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One of the greatest myths of outsourcing is that small companies do not want to outsource; it is a sophisticated management idea, the value of which only few understand.

Nothing can be farther from truth. In reality, it is not the intent of small companies, but the inability to outsource that mars their outsourcing drive. Moreover, the pace at which the large corporations are embracing outsourcing has left large service providers with little incentive to look beyond them for business acquisition. They have little time for the Small and Medium Enterprises (SME). "It is not a question of intent; they (SMEs) want to do it," says Akshaya Bhargava, head, BPO Investments, 3i, a UK-based private-equity firm. "Small companies have no know-how, no management bandwidth; and large suppliers are not interested (in spending time to educate)," he adds.

If large service providers are not interested, what of the smaller ones? Is it a supply side problem? A walk along any street of Chennai, India or Manila, Philippines will convince one that that is not so. The number of smaller players who ask how to "get business" while proclaiming their technical competence can make the agnostic believe that it is not a supply side problem. The problem is: To make the twain meet.

That is what online services marketplaces-such as Elance Online, Guru.com and Rent-A-Coder-are trying to do: make the small and medium buyers meet the small and medium suppliers.

Demystifying Online Services Marketplaces
The principles of most of the exchanges are similar. They follow the eBay model where both buyers and service providers have to register themselves to participate in the marketplace activities. Usually, most marketplaces, except for those that are built more as freelance-staffing services providers, do not require the buyers to pay anything. The suppliers, of course, have to pay a periodical fee, a commission on the revenues earned, or a combination of both. Almost all the freelance online services marketplaces are supplier-funded.

Unlike the product marketplaces, a bidding activity in a services marketplace is always buyer-initiated. That means the bids are almost always reverse auctioned. When the buyer needs the services of a supplier, he posts a request for proposals with a specification of the work. The suppliers then bid for the project in a reverse auction. Usually, there are two variations to the auction process. Some projects are open to bidding from any supplier. They are called open auctions. In contrast, there are invite-only auctions, where only invited suppliers are allowed to bid. This mechanism necessitates the need to have a search facility for the buyers by which they can search the right suppliers. Most marketplaces today provide that kind of search.

Moreover, deciding to buy is not the ultimate but the initial step in the business cycle. "That certainly makes the services marketplace a lot more complex than an eBay," says Inder Guglani, Founder and CEO, Guru.com, Pittsburgh.

Once a supplier is selected, most marketplaces require the buyer and supplier to sign a basic agreement. After the project is completed, the payment is made to the supplier. Most marketplaces today provide an escrow service that provides some protection to both buyers and suppliers. And, of course, there is the feedback mechanism, through which both buyers and suppliers rate each other, as in eBay, and they are the most valuable assets for building a reputation in a marketplace. Many marketplaces also provide a dispute-resolution mechanism, by which they mediate and even arbitrate if and when required.

Some of these facilities are the bare minimum to make any online marketplace work. For example, registration, search, auctions, feedback, payment and risk management are concepts taken straight from the eBay model, and have been improved upon by these marketplaces in the service context. When Elance Online started, it was a replication of the eBay model. So, there were no invite-only auctions, escrow accounts and many such similar facilities, which challengers like Rent-A-Coder and Guru.com started offering, and are today available in all the marketplaces.

At that time, these players were struggling to prove that services could also be bought and sold online in an equally, if not, more efficient manner as products. So the thrust was on making the systems reliable in terms of trustworthiness and, of course, efficiency. This was based on the assumption that services are also getting commoditized like products.

However, despite the drive towards commoditization, services remain essentially different from products in two major aspects: Control is still important; and delivery quality is more important than the transaction itself. Both these are soft issues that cannot be so easily commoditized.

Later entrants like oDesk, a freelance-staffing marketplace, and Freelance.com, a Europe-centric marketplace, have tried to leverage this gap. oDesk has been able to differentiate by attracting a set of buyers who would like to hand over projects that they would pay for based on the progress - the equivalent of time and material-based pricing in traditional outsourcing. That has resulted in those suppliers flocking to the site who want the comfort of home but do not have a huge risk appetite. They get paid on a weekly basis. In essence, it has become a homeshoring facilitator rather than a marketplace like Elance or Guru.com.

Freelance.com's approach is extremely interesting. Its core users, Europeans, are far more conservative than the Americans. The marketplace has hence been trying to blend some of the traditional outsourcing practices to the online marketplace. It has introduced the concept of project managers who screen the suppliers on behalf of the buyer and supervise the project through its entire lifecycle. Many believe this will encourage the buyers to outsource larger projects using this marketplace. The jury, though, is still out. While each player claims to have some differentiation, there is still not much of a difference between the marketplaces in their tangible features. "The fact is that there are not too many differences between one another in positioning," admits Guru.com's Guglani.