freelance work was done on a small scale and there were few people who could live comfortably on it. Freelancers were typically hired by small companies for very niche jobs. As the market is developing, there will be more freelancers than contingent workers. Why is freelancing suddenly taking the lead?

Up to 45% of GDP lost due to inefficient organization

To explain the rise of freelancers, some basic economic understanding is helpful. “The nature of the firm” published in 1937 by Robert Coase profoundly disrupted the economic scholarship of the time. The question he answers is as simple as it is challenging to the traditional notion of market economies: Why are there firms? In the ideal market, individuals act according to their own interests, maximize their benefits, and mutually create profit. But why do people sacrifice flexibility and establish large firms in a competitive environment?

As Coase demonstrates, there are not only the costs of producing and supplying commodities on the market, but also costs of using the market mechanism in the first place. Following the Nobel Prize laureate D. C. North, transaction costs make up around 45% of the GDP in the US, before even a single product has changed its owner. To produce and supply commodities, people must gather information, set up contracts, negotiate the deal, etc . After producing the product, selling it or realizing the deal, contracts need to be controlled and adjusted. All this is vulnerable to communication and troubleshooting problems, misunderstandings and conflicts - immense costs come up, even before a profitable transaction on the market can be made (see depiction).

The higher these ‘transaction costs’, the more likely firms are to emerge, especially in fields of long lasting contracts (e.g. financial services), very specific transactions (e.g. construction companies) or in highly insecure markets (e.g. marriages). Firms, as Coase states, save transaction costs by replacing the horizontal mechanisms of the market (supply, demand, prices, etc) by rigid hierarchical organisation. As Esko Kipli writes, “[...] a firm would emerge, exist and continue to exist successfully if it performed its planning, coordination and management functions at a lower cost than would be incurred by means of market transactions.”

Freelancing and transaction costs

The labor market (next to the commodity and financial markets) is especially prone to transaction costs, because the efficient organisation of a workforce is always imperfect to a certain degree: finding workers, vetting workers, negotiating salaries, contracting, ensuring compliance, etc. is error-prone. That is why it has long been most efficient to hire contingent workers and employ them for a long tenure. Long contracts lower the chance of misunderstanding and conflict. Therefore, the stricter the organisation and the longer the tenure, the lower the transaction costs. New technologies however changed the game.

How freelancing is solving the problem

A decade ago, the transaction costs for hiring a freelancer on the labor market were huge . The process was inconvenient, unprofitable and the outcome lacked quality. Today however, freelancing platforms can reduce transaction costs drastically. Through the emergence of online platforms and intelligent matching algorithms, freelancing has overcome three specific bottlenecks:

Finding the talent

Finding the right freelancer has always been extremely costly and time-consuming. The problem was not finding the people who want to work, but finding the right talent for a very specific task. Every job requires a very particular skill set, which is hard to asses beforehand. Freelance platforms, however, possess a large pool of relevant data on their freelancers (skill set, experience, rating, reliability, etc.) which can then be leveraged by artificial intelligence and machine learning algorithms to match the very best candidate to a particular job. This not only save time and money, but also improves worker satisfaction.

Delivering high-quality work

Matching the right talent to the right job is the first step to the better quality of freelance work. But there is a second element which ensures the quality of outcome. Breaking up the rigid structures of a company allows the market mechanism to organize the workforce. Not personal preferences or hierarchical positions, but vetted skills and performance should matter when it comes to job matching. Platforms have the capability to constantly review and rate the results of a freelancer. Based on more than 5000 data points such as test scores and previous ratings, the WorkGenius AI finds the person who will deliver the best work.

Ensuring high performance

Keeping workers on track is expensive, especially in large companies. The goals of the principals of large corporates often differ from the goals of their workers workers. Making sure that business goals are aligned is incredibly expensive. With freelancers it has long been similarly difficult to ensure motivation and maintain the quality of work. However, online freelance platforms can offer new creative ways of ensuring worker compliance. Next to task based payment models, community oriented incentivising and gamification have huge potential. Also, freelancers can develop reputation by submitting qualitative work which will improve their standing in the platform economy.

WorkGenius combines the advantages of a competitive expert marketplace with unprecedented AI-driven job matching. Pay for high-quality results, not the hassle. It has never been easier. Vist WorkGenius.com for more!