The Freelance Economy Is Booming. But Is It Good Business?

The Freelance Economy Is Booming. But Is It Good Business?
Image credit: blog.moven.com

In January 2013, when 24-year-old Kelsey McBride was laid off from her job as a publicist for a payday loan company in Beverly Hills, Calif., she knew there was one thing she wouldn't miss: the 90-minute commute in bumper-to-bumper Southern California traffic. But the regular paycheck? That she would miss.

Fortunately, she had been doing occasional freelance projects on the side during her six months of employment, and she drew on the experience to begin setting herself up as a publicist for authors. She turned to Twitter to find clients, doing searches for "book release" and other key phrases, then emailing or tweeting at the authors to offer her services.

For the first three months, she managed to land only three clients a month. But things have turned around. Now, she says she has 10 to 15 clients a month, and makes $4,000 to $6,000 in monthly income.

McBride is part of a recent and still-growing trend of freelancers taking the ball from full-time workers. All over the U.S., companies are replacing full-time employees with independent contractors, and people who once counted on a steady income are being left to fend for themselves in a hyper-competitive freelance market.

The Freelance Economy Is Booming. But Is It Good Business?
Kelsey McBride, 24, works in her home office in Beverly Hills, Calif. as an independent publicist for book authors.
Image credit: Kelsey McBride

It's a market that is growing tremendously. There are nearly three million freelancers registered on Elance, the largest online platform for what Elance chief executive Fabio Rosati calls "fractional jobs," a term describing the result of full-time job functions being split into individual tasks performed by freelancers. More than 60 percent of mid-size corporations in the U.S. expect to hire more freelancers in the coming year, according to a study commissioned by Elance and conducted by independent consulting firm Tower Lane.

Work has been moving online for years now, with Monster and other online job boards giving way to LinkedIn, and a host of digital tools making distance work ever more viable. To hear Elance's Rosati, tell it, Elance is merely "the next logical step, combining online matching and online work on a single platform where professionals can connect, collaborate and pay in real time."

To be sure, some business owners welcome the trend.

"Freelancing is awesome. It keeps costs down and lets you quickly test out an individual," Trey Smith, who runs San Diego, Calif.-based Kayabit Games, says. "For example, I can hire an artist for an hourly job and cancel the contract if it doesn't work out the first day. Doing this with a full-time, in-house employee is much more difficult."

Smith says he has hired dozens of freelancers across various platforms for contract work, including Elance, Guru, Odesk and Vworker. About 60 percent of the independent workers he has hired live in America, while the rest hail from countries such as Ukraine, Pakistan, Singapore and Portgual.

'We serve the world'
The U.S. has the greatest number of Elancers, with nearly 716,000. India is second, with more than 359,000; Pakistan is third, with more than 113,000; and the Philippines are fourth, with more than 89,000. Of the top four countries by number of Elancers, three are in the developing world. The top four hiring countries, by contrast, are the U.S., Australia, the U.K. and Canada, in that order.

These numbers make it hard to escape the impression that the global market consists largely of First World employers hiring cheap Third World knowledge workers for fractional labor.

"We serve the world," Rosati says, but adds that Elance has "evolved" over the past few years and now boasts a larger pool of sophisticated clients who are more concerned with quality than with price.

Related: The Surprising Tasks Your Competitors Are Outsourcing

According to Elance, the average hourly wage for U.S. freelancers using the company's platform was $28 during the second quarter of 2013. That represents a five-percent increase from the same period of the previous year. It's difficult to compare the freelance lifestyle to the work hours of full-time employees, but if one assumes 40 hours of billable work each week at $28 an hour, and two weeks of unpaid vacation, the freelancer would earn an annual income of $56,000. But in reality, freelance compensation is all over the map.

At the high end of the market are the young professionals who find work through HourlyNerd, a startup whose investors include billionaire Mark Cuban. HourlyNerd limits its pool of freelancers to MBA students and graduates of the top 20 U.S. business schools. More than 1,000 MBAs have signed up so far, and they are averaging $20 to $50 an hour, according to co-founder Rob Biederman, a 27-year-old MBA student at Harvard Business School.

But they are earning those rates only after enrolling in costly graduate-degree programs. A Harvard MBA costs more than $100,000 in tuition alone, though fellowships and other financial aid lessen this burden for many students. Meanwhile, full-time jobs for elite MBA grads at McKinsey & Company, Bain Capital, Boston Consulting Group and other top firms come with six-figure starting salaries.

"No offense to them, but I am shocked at how low they price their time," Biederman says of the freelancers.

Knowledge workers, a la carte
Far lower on the food chain are freelancers who soak up busywork for business owners like Josh Feinkind. Feinkind sells designer fish tanks and high-end furniture for cats and dogs through his New York-based company RefinedKind Pet Products. He recently hired an Elancer for an SEO project. Usually, he awards projects to freelancers with high ratings, he says, but in this case he chose someone who was new to Elance and had yet to receive any rating at all. The determining factor? While other Americans were pricing the project at $500 a month, this Elancer priced it at $100 for three months.

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Brian Patrick Eha is a freelance journalist and former assistant editor at Entrepreneur.com. He is writing a book about the global phenomenon of Bitcoin for Portfolio, an imprint of Penguin Random House. It will be published in 2015.

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