ODesk Charts the Future of Distributed Work

2/15/11Follow @wroush

Consider these five trends, and then ask yourself what kind of Internet business you would create to exploit them.

1. Persistent economic uncertainty, leaving employers unwilling to hire lots of new permanent employees—but needing to get work done nonetheless.

2. The emergence of outsourcing as a mainstream, accepted, even expected corporate practice.

3. A growing number of people with home broadband connections for doing computer-mediated work and easy access to remote collaboration tools like Skype, Box.net, Basecamp, and Github.

4. More workers choosing (not necessarily being forced) to work from home as career contractors.

5. The interconnection of banking and financial systems around the world, making it more practical to transfer payments internationally.

Well, obviously, if you were thinking like an Internet entrepreneur, you’d want to go out create some kind of online service that helps businesses find, manage, and pay remote contractors, whether domestic or foreign, and then take a cut of the action.

But as it turns out, you’d quite possibly be too late: a company called oDesk created just such a service in 2005, and it’s now built up such an impressive lead over rivals such as Guru and Elance that it may be unstoppable. The six-year-old Redwood City, CA, startup has been growing its business at 100 percent per year for the last three years, and is now the world’s largest online employment platform, with more than 1 million contractors and employers signed up in more than 150 countries.

ODesk’s services, which include a hiring marketplace, tools for monitoring contractors’ hourly work, and a backend for handling payments across national borders, have been “a hit from the beginning,” says Gary Swart, the company’s CEO. But the venture-funded startup has also been the beneficiary of some huge and unexpected shifts, especially the global economic meltdown of 2008-2009. “The winds got stronger, fueled by the economy, the Internet, and globalization,” Swart says.

Barring the collapse of the Internet, a drastic drop in unemployment, or a sudden end to globalization, oDesk seems positioned to keep growing for years to come—and perhaps to eventually earn a nice return for investors Sigma Partners, Globespan Capital Partners, Benchmark Capital, and DAG Ventures, who have put $29 million into the company. With 38 full time employees of its own, the startup may or may not be breaking even yet, but it’s already operating extremely efficiently—its last venture round was almost three years ago, and Swart told me in September that the company still had $15 million in the bank.

ODesk’s business model is simple: it adds an 11 percent fee on top of whatever rate contractors charge employers. In January payments to contractors totaled more than $13 million, and oDesk expects that they’ll surpass a cumulative $200 million for 2011, meaning the startup’s top-line revenue should exceed $20 million.

A few big companies use oDesk, but Swart says the startup’s sweet spot is actually with small and medium-sized businesses (SMBs), especially in the U.S., the United Kingdom, and Australia. Such companies are even more reluctant than big, Fortune 500 companies to hire more full-time employees—and just today, oDesk released a report showing that many are turning to long-term contractors instead. Today’s SMBs are handing out 6.4 times more long-term contracts (lasting 6 months or more) than they were in 2008, according to data oDesk compiled on its more than 1 million contractors and employers. “The world of work is changing,” Swart observed in an announcement about the report. “SMBs are tapping career contractors because they need a scalable, customizable workforce in order to grow, and workers want flexibility in order to manage and grow their own careers.”

In fact, oDesk came into existence precisely because of a worker who wanted some flexibility. Greek native Odysseas Tsatalos had co-founded a San Jose, CA, company called Intacct, which makes cloud-based accounting and financial management software. He wanted to hire his software-engineer friend Stratis Karamanlakis, who lived in Athens and didn’t want to move to the U.S. But Intacct’s CEO vetoed the idea, saying it would be too hard for the company to oversee Karamanlakis’s work remotely.

Tsatalos took that as a challenge, and started building a diary system that would help remote workers document their progress for verification by supervisors. “He kept building this and showing it to the CEO, and eventually the CEO ran out of objections and said, ‘Okay, let’s hire Stratis,’” says Swart. But by that time Tsatalos’ software was looking like a commercializable product. So he left Intacct in 2005 to start oDesk, and brought on Karamanlakis as co-founder.

Sigma Partners managing director Greg Gretsch, one of oDesk’s first investors, recruited Swart about five months later to be CEO. Swart was a Pure Software/Rational/IBM veteran who’d gone on to work at New York startup Intellibank. Arriving at oDesk, Swart says he realized that the Tsatalos’s platform for managing contract talent needed to be paired with a system for finding the talent in the first place, and then paying for it. “So we started out our service, five years ago, saying, ‘We are going to enable companies to hire, manage, and pay remote workers’—we wanted to be a global employment platform.”

And that’s what it’s on its way to being. To be truly global, of course, oDesk would need to have operations in 190-some countries, and so far it’s in only 10, all with a high quotient of software engineers doing freelance work, including the United States, the United Kingdom, Canada, Russia, India, Pakistan, Ukraine, the Philippines, and Australia. (Connecting with banks in each country, and especially learning their tax codes so that oDesk can legally pay contractors, is a time-consuming business, so oDesk is expanding to new countries only gradually.)

As Swart says, there are three parts to the oDesk platform: hire, manage, and pay. The hiring part hinges on oDesk’s database of contractor profiles, each one including a skills overview and a work history with reviews from previous employers. Prospective employers browse the listings and make contact with promising contractors through the site. Unlike most job sites, oDesk doesn’t charge either party for making a connection. “We didn’t want to be in that business,” says Swart. “What we want is to monetize what happens after the match.”

During a contract assignment, oDesk’s work diaries come into play. They log the time when contractors are signed in at their computers, and at random times, they capture and record whatever is on the contractor’s screens for later review by employers. Contractors can see each new screenshot and delete it if they want to (if they happened to be watching a YouTube video, say)—but then won’t get paid for that segment of time. “What it really boils down to is trust but verify,” Swart says. “It’s the ability to trust that a remote worker was doing what they said they were doing.”

Then there’s the “pay” part. Every week, ODesk calculates how much each contractor is owed based on the work diary logs and their hourly rates, and issues payments via direct deposit, wire transfers, or Mastercard Payoneer deposits. It charges employers for the contractor’s fees plus its 11 percent cut—so if a contractor charges $10 per hour, oDesk bills the employer for $11.11 per hour. ODesk takes care of any required tax withholding. One crucial twist that makes oDesk more appealing for contractors is that the startup pays out of its own pocket for the full amount of work completed, whether or not it collects that money later from the employer. (That creates a definite business risk for oDesk; for one thing, it means the company has to be pretty careful about “kicking out the riffraff” employers, Swart says.)

Employers are using oDesk to farm out all kinds of work, from voiceover work to telemarketing. But the largest groups of contractors are in Web and software development, software quality assurance, software documentation, and technical writing—all pursuits that are easy to clock using the work diary software. “There is a huge international supply and demand for work that has to be done in front of the computer,” says Swart. “We are starting to see things like translation, legal, accounting, bookkeeping, any job that can be done remotely.”

It’s true that oDesk’s technology makes it even easier for companies to take work once done by U.S. workers and “offshore” it to lower-paid contractors in other countries. But before you get too worked up about that, consider that it’s also providing work to people here who would otherwise be left out of the labor market. “Our customer support is run by a stay-at-home mom in Tennessee who graduated from UT-Austin,” says Swart. “Her other local job choices were literally either Blockbuster video or a dentist’s office, both at minimum wage. She manages a team in the Philippines that got so big we ended up hiring her friend who lives in Texas, and then we hired a woman in Boston to help train the workers in the Philippines.”

From one perspective, that’s all just oDesk “eating its own steak,” as Swart puts it—it’s exactly this kind of outsourcing that has allowed the company to manage $250 million in contracts over the last five years with just 38 full-time employees. But it’s also a sign that oDesk’s platform is helping more people find paying jobs that fit their skills and their life situations. And in the long run that has to be good for U.S. competitiveness—and for U.S. workers.

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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