Friday, July 6, 2012

Disintermediating a Labor Channel: Does it Make Sense?

Over the years, I have talked with plenty of startups on building crowdsourcing services and platforms. Mechanical Turk (for the majority) and oDesk (for the cooler kids :-p) are common choices for recruiting workers. (For a comparison of the two, based on my personal experiences, look here.)

A common aspiration of many startups is to be able to build their own labor force and channel. Through Facebook, through cell phone, through ads, everyone wants to have direct control of the labor.

My reaction: This is stupid!

(Usual disclaimer that I work for oDesk for this year, etc., applies here, but I will stand behind my opinion even without any relationship to any labor marketplace.)

A very short-sighted reason for this is cost savings: oDesk and Mechanical Turk have a 10% fee. Therefore by disintermediating the labor platform, the company can save 10% of the labor cost. Well, to immediately make the adjustment, you do not save 10%. You save maximum 7%. The other 3% is the fee that will be taken by the payment channel (credit card, paypal, etc). The fact that the cost is borne by the worker when using Paypal is not true savings. For foreign workers, you also have a 1%-2% hit when using Paypal or a credit card, which goes on top of the best FX exchange rates. Add extra overhead to handle fraud, mistakes, and other things-that-happen, and the true savings are at most 5% to 6%.

But even 5%, isn't that something worth saving? No.

Problem #1:  If you are a small startup, saving 5% in labor costs should not be the goal. Just the cost of developing, managing, and handling complaints about payment is going to cost much more of development time than the corresponding savings. Creating a payment network is typically not at the core of a crowdsourcing startup, and it should not be. Let others deal with the payment and build your product.

Problem #2: If you are a bigger company, saving 5% in labor costs may be more important. However, if we are talking about labor, then bigger companies start hitting compliance issues. Handling money laundering regulations, handling IRS regulations, and many other HR-related aspects are typically worth the 5% extra. Who wants to be in the HR business if they have a product that is doing something else?

So, why people still obsess about this? Why everyone wants to build its own labor platform?

Well, because VC's ask for this. "If you are building on top of MTurk/oDesk/whatever, what is your competitive advantage? What prevents others from duplicating what you have done?

The knee-jerk reaction to this demand from VC's is to build a bespoke labor network. Which works fine, as long as you are talking about a relatively-small sized network. Once the size of the labor force becomes bigger, then other problems appear: Identity verification, compliance, regulations, immigration, are all tasks that are time consuming. (Especially when dealing with foreign contractors.) And they are never tasks that add value to the company. They are all pure overhead and solving such issues is absolutely non-trivial. 

Do you think it is accidental that Amazon does not pay in cash the MTurk contractors outside India and US? Having seen from the inside at oDesk what is the overhead to build reliable and compliant solutions for handling international payments, I can easily say: Stay away, this is not something you want to do at scale, having to deal with bureaucrats from all different countries around the world.

The parallel with building your own data centers vs getting computing resources from the cloud is direct and should be evident. Unless there is a very good reason to handle your own machines (and space, and aircondition, and handling electrical failures over the summer, etc etc), you just build your infrastructure using the cloud.  Same thing with labor.

Allocating resources to handle overhead tasks, is taking aware resources from the main goal: Building a better product! Let others take care of infrastructural issues.