Contracting online

THERE'S A NEW TYPE of digital exchange in town, one that matches workers' skills with the projects that require them. These dynamic sites may someday give traditional staffing agencies a run for their margins.

In yet another version of the disintermediation scenario, upstart dot-coms such as eLance.com, Guru.com, FreeAgent.com, IQ4hire.com, and Monster Talent Market are looking to give contract workers a direct connection to companies that want to hire them, pocketing a modest transaction fee in the process and undercutting the traditional intermediary, the staffing agency.

Although they are new to the staffing game, these types of Web sites do have some unique advantages. They offer workers the chance to find their own clients in databases of RFPs (request for proposals) and project descriptions -- for free and from anywhere. They give corporate clients an opportunity to draw from a global pool of independent contractors at reasonable prices. And they are striking a chord with contract workers who don't want to pound the pavement looking for work and don't want to fork over as much as 30 percent of their paycheck to a staffing agency.

"I'm trying to avoid using agencies, because they are taking part of my pay. If I can find clients on an exchange, then I can bill the clients directly," says Phillip Kahrl, a Lotus Domino programmer, in Bishop, Calif. "Exchanges are a good way to get new job contacts without having to do cold calling; I can see what people are looking for."

The sites are popular with small companies, those with fewer than 50 employees, because they don't charge the premiums that a staffing agency does -- extra fees that rapidly drive up project costs.

Faith Kaminsky, a Web designer with her own firm, Hey You Productions, in New York, uses Guru.com to hire programmers with experience designing Web sites that require database interaction.

"I've made good contacts that way, and I've contracted out some work to them," Kaminsky says. She also uses the exchange to find projects for her company. "By listing myself on the exchange, people come to me instead of me going to people. The majority of companies I've done work for found me that way."

Everyman's network

Finding work is tough when you're trying to network outside the United States. The biggest selling points of exchanges are that they make global networking possible, they make it cheap, and they make it easy.

"It doesn't matter whether you're in Iowa or Moscow, you can still bid on projects. About 40 percent of our transactions are across national borders," says Beerud Sheth, co-founder of eLance.com, based in Sunnyvale, Calif. The global nature of exchanges makes it easier for U.S. companies to find workers overseas who are willing to work at discounted rates, and it allows U.S. contractors to work remotely, from the comfort and convenience of their own workplace.

Of course, there are downsides to these perks. Using online exchanges to find work may mean no travel to meet clients, interviews at an agency, or face time at a new engagement. This lack of physical presence can easily lead to miscommunication: Fatal gaps in understanding or expectations can doom projects, ruin new business relationships, and leave contractors holding the bag. Contractors tell stories of projects for which the specifications weren't clearly spelled out or were changed unexpectedly. They also say they sometimes have difficulty getting paid.

"Not many people are assured yet that this workks, because there are a lot of trust issues," says Hourash Falati, a C++ and Perl contract programmer in Vancouver, British Columbia. "You're doing work with someone you've never met, and you're not very sure how good they are. These are issues you don't have when you work through an agency."

Falati has been getting projects through eLance for the last three months, and so far, he's enthusiastic. He can find a wide variety of projects online, from six-week to six-month engagements, and he works with companies from across the United States and in Taiwan, Hong Kong, and the Czech Republic that his agency won't deal with. And Falati likes never having to leave home to meet clients or agency staffers.

Enough for all

Aggregating hundreds of skilled workers in one place has some unintended consequences: competition, for one. Exchange sites such as eLance use dynamic pricing, a sort of reverse auction mechanism, to set project fees and hourly rates, so contractors are bidding against one another to land jobs. The potential is for contractors to drop their rates, especially when bidding against overseas programmers. But users say their skills are commanding market rates.

"There is strong competition from service providers in many countries," Falati says. "The downside for us is that competitive pressure drives prices down. But because of the large number of projects available on the exchange, the pricing pressure is not a big deal."

In the long term, digital exchange sites could possibly upend the labor market.

But they haven't taken much of a bite out of the traditional contract employment middlemen yet. According to Jeff Jones, a principal at AJM Professional Services, an IS recruiting company in Troy, Mich., exchanges haven't had any effect on his business, especially because companies such as his tend to specialize in placing permanent employees.

Outsourcing hiring to an agency is extremely cost-effective for large companies that want to off-load the time and administration hassles. Good staffing agencies will continue to prosper because they maintain relationships with their corporate clients, know their needs, and are proactive in meeting them. Staffing agencies screen and interview contractor candidates, manage payroll, verify employment eligibility, and take care of problems that may arise on the job -- tasks that not all digital exchanges are not equipped to perform.

"There always will be a role for staffing agencies in providing the human touch. But the challenge posed by exchanges is that they will put pricing pressure on the staffing agencies," predicts Dwight Herperger, co-director at Monster Talent Market, an IT contractor digital exchange created by Monster.com. Monster, owned by TMP Worldwide, in New York, is one of the leading Web sites where people look for full-time IT jobs.

Changing market dynamics

Although not a replacement for full-service agencies, digital exchanges do create a low-cost alternative for companies and workers to find one another. Over time, this may erode the premiums that agencies are able to charge clients for their services. Certainly, executives at Internet companies are gunning for ways to tap into the rich revenue streams that traditional brick-and-mortar staffing companies are funneling from their clients and their contractors.

"We are an alternative to high-priced staffing agencies," says Jon Slavet, co-CEO of Guru.com, in San Francisco. Guru.com charges companies about $200 to post a project, or about $1,000 per quarter to post several projects. He says the average IT project has a value of about $25,000.

Online intermediaries are quickly finding ways to duplicate some agency services online cheaply and efficiently. For example, through a partnership with Contractors Resourcces, in Cranford, N.J., Talent Market offers a service called MyBizOffice. For a fee equal to 4 percent of a contractor's earnings through the site, the contractor can buy services such as client billing, tax filing, 401k administration, and health benefits.

Taking a different tack, eLance.com offers a collaborative workspace on its server for company and contractor to exchange data and software. It also provides follow-up interviews, in which company and contractor rate each other on professionalism, courteousness, and qualifications. In addition, for international transactions eLance.com offers free use of its bank account and international currency conversion service.

Monster Talent Market charges companies 5 to 7 percent of an IT contract's value.

Some exchanges, such as eLance, are free to both companies and contractors.

"Eventually, we intend to charge a single-digit percentage of the transaction value. It will be a combination of the buyer and the seller paying," says eLance's Sheth.

Such low fees will keep the exchange popular with contractors and small businesses, Sheth says.

"The Fortune 500 companies have the Andersen Consultings. It is the smaller businesses and individual contractors for whom eLance levels the playing field," Sheth explains.

But there's another interesting twist to the potential competition between digital exchanges and staffing agencies: The two sometimes coexist symbiotically. At FreeAgent.com, owned by Opus360, in New York, staffing agencies are allowed to post their projects on the exchange just as if they were hiring companies.

"We let them on because they are a major force in the industry. They are a source of projects that our free agents can choose to bid on or not," says Jeffry Adelman, marketing director at FreeAgent.com.

Big business

So far, digital exchanges have been most successful at auctioning off contract work, because the risk involved in hiring a temporary employee is low compared to hiring a full-time, salaried employee. But the concept also works for contract companies that are looking for new clients.

Web site IQ4hire, based in Chicago, hooks up companies with consulting firms. The results can be projects valued at more than a million dollars. Vinnie Mirchandani, president and co-founder of IQ4hire, would be more than happy to get a piece of the pie for projects that valuable.

What sorts of business-to-business project deals are getting made online?

"There are projects for implementing a call-center project and upgrading an ERP [enterprise resource planning] system," Mirchandani says. "Typically these projects are done for large companies and last four to five months."

IQ4hire is using its role as an online intermediary to offer a battery of services and tap multiple revenue streams. It charges both the hiring company and the consulting firm a fee equal to 3 to 4 percent of the value of the contract. In addition, the firm sells annual subscriptions to consulting firms that want a presence on the site, such as posted case studies of their work.

Because it is dealing in big-ticket IT projects, IQ4hire will get involved in how projects are planned and run, offering companies advice on how to present and bid their projects. Services such as these are a far cry from the hands-off philosophy espoused by other exchanges, the majority of which cater to independent contractors and smaller companies.

However, the potential for major market shifts remains. Digital exchanges may not have proven themselves yet, but they are beyond the concept stage and in the marketplace.

So far, they have some enthusiastic adherents. In time, they might offer information, opportunity, and services that a ttraditional staffing agency can't duplicate. That, and a lower cost of operation, could put a dent in any agency that's extracting revenue but not providing significant value to client or worker.

This story, "Contracting online" was originally published by InfoWorld.

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