The evolution of marketplaces
Marketplaces have been around for thousands of years. Bazaar, souks, retail outlets, malls – all have shared a central purpose – to pair buyers and sellers. More recently, marketplaces have gone online, initially around peer-to-peer retail like eBay or Taobao, but what really has Silicon Valley agog now are mobile app-based service marketplaces. Uber, AirBnB, Udemy, DogVacay, Instacart, TaskRabbit, Spinlister, Postmates and OpenAirplane all boast robust valuations and several of these business marketplaces have fundamentally altered entire markets. Yet despite increasing talk about competency marketplaces (i.e., for skills), these have been slower to develop despite targeting the largest marketplace in the world: the market for human capital.
To understand this, it’s worthwhile to look at what defines markets as well as what makes them efficient. A good definition is from Health Care Market Deviations from the Ideal Market, by Ari Mwachofi and Assaf Al-Assaf:
“Fundamentally, a marketplace is where buyers (consumers) and sellers (producers) interact (directly or through intermediaries) to trade goods and services. It is a situation where forces of demand and supply interact to determine prices of goods and services being exchanged. Therefore, a market includes mechanism[s] for: determining prices and quantities of the traded item, communicating information about prices, and for the distribution of goods and services.”
However, there are many frictions in markets – information asymmetry, lack of critical mass of buyers and sellers, geographic distribution issues (e.g. it doesn’t matter if there is an efficient market for spices in Marrakech if you live in Milwaukee), medium of exchange issues (e.g. currency), and a clear understanding of the goods or services being purchased. The most successful marketplace companies have used technology to minimize these frictions and push closer to the market ideal (see examples in the table below).
Marketplaces for skills
Recently, several experts have described the emergence of competency marketplaces, which provide information as to the skills that individuals have. Ambitious corporations and nonprofits are trying to build and spur development of these marketplaces – LinkedIn, Portfolium, Lumina Foundation (through grant support to several parties including select universities and using transcripts in new ways) and Mozilla and the MacArthur Foundation’s Open Badges, among others.
I’m a believer that these marketplaces will eventually take hold and revolutionize the economy; however, widespread adoption will take time, primarily because of the market’s inherent frictions:
The market for human capital is inherently messy. It’s why there are highly paid executive recruiters and multibillion dollar staffing firms. Whichever party can mitigate one (or likely several) of these frictions can drive tremendous value and generate outsized profits.
LinkedIn’s Initial steps to reduce frictions in labor markets
One company that is leading the development of a competency marketplace is LinkedIn. As described in previous posts here on Educelerate.com, for all the talk about LinkedIn as a social media company, in reality it derives a majority of its revenue by pairing buyers of human capital (employers) with sellers of human capital (individuals). LinkedIn’s CEO Jeff Weiner describes his company in similar terms: “LinkedIn’s fundamental value proposition is connecting people to opportunity” and the company has vision to “create economic opportunity for every member of the global workplace” through something they call an economic graph.
Not coincidentally, LinkedIn has been working to reduce the frictions in the market for human capital. LinkedIn has an enormous number of users and employers that (at least partially) depend on LinkedIn’s information to make hiring decisions. The company marries the beauty of social networks, the ubiquity of “friending” someone with the power of peer endorsements, making individuals stand out in ways that a traditional résumé cannot.
Still for all the success LinkedIn has had, there is lots of room for improvement – the frictions within human capital markets are still great. That said, there is one specific area where tremendous volumes of data are being collected and if married with LinkedIn’s already vibrant data set could provide a further competitive advantage – labor price transparency.
Employee: “Dammit, I’m underpaid!” Employer: “Dammit, I’m paying too much for that guy!”
For all the data that LinkedIn has collected, it has very poor visibility regarding how much people are paid for the skills they have and the work that they do – however, this is a critical item in the functioning of markets. Imagine trying to connect buyers and sellers of stocks without price information; it would be insane – but it’s what often happens in labor markets. While there are a bevy of firms that do compensation studies, they often simply equate how much people in comparably titled roles or with similar years of experience make – not how much their work is worth. It’s actually quite startling that LinkedIn has been able to generate as much value as it has without this crucial block of information.
There are actually two categories of firms that could be interesting to LinkedIn and I could easily see acquisitions in both over time – salary comparison websites and freelance worker websites.
Glassdoor, Payscale, Salary.com and other salary comparison websites have millions of data points that could be very valuable when paired with the data that LinkedIn already has. Imagine if LinkedIn could provide inexpensive compensation reports that were vastly more detailed and tailored to the skills and talents of your employee base? These activities could be disruptive to the existing set of providers in the marketplace and to the entire compensation and benefits branch of human resources.
Companies such as Upwork, Crowdsite, Fiverr, Flinja, Freelancer, Guru.com, vLance, and Task Army could provide another twist. Each of these companies are marketplaces for freelance or crowdsourced work – matching individuals with skills and employers who need work done on specific and discrete projects. Each of these businesses provides pricing information on labor at the most micro level – sometimes measured in minutes and hours. Pairing the information that LinkedIn already has with one of these companies could be a game changer for the discovery and pricing of talent in the growing freelance arena.
LinkedIn already has a strong competitive moat with its hundreds of millions of active users. By acquiring one (or two) of the companies mentioned above, frictions in the human capital marketplace could be further reduced – and help LinkedIn become a growth company for decades to come.
Editors Note: This guest post is written by Raj Kaji (@NirajKaji), who has worked for over a decade in higher education, including at Bridgepoint Education, Walden University and Laureate Education as well as an entrepreneur in founding four start-ups. All points presented represent the personal views of the author and in no way reflect the opinions of his current or past employers.