On-Demand Staffing: Online Labor Exchanges Come Of Age From Elance to eBay, Lime Exchange to Craigslist, today's online labor exchanges offer resource-strapped businesses easy, on-demand access to workers with specialized skill sets --and you pay only for what you use.

By bMighty.com

Opinions expressed by Entrepreneur contributors are their own.

Rusty Weston

A decade ago, service exchanges were among the first "e-business" marketplaces that sprouted up on the Web. But the sites were unsuccessful: Buyers weren't ready, and B-to-B exchanges were lambasted as difficult to navigate or trust.

Flash forward to today: There's a plethora of labor exchanges where small and midsize businesses source and engage contractors both locally and globally. And with increased competition comes more choice and -- finally -- innovation. The new generation of labor exchanges provides automated sourcing tools to help with contracts, project management, payments, and even resolve disputes, if necessary. The latest wrinkle is a proof-of-concept option to help build trust between buyers and providers.

Small and midsize firms that prefer not to add head count use labor exchanges when they seek specialized skills, usually on a project basis. The critical test for labor exchanges is whether they can effectively automate the sourcing process and save SMBs from hiring lawyers and sourcing advisory firms, much the way that large corporations negotiate with service providers.

The leaders in this still emerging field include Elance, Guru, oDesk, ki work, and Lime Exchange. Yet millions of dollars worth of contracting work also flows through eBay and Craigslist, even though those sites lack project management features found in more specialized exchanges. One of the key advantages of labor exchanges is that the "employer," or SMB customer, pays nothing for using the system; fees are collected from service providers, who pay, in some instances, to be listed on the exchanges plus a percentage of the invoice.

That's not to say the exchanges aren't trying to collect money from SMB buyers. For instance, ki work offers buyers a $20 monthly fee to become a "certified" buyer, granting them an "improved" chance of sourcing good service providers. While such fees are optional, service providers are forced to jump through flaming hoops to reach buyers -- lending further credence to the process.

Not surprisingly, buyer feedback ratings -- so prevalent on eBay and Amazon -- are pivotal to success for independent service providers. A good rating can make purchasing decisions, while bad ratings chase away buyers.

Savvy On The Buy Side

SMB buyers that outsource say it provides scale to their businesses, freeing them to work on more strategic and less tactical concerns. Increasingly, SMB buyers are learning how to navigate labor exchanges to obtain competitive bids from qualified service providers. But beyond cost, SMB buyers are using labor exchanges because the available sourcing and management tools provide value to them.

"Anything that doesn't require a human being to be there physically I pretty much have outsourced," says Jonathan Fleming, a Realtor and entrepreneur in the San Francisco Bay Area who uses third parties to provide a boost to his online marketing efforts. "I use editors, graphic designers, Internet marketing, and search engine marketing."

Fleming, who sources services on Elance, hires third parties to help manage his real estate contacts and prospects that come in through his Web sites. "They go in, scrub leads, and hand them to me in my e-mail package each morning," he says.

Tony Caporicci is an entrepreneur in Las Vegas whose firm, Gendais, develops tech products, such as a GPS application for an iPhone. But he doesn't do everything himself -- he subcontracts much of the work to service providers. He recently posted a job request for data-entry work on Lime Exchange that elicited bids from India, Brazil, Russia, Ukraine, and the United States. "We chose someone from the States because they were local," he explains. What sold Caporicci on Lime Exchange were the number and variety of responses, plus the administrative tools that enabled him to place money in escrow for the service provider -- a critical, trust-building aspect of their relationship.

Though effective, labor exchanges could stand some improvement, according to Steve King, partner at Emergent Research, in the San Francisco Bay Area. "If you talk about day-to-day management of projects or work, I don't think anyone has that knocked yet," he says. "When you hire people through a marketplace, you still have to use traditional management techniques. You throw something over the fence to these folks, and they may or may not come back with good work. It's still a management issue."

Chief among the challenges and opportunities presented by labor exchanges is the abundance of suppliers located beyond U.S. borders. "Almost all of the marketplaces include global players -- mostly providers rather than buyers," King says. "Without a doubt, it has a leveling impact on pricing. While the prices are appealing, managing providers located in other countries and cultures poses risks to novice customers."

Fleming says he has 15 people working for him intermittently, and doesn't mind working with international service providers. "People might work three hours or a whole day ahead of me," he says.

Unlike most classified ad-based sites, labor exchanges typically organize providers into searchable and browsable categories, giving each provider a page that highlights their skills, education, work samples, transaction history, and a customer feedback rating system.

"We are trying to create a platform that allows service providers to establish who they are and, on the other hand, provide buyers a low-risk way of finding them," says George Searle, CEO of Lime Exchange.

Cathy Siciliano, senior director of marketing at Elance, says one of the first things novice customers should understand about contracting with providers on labor exchanges is that it's different to both source and manage providers who don't come into your office every day. "We have tools on Elance that help the employer facilitate communication," Siciliano says. Elance clients and service providers can record discussions in private work rooms, and track and store work products, including various revisions of Web design, documents, or software projects.

One-Stop Shopping

As an attempt to automate the sourcing and management of service provider relationships, labor exchanges are unlikely to put specialized providers, such as outsourcing advisers or attorneys, out of business any time soon. But SMB buyers will benefit because they don't typically have the budget to spend on third-party advisers.

"I don't see SMBs having an appetite for consulting services to help them contract more effectively," says Eugene Kublanov, CEO of neoIT, a global services advisory firm. "That's part of the reason we don't work with SMBs, because they prefer to bootstrap it and go out on their own. In a marketplace format, automation makes a lot of sense for SMBs as typically the scale and complexity of the projects are significantly lower than what Fortune 1000 companies outsource."

Despite the availability of specialized sourcing and management tools on labor exchanges, some SMB buyers may prefer to continue using a more traditional classified ad approach found on Craigslist, among other sites. What buyers sacrifice in features they may make up for in lack of complexity. On the other hand, service providers may have a lot to say about the process as well. For providers, the labor exchanges provide standardized contracts and payment systems -- guaranteeing that payment will be received for satisfactory work. It is a challenge to pitch SMB firms for work, but collecting payment for services rendered also can be an expensive proposition. If the best providers move to certain labor exchanges, then savvy customers will choose to follow.

Rusty Weston is a San Francisco-based journalist who blogs for My Global Career and Fast Company.

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