Increasing Purchasing Power via Crowdsourcing

Understanding the difference between a Crowd model and standard outsourcing approach is critical in determining how your company can leverage a crowd.

What is the difference between Crowdsourcing and Outsourcing?

The key difference is that when you outsource using either contractors or offshoring you have don’t alter the non-business specific overhead involved. Over seas development centers still require similar non-core functions to be performed, such as managing office space; hiring, training, and replacing workers; defining process; and managing labor. At best they chase a lower labor rate for the same productivity, at worst they add capital expense and decrease productivity. A good crowd model allows you to tap into a global pool of talent, without the overhead.

So how does the model work?

Rather than get straight into the logistics of a crowd model, let’s start by looking at how infrastructure has been moved to the cloud. Let’s imagine a web software company in 2000 trying to get started, what would they need to do to run a web application for customers with acceptable performance and up time?

1. Build a staff for managing infrastructure
2. Contract a hosting company or build internal hosting capability.
3. Buy or lease severs, networking gear, etc.
4. Build data center
5. Create and evolve processes for managing infrastructure
6. Deploy and support application

Only step 6 provides the business value. Now with a cloud model (e.g. Amazon’s EC2 and S3) the company’s process looks like:

1. Buy capacity on EC2 and S3 with credit card
2. Deploy and support application

Beyond the cost per capacity savings, the elimination of the management infrastructure to support this capability is an enormous benefit.

Applying this Lesson to the Crowd

Today a company that’s going to develop a software application would typically have management overhead to build and maintain a team of engineers that included:

1. Basic HR functions
2. Ability to add, train, and replace team members
3. Processes and quality control (agile? waterfall?)
4. IT Costs (e.g. buying dev tools and PCs)
5. Middle management layers
6. Waste / Unproductive Hours

None of that cost is a part of the core function of building software: analysis (what should we build), architecture (how should we build it), development (building it), test (does it work.) Just like in the above example, the need for this overhead is eliminated in a crowd model.

In the past large companies could access the capital to build out management capabilities necessary to marshal resources of both types (infrastructure and labor) on business problems. The crowd and cloud models allow small firms to leverage these resources, and present an opportunity for large ones to drastically increase their business’ purchasing power. Taken to the next evolutionary step this will result in extremely agile companies and dramatic changes in management model.

Future articles will look at some of these economic aspects of crowd models:

• Value of Incremental and Immediate Scalability
• Aggregation of Management Costs
• The Difference between Enabling and Driving Innovation
• Procuring Outcomes instead of Labor Effort
• Different Monetization Approaches in Crowd Models

Let me know in the comments if there are other topics that would be good to cover in this series.

[bwright]