## Wednesday, July 31, 2013

### Online labor markets: Why they can't scale and the crowdsourcing solution.

I am a big proponent of outsourcing work using online labor markets. Over the last decade I outsourced hundreds of projects, ranging from simple data entry to big, complex software products. I learned to create project specs, learned how to manage contractors, and learned how to keep projects moving forward. In general, I consider myself competent in managing distributed teams and projects.

I also met and talked with many people that share my passion for this style of work. We discuss strategies for hiring, for managing the short- and long-term projects, for pricing, for handling legal risks, and other topics of interest. After many such discussions, I reached a striking conclusion: Everyone has a completely different style of managing this process.

This plurality of "best practices" is a bad thing. Having too many best practices means that there are no best practices. The lack of consensus makes it impossible to effectively teach a newcomer of how to handle the process.

The problem with manual hiring in online labor markets

People that want to use contractors for their projects face the following problems:
• Few people know what they want: Just for fun, go and check random projects on oDesk, eLance, and Freelancer. An endless list of poorly described projects, requests for "clone of Facebook" for $500, and a lot of related crap. It is not a surprise that many of these projects remain open for ever. • Few people know how to hire: Ask any startup CEO how easy is to hire an employee. It is a pain. The art and craft of inferring the match of an individual to a given task is a very hard problem. Few people know how to do it right. Even within Google and Microsoft, with their legendary interviewing processes, interviewing is seen by many as a hard, time-consuming, and unrewarding experience. • Few people know how to manage a project: Even fewer people know how to manage a project. The harrowing fact is that most people believe that they can. Most people hire someone, hoping that the employee will be in their head, will understand what these vague specifications mean, will know everything that is not documented in a project, and will be able to do a great job. Very few people realize that outsourcing a project means that you will need to spend significant amount of time managing the project. The result of the combination of these factors? Online labor does not scale through manual hiring. (Of course, this is not unique to online outsourcing. Offline hiring has the same problem.) There are simply not enough qualified employers that can hire effectively, who will be able to create demand for jobs for the online labor markets to continue to grow. Online hiring vs online shopping The counter-argument is that labor was always like that. Since the market for labor operates "manually," the transition to electronic hiring will allow for growth. In the same way people were initially afraid of shopping online, they started buying things online, they are going to switch to hiring online. I do not buy this argument. When people buy an item online, they buy a standardized product. They are not ordering a bespoke item, which is created according to the customer specifications. Customization is typically limited and allowed on a specific set of dimensions. You can customize your Mac to have a better processor, more memory, and a larger hard disk. But you cannot order a laptop with a 19 in screen, and cannot ask for 96 Gb of memory. But in online markets this is what happens. The random customer comes and asks for a web application ("just the functionality of the X website"), and wants this app to be built for$500. It is the same as if someone  goes to a computer store and asks for a laptop with a 19 inch screen, with 128Gb of memory, and 10Tb disk. And, since 1Gb of memory costs 7 dollars, it is reasonable to just pay \$1000 for 128Gb, right?

Lessons from online shopping

Based on the experience for the transition of shopping from offline to online, let's see how online labor can move forward.
1. Standardize and productize: Currently, in online markets, most people ask for a specific set of tasks. Content generation, website authoring, transcriptions, translations, etc. Many of these can be "productized" and be offered as standardized packages, perhaps with a few pre-set customizations available. (Instead of "select the hard disk size, you have a "select blog post length".) This vertical-oriented strategy is followed by many crowdsourcing companies and offers to the client a clean separation from the process of hiring and managing a task. This vertical strategy works well to create small offerings but it is not clear if there is sufficient demand within each vertical to fuel the growth expected for a startup. This is a topic for a new blog post.
2. Productize the project creation/management: When a standardized offering is not sufficient, the client is directed into hiring a product manager that will spec the requirements, examine if there is sufficient supply of skills in the market, hire individual contractors, manage the overall process, etc. This is similar to renovating a house. The delivered product is often completely customized, but the client does not seek to hire separately electricians, carpenters, painter, etc. Instead, the owner hires a "general contractor" who creates the master plan for the renovation, procures the materials, hires subcontractors, etc. While it eases some of the problems, this is a process suitable only for reasonably big project.
3. Become a staffing agency: A problem with all existing marketplaces is that they are not acting as employers, but only as matching agents. Few, if any, marketplaces are guaranteeing quality. Every transaction is a transaction between "consenting adults." Unfortunately, very few potential employers understand that, and hire with the implicit assumption that the marketplace is placing a guarantee on the quality of the contractors. So, if the contractor ends up being unqualified for the task, there is very little recourse. By guaranteeing quality, the employer (who is the one spending the money) gets some minimum level of guarantee about the deliverable. Unfortunately, providing such quality guarantees is easier said than done.
4. Let contractors build offerings: By observing the emergence of marketplaces like Etsy, you can see that people are becoming more comfortable with ordering semi-bespoke, handcrafted items online, for which they have little information. A potential route is to allow the contractors in online markets to build such "labor products" and price them themselves, in the same way that Etsy sellers are putting up their handcrafted stuff online.
All these approaches are fine, and I expect most current marketplaces to adopt one or more of these strategies over time. However, all of them rely on the same assumption: That hiring, as shopping, will be a human activity.

What happens, though, if we stop assuming that hiring is a human-mediated effort?

Crowdsourcing practices to the rescue

I will not pretend that the current state of the crowdsourcing industry offers concrete solutions to the problems listed above. But today's efforts in crowdsourcing move us towards an algorithmically-mediated work environment.

Of course, like all automatic solutions, the initial environment is much worse than "traditional" approaches. We see that in all the growing pains of Mechanical Turk. It is often easier to just hire a couple of trusted virtual assistants from oDesk to do the job, instead of trying to implement the full solution stack to get things done properly on MTurk.

However, the initial learning curve starts paying off later. Production environments that rely on a "crowd" need to automate as much as possible the hiring and management of workers. This automation makes the tasks much more scalable than traditional hiring and project management. High-startup costs, then lower marginal costs of adding workers to a process.

This leads to easier scalability. Of course, the moment the benefits of easier scalability start becoming obvious, it will be too late for players that rely on manual hiring to catch up. It is one of the reasons that I believe that Mechanical Turk has the potential to be the major labor platform, even if this seems a laughable proposition at this point.

I will make a prediction: Crowdsourcing is currently at the forefront of defining the methods and practices in the workplace for the next few decades. Assembly lines and integration of machines in the work environment led to the mass production revolution of the 20th century. The current crowdsourcing practices will define how the majority of people are going to work on knowledge tasks in the future. A computer process will monitor and manage the working process, and hiring manually will be soon a thing of the past, for many "basic" knowledge tasks.

Some will find this prospect frightening. I do not find it any more frightening than having traffic lights regulate traffic in intersections, or having the auto-pilot taking care of my flight.