Upwork: In Demand Talent On Demand

Upwork connects freelancers and agencies to businesses looking for high quality, specialized talent.

Upwork is the largest global freelancing platform, connecting businesses with talent all over the world. Specifically, Upwork is a transaction platform which lowers both search and transaction costs. Upwork benefits from cross side network effects – the more business postings that exist, the more talent is attracted to the platform and vice versa.

Creating Value

Upwork creates value for both the businesses and the freelancers. Businesses post a job describing a project and the skills required to complete the work. Both businesses and freelancers are empowered to find their own matches by searching the platform, however, Upwork utilizes algorithms to recommend the best projects/freelancer matches. Upwork creates trust on the platform by verifying freelancers and companies and displaying various data to increase transparency. This includes skill level, success scores and client feedback.

Businesses benefit from the flexibility offered by the Upwork platform. They can quickly augment their full-time employee base to complete projects as needed. They can immediately find talent with specific skills from a global pool of online specialists that would have otherwise been inaccessible. Freelancing platforms enable companies to get high quality work done at a fraction of the cost of a full-time employee or conventional agency.

From the freelancer perspective, Upwork enables talent to have freedom and flexibility to find jobs online. Upwork consolidates millions of projects, providing freelancers with top paying, quality work all in one place. Additionally, Upwork highlights ideal jobs for freelancers but gives total control to choose their own clients and projects. This reduces the time it would normally take for freelancers to find work

Upwork also creates value by managing administrative tasks associated with freelance work.  There is an online workspace that encourages easy collaboration, enables communication and provides tools to verify hours worked. Upwork also handles all invoicing and billing for the projects with payment protection.

Capturing Value

Upwork captures value from both sides of the marketplace. From the freelancer, they take a fee based on the size of the client relationship. The pricing model is outlined below:

  • 20% on transactions under $500
  • 10% on transactions from $500-$10,000
  • 5% on transactions over $10,000

By utilizing this model, Upwork is incentivizing freelancers to work consistently with the same company, making the platform stickier for both sides. Upwork also capture value from the business side of the marketplace by offering tiered services for a monthly subscription fee. However, the freelancer fees make up 63% of their revenue as of 2019.

In addition to monetary value, Upwork finds value in the data that is collected on the platform. Freelancers that have more project feedback are more likely to get hired again and so this is a valuable way to keep the platform engaged. This data is a valuable way to discourage disintermediation for both sides.  It also informs the data algorithms that Upwork uses to recommend projects and freelancers.

Scalability

Upwork has the benefit of scaling within a massive market – over $1.5 trillion in the gig economy and over 36% of Americans working as freelancers in 2018. Freelancing is becoming increasingly popular, enabling Upwork to scale even faster. Additionally, new businesses and freelancers can quickly be added to the platform at an extremely low cost. They have been able to create automated, simple, repeatable processes on the platform. Upwork benefits from cross side network effects so there is little need for high sales/marketing costs. Because Upwork can serve the global market and easily enter new markets, the platform is scalable.

Sustainability

Although Upwork is experience growth (23% increase revenue), they are continuing to lose money. Upwork has a defensible global network cluster but must figure out how to generate profit to be sustainable. One concern with Upwork’s current business model is disintermediation. Because freelancers are being charged the bulk of fees, they have an incentive to move their relationships off the platform. Freelancers are likely to be more price sensitive than corporations and therefore might not be the side of the platform to capture majority of value from. Another concern is the ease of multi-homing; it takes very little effort for a business to post the same project description and for a freelancer to maintain a profile on multiple sites. With low barriers to entry, a new competitor could easily enter this space and undercut the fees charge by Upwork to steal their talent and client base. To combat these issues, Upwork will need to continue to add value, in the form of additional services, for both sides of the platform.

 

Sources:

https://www.upwork.com/i/how-it-works/

https://hbr.org/2013/04/using-the-crowd-as-an-innovation-partner

https://www.upwork.com/hiring/for-clients/6-ways-online-freelancing-platforms-create-value/

https://investors.upwork.com/news-releases/news-release-details/upwork-reports-fourth-quarter-and-full-year-2018-financial

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5 thoughts on “Upwork: In Demand Talent On Demand

  1. Interesting article on Upwork! I think you hit the nail on the head in your last paragraph around sustainability – I worry that their platform is at high risk of disintermediation as well. It feels like they’ve tried to discourage it through their pricing model to freelancers, encouraging them to be stickier on the platform by charging less commission for the larger/more numerous transactions. Although, I agree with you that this will likely have the opposite intended effect. If I were a freelancer working over and over again with the same employer, it would be really easy to move off the platform and instead have no commission charged. I agree with your assessment that Upwork will need to fine tune how they provide value to both sides of the platform to better defend their business.

  2. Thanks for sharing, great analysis!
    I have been following this company in the past years and agree with your comments. I used to hire free lancers for my small business and the experience was always good, but I experienced many times the free lancers willing to go offline and work directly with the client, specially for medium size projects around $ 10K, so disintermediation is really a concern. Upwork has been adding some additional services for both sides like project management tools and certification/training for free lancers and they will need to continue to strengthen this network effect in the following years.

  3. Thanks Alli! As you eluded to, my main concern with Upwork is “width vs depth”, it’s hard to create a platform that cater to all the verticals (creative, sales & marketing, CS, data science, eng etc) while maintaining a high engagement and therefore low disintermediation risk. Vertical competition is fierce: Instawork for hospitality industry, Joist for industrial contractors, Wonolo and Merlin for blue collar jobs, Toolbox for construction etc. I wonder if Upwork could explore possibilities in vertical integration, so as to create more value added services and keep both demand and supply on the platform for long term.

  4. Great post, Alli! I was actually thinking of writing about Upwork as well, but I am glad that you beat me to the punch. I agree with you that disintermediation might be a big problem for Upwork. My roommate is currently starting a company and used Upwork to find freelance software developers. Once he found a few developers he was interested in, they took the conversation offline. I wonder if one way to address this from the perspective of Upwork might be to charge freelancers for the connections made in addition to a commission fee for the transaction amount.

  5. Super insightful post! I have been following Upwork quite closely for a few years and believe in its strong future potential with the software engineering and data science requirements of small firms increasing. I do see some hope in the tackling some disintermediation using AI based on the interaction on the platform. In my view the push should be on developing a strong B2B sales force to sign up companies with recurring work who are less likely to disintermediate based on the services being offered to them.

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