The Future is Freelancing?

Recently, Shane Snow (CCO of Contently) penned an article called “Half of us May Soon Be Freelancing: 6 Compelling Reasons Why.”

Shane believes that the future of journalism is freelancing and is working to make that happen – he is the COO of Contently, which was founded to help freelance journalists succeed. Fortunately, he doesn’t adopt the position that all business will become freelance-based – he says that “I don’t believe the majority of businesses will ever become completely freelance or remote (core staff need to be in-house and work in proximity at any company of a certain size; local service-based businesses need people on site, though those can be freelancers).”

Quite right: there are reasons to have people on site, and to have employees on payroll.

To understand that, let me outline a different perspective on freelancing.

My go-to to understanding the formation and structure of businesses is Ronald Coase; specifically, his article on The Nature of the Firm. The basic premise is that a firm exists where it is cheaper to do transactions within a company than outside of a company. As a crude example, if you have a graphic designer in house you can ask them to do something; if you go outside the company, you normally have to deal with asking for a quote (which entails generating a RFQ, etc); additional overhead in billing; less commitment on resource allocation; difficulty meeting deadlines; and so on.

As a note: “transaction costs” include pretty much everything, from the costs of locating a freelancer, vetting the freelancer, risk of getting the wrong person, costs of communicating, etc.

For a company, hiring employee full time makes sense as long as you have the work to justify it – a company is basically negotiating a lower rate for buying in bulk, and committing to future purchases. Employees can agree because they decrease their risk (not having business) and increase their utilization (no more accounts receivables, marketing, lead generation, contract negotiation, etc).

So, there’s a natural place for freelancing: it’s where companies want less-than-FTE work of a certain kind, the transaction costs are sufficiently low, and the freelancer is not risk-averse and/or is in high demand.

Consequently, anything that reduces transaction costs will increase the rate of freelancing (of, if you’re feeling extra fancy, the “natural rate of freelancing”). Online marketplaces that make it easy to establish contracts and monitor work; online portfolios that show work done; ratings by people (freelancers rating companies and companies rating freelancers); and so on.

The fun factor is the internet, because the internet effectively expands the market – it removes much of the impact of geographical location. Not completely, because people still prefer in-person contact, but in general you’d expect that to be factored in rates or business allocation (so, a freelancer who is nearby will get selected over a remote freelancer).

Overall, I don’t think this is a particularly notable change in theory – but it certainly is notable in practice.