Abandoning the red-light district business model – TOBE

In my previous post Abandoning the red-light district business model – ASIS I explained the current ICT freelance business, and how it is pretty similar to the way business is done in a red-light district.

Now I’m going to explore the possibilities of exiting this business model for a better business model. Better for the freelancer and the paying client, not better for the agencies.

But before we start looking for and alternative, we should first find out why this business model exists. Why is there a party in the transaction that add little or no value, but still walks away with a serious piece of the pie? In other words, are the pimps still in business today?

There are a number of reasons why clients prefer working with agencies to hire freelancers, rather then working with the freelancers directly. If we are to provide an alternative then it should meet each of these requirements.

  • Administration: Working with only a limited number of agencies simplifies administration. If you hire 20 freelancers from 5 different agencies you only receive invoices from those 5 agencies, and not from 20 different one-man companies.
  • Volume Discounts: If a client hires 10 people from the same agency he is in a power position to demand volume discounts. This is not something you can do if working with 10 different companies.
  • Business Continuity: Agencies sell the illusion of business continuity. They claim to be able to replace any resource with a equivalent resource if that would be necessary. While this might hold for the more commodity type of roles such as developers, or network admins, this is definitely an illusion for any type of senior role. You cannot simply replace a senior architect by an equivalent and continue business as usual. First of all because this “equivalent” simply doesn’t exist, there will never be someone out there with the exact same background and experience. And secondly because the new resource will always need a certain time to get to know the new environment and work himself in.
  • Sales: Freelancers in ICT are generally good in what they do, whether it be database administering, architecting or analyzing, that is their trade, and as professionals they master the skills necessary. But sales is a totally different trade, one in general that ICT freelancers do not master. Because of the lack in sales skills clients never even hear from the freelancers directly. In general ICT freelancers are just not able to sell themselves.

If the freelancers ever want to get out of this red-light district business model they will need to join forces. Small one-man companies aren’t even considered by the major clients in the business, but a company that represents a large number of freelancers will.

How should such a joined-forces company look like? Freelancers are all their own business owner, and they surely will not be inclined to join a company as a semi-employee, where they have no control whatsoever on how the company is managed. And they will certainly not be happy with “yet another agency” that creams of the profit for themselves.

So in order to attract freelancers I think this new company should be in the form of a cooperative company, where each freelancer can be a partner and stockholder. Whenever a freelancer works through this company, a part of the margin could be turned into shares. So the more a freelancer works though the company the more shares he gets.

The mission of the company should not be to make profit itself, but to maximize the profit of the freelancers, so margins could be relatively low compared to “regular” agencies. Any profit that would be made can either be invested in things like business development, or it could flow back to the freelancers in the form of a dividend, thus rewarding the freelancers according to their contribution.

Now lets have another look at the clients requirements to see if how such a company could satisfy them.

The Administration and Volume discount requirements both boil down to one point. The company should represent a large enough number of resources. The number of freelancers should reach some kind of critical mass to be allowed to play in the major league.  But how much is large enough… that’s a tough one. I think it’s save to say that 10 is too low, and 100 is sufficient, so I guess the truth is somewhere in the middle.

As for Business continuity, we as freelancers know this is an illusion. I would plead for an honest approach. Just tell the client honestly that we cannot guarantee business continuity for any type of senior freelancer. At the same time I would try to educate the clients and tell them that in fact no agency can guarantee this, despite their promises. If handled well this could even prove to be an advantage for our company as it would be perceived by the clients as being honest; a quality often hard to find in other agencies.

The last issue is Sales. It’s all good and well to have lots of freelancers ready to jump in, but without sales they will just stay there, being ready. So somehow the company should be able to reach out to the CxO’s and convince them to do business with us. On idea is could be to have the freelancers do some sales themselves, but I doubt that would work. I mean, have you ever seen a sales professional? Now compare that with the impression an average ICT freelancer makes….


No, I’m pretty convinced the company would need to attract real sales professionals to do the sales, after all, we don’t expect sales people to be able to do our job do we? And in the true spirit of the company these sales people should also be allowed to earn their part of the shares and become partners and stockholders.

So to conclude, if we ever want to get rid of the red-light district business model, and we don’t want to be treated like prostitutes, freelancers should join forces in some sort of cooperative company that is big enough to appeal to the major clients on the market.

5 thoughts on “Abandoning the red-light district business model – TOBE

  1. Geert,
    I think your explanation nearly corresponds to how I see things. I do not agree on the margin however: why should this be small, the marging is investing in the company: office, business development, collaboration website (sharepoint), knowledge base (think of books), marketing, memberships to various organisations and the surplus is paid as divident, etc. I do not mind a marging of let us say 20% if I know this will be invested in business growth…
    Best regards,

    1. Bart, I understand you point, and I wouldn’t really mind either, I think I’m paying about 20% right now to a company that I have no relation to at all, except for my contract (I wouldn’t even know what there offices look like).
      But for this company to succeed it will need to represent a large enough number of freelancers. I think cutting back on the margin is the easiest way to persuade potential collaborators to join us. It offers an immediate reward, whereas the investments you mentioned are more of a long term reward.
      Definitely a point to discuss, and I guess the truth will probably be somewhere in the middle. It will be a matter of finding the right balance between investments and immediate rewards.

  2. Hi Geert,
    the theory you put out here seems straightforward and I personally beleive there is some merit to it but – do you plan to leave it as is – a theory, or have you made any attemps to put the model into practice?

  3. I agree completely, if you look at sites like vWorker with a few modifications (more community, online training etc) you may have your sales without a lot of overhead. Setup the site and then target governments and large organizations with direct sales and leave the rest up to Google.

    Few more ideas but anyway I think that is the way of the future.

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