Roland Coase, the brilliant British economist, had a simple and yet profound insight on the nature of firms. He recognised that the reason firms exist is mainly to reduce the transaction costs of going to the market for every single input they needed for production. It is simply too costly to identify the right supplier, negotiate a price and sign a contract for every nut and bolt needed. It makes sense for the entrepreneur to hire people and bring things in-house. However, Coase also recognised that as entrepreneurs create and grow their companies, they will create their own internal transaction costs. The bureaucracy needed to organise and allocate resources will become less efficient as the firm grows.
When I first read Coase's theory in business school, I was very sceptical of how much value these rather philosophical observations on the nature of companies would add to my career. So the irony was not lost on me when I first began to build Forefront and connected its success to his theory. Borne out of Deloitte's Innovation Investment's scheme, an initiative to encourage its entrepreneurial employees to turn their ideas into new ventures, Forefront is an online marketplace that connects a curated community of independent consultants to project opportunities.
For the better part of the 20th century, modern management systems and communication technologies led to a continuous decline in internal transaction costs of companies, and enabled the creation of global enterprises with ever expanding boundaries. This is now about to change.
Competition is intensifying. The average lifespan of Fortune 500 companies today is approximately 15 years and declining. In the 1950s, their life expectancy was 75 years. Rigid and bureaucratic organisations who fail to adapt to the rapidly evolving market will be left behind. This potential to lose out on market opportunities is increasing the internal transaction costs of companies. Most executives recognise this and aim to build more agility in their organisations as a whole, and their workforce in particular. Roughly half of the global executives surveyed by Deloitte expressed their intention to increase their use of freelancers.
On the other hand, online talent marketplaces and crowdsourcing platforms are attempting to bring more transparency to the labour market and reduce the time, effort, and risk associated with engaging external talent. It started with more general platforms like Upwork (formerly elance-Odesk) and Freelancer who connect organisations with a cost-effective, remote freelance workforce for low-value work. It is now evolving to specialised marketplaces connecting organisations with more professional expertise. Toptal connects CTOs to top-tier freelance software developers and most recently CFOs to finance professionals. Axiom, Peerpoint, and Lexoo connect the General Council to freelance Magic Circle lawyers. At Forefront, we are striving to eliminate the transaction costs of finding external talent in the particularly opaque market of freelance management consultants. We help our clients connect with a community of freelancers that have been curated for the needs of their organisation.
The continued growth and improved efficacy of these talent marketplaces in the coming years will continue to reduce the transaction costs associated with identification and pricing of expertise. Concurrently, over the coming years, smart contracts using Blockchain will drive these transaction costs down even further. As the opportunity cost of bureaucracy grows and as creating temporary teams from external networks becomes easier, the nature of the firm will evolve. Organisations will have to adopt a borderless policy for their workforce. In specific cases, we could see categories of services delivered end to end by a distributed syndicate of self-organising freelancers. To remain competitive, now is the time to consider how online talent marketplaces can influence the shape of your workforce.
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