Freelancer Marketplaces are marketplaces like Upwork.com or Fiverr.com that enables a freelancer to be found by a customer and importantly, enables their transaction online. The order and payment is made through the platform. The platform also serves as an escrow to hold the buyer's money while the work is performed. The marketplace takes 10-20% of the order value as a fee for enabling this transaction. Such platforms are consumer focused, public and open and anyone can be a buyer or a seller. Gig listing sites like Craigslist don't qualify as freelancer platforms because they only serve the discovery portion, but the transactions are expected to happen offline and are not managed or controlled in anyway by the platform.
Freelancer Management Systems or FMS (or Independent Contractor platforms) are also online platforms where freelancers create an online profile so they can be discovered for contract gigs. However FMSs are different in that they are are not public. Only preapproved clients of the FMS can engage them on an as-needed basis. FMSs are oriented to enterprise customers and work well where clients return often to use the same contractors from a semi-dedicated and curated talent pool. They get the benefit of using contract talent on an on-demand or shared basis where they only pay for the time they use the freelancer.
Unlike freelancer marketplaces, there is greater trust through curation, background checks and Independent Contractor (IC) compliance and other more formal processes that are required by large companies. Unlike consumer freelance marketplaces, large companies have very strict restrictions on how they can use freelancers because of the risks associated with it. Some of these risks that are not very serious for small business or consumers can be very expensive and damaging to large companies.
Below are a few examples of the risks and why large companies prefer freelancer management systems over freelancer marketplaces.
A new manager at a large company may have used a content creator or logo designer freelancer on upwork.com while she was doing a college marketing project. She sees the project estimate from a large consulting company for a project and decides she can use the same freelancer marketplace in order to save her company some money. The risk for the large company is that the freelancer she uses may deliver her stolen content or design that belongs to someone else. While this may not have neen a big problem in her college project, at the company it could lead to a lawsuit or bad PR. A bad freelancer in a foreign country may not care about IP or their reputation, doesn't carry liability insurance and would just move on to a new client while the Manager would learn a difficult lesson. This is why large companies would rather pay much higher billing rates to consulting companies, onsite contractors or a trusted freelancer on their FMS, than take a chance on an unknown freelancer from a freelancer marketplace.
Another huge risk arises from worker misclassification where contractors are used as employees giving rise to co-employment risks. If a contractor is used by a company for doing the work similar to a fulltime employee for long periods, they automatically become eligible to be considered as fulltime employees- whether the company has a contract or not. FMS systems are designed to track usage of contractors and can guide a company about when they might be at risk for using a contractor on an almost fulltime basis for long time periods.
A third big risk is that company confidential information is often shared with freelancers that are not under any confidentiality agreements. Freelancers may be engaged without backgroud checks and get access to things they may not be eligible for, Some examples are defense and scientific data that are subject to export or other control. Felons getting access to personal (PII) or financial information, etc.
FMS systems alleviate some of the above risks and are an in-between solution that falls between a freelancer marketplace and a consulting company. FMS systems gained popularity for remote tech support jobs where it was cost prohibitive for companies to hire staff on a fulltime basis and send out their service personnel for one-off jobs. Instead companies discovered they could engage local workers on a per job or per hour basis where the jobs were sporadic and didn't require too much specialization. For these kind of jobs they found FMSs like WorkMarket and FieldNation that are now considered leaders in this field.
Example Use Case of an FMS
As an example, an FMS would enable someone like Dell's Service Department to quickly find and send a technician to go to your Grandma's house in a remote town to replace a defective hard drive. Previously it may have required telling your grandma to ship the laptop to them and incur shipping costs both ways and a long time to repair and send back. With an FMS, Dell can post that job online on their chosen FMS which relays that job to several hundred qualified technicians in that town and picks the one that is the best fit and available in an instant.
Benefits of an FMS
The ease of availability, the reputation management system of the contractors in the system and the ability to hire them only for a short time, make this a great proposition for clients. It is easy for Managers to call upon their favorite contractors on an on-demand basis- without the rigmarole of having to send out a request, screen and interview, get a new contractor up to speed and also commit for a certain period of time. In many cases companies may already have an informal pool of contractors that they could bring onto a freelancer platform to manage their transactions better.
Cons of an FMS
The only downside risk from FMSs is from co-employment risks and if they engage the worker as a 1099 instead of as a W2 employee. This is also probably the reason that FMSs are mostly used for remote work outside of the client offices. Most FMS systems promise to take care of the compliance issue but other than some checklists and paperwork, this remains a challenge as the rules are still subjective around what constitutes an employee vs a contractor.