The Long Tail effect seems to be making its way into yet another business domain. This time it is the domain of sourcing, or more specifically sourcing of business services. According to the classical rules of Long Tail, the spread of the Internet and the evolution of web technologies have led to drastic reductions in search and transaction costs, which in turn enabled a large number of small local players, both on the supply and demand sides, to join the global market. These firms carry out a large number of small-value transactions, which together make up a respectable size market. If the trend continues in the future, it is likely to change the way firms create and manage their outsourcing portfolios. It will also further propel the much-touted e-lance economy.

Various terms have been used to describe the phenomenon, including Online Freelance Marketplaces, Online Programming Marketplaces, Person-to-Person Offshoring, Electronic Market for Services etc. We prefer the broad umbrella term Online Sourcing Marketplaces (OSMs) that captures most of the individual flavours. OSM is an Internet environment where buyers and suppliers of business services can meet, offer and bid for jobs, settle contracts, and carry out financial transactions. A number of online platforms currently provide such environments. Some of the bigger players include GetAFreelancer, Elance.com, GetACoder, RentACoder, Guru.com, and AgaveBlue. While most of these firms are based in the US (with a few exceptions), the audience they serve is truly global with both suppliers and buyers coming from different countries around the world.

So how do OSMs work? The majority employs the reverse auction model. In a nutshell, the buyer posts a project and receives bids from potential suppliers. The buyer then selects a supplier and awards the project based on the bid amount as well as other criteria, such as delivery time, suppliers’ reputational ratings etc. The parties manage the project by communicating via a private message board and other online means provided by the OSM platform. Once the work is completed, the buyer has to approve it and pay the supplier. At this point, the buyer also leaves feedback and rates the supplier on how well the project has been executed. Hearsay evidence suggests that in order to mitigate quality control risks, buyers often award the same contract to multiple suppliers. Although this implies paying multiple times for the same project, in the end the buyer can choose from several alternatives and pick the best one for the final rollout.

The range of services currently traded on OSMs is quite broad. The top three categories include IT-related jobs, design and multimedia, and writing and translation. Significant activity has been also recorded in other areas such as administrative support, legal services, and sales and marketing. Keeping true with the Long Tail principle, the average OSM deal amount remains low and hovers between US $100 and $5000. The majority of projects on Guru.com, for example, sells for US $700 or less. While it is difficult to come up with a reliable estimate for the overall market size, Evalueserve, a research and analytics services firm, suggests that in 2007 OSMs earned more than US $250 million in revenue (this comes mostly from registration and project commission fees). This estimate is consistent with the figures reported by individual OSM providers. Elance.com, for example, expects its total billing in 2008 to rise 50% and reach US $60 million, while Guru.com forecasts revenues of US $26 million in 2008. Most firms also report a double to triple digit growth in the number of subscribers and projects.

While the OSM phenomenon has been around for a number of years, it remains new and poorly understood by most firms. This summer we started a research project here at IESE looking at how and why firms engage in offering and providing services via OSMs. Our goal is to take a comprehensive view and try to understand the key benefits, challenges, and success factors for all the stakeholders involved. To accomplish this we will need to get input from a wide range of firms and individuals, including OSM platforms providers, buyers, and supplies. If you have been involved in any of these capacities in an OSM project, we encourage you to participate in the study. To do so, please leave your feedback on this blog or send us an email.