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The so-called “gig economy” is here to stay. It is not a temporary, limited phenomenon, and it neither started nor ends with ride sharing. Instead, it is a universal development of the job market that will eventually affect all industries. As such, entrepreneurs should consider what this development means for their hiring and strategy decisions.
A universal development
Some 20 years ago, I worked in web systems development. At that time, a few brave souls tried spreading their wings and worked as self-employed coding consultants. Selling their expertise as hourly subcontractors, they were brought in by software development firms when a project required more hands on keyboards than were available in-house.
Today, the structure of the software development industry is quite different. Its methods are more standardized and the processes more mature. Now, rather than an oddity, self-employed architects, coders and designers are a common occurrence. In other words, while there are still opportunities for full-time employment, the profession has become much more gig-oriented.
Ride sharing was a much faster change, going from top-down taxi companies to private drivers working their own hours for Uber or Lyft. That being said, it is the same development. Industries and firms fall apart over time. This development is natural is here to stay.
Industries and firms fall apart in time
We have become used to seeing firms as core to the market, and this is for good reason. But while there are firms, they are transient phenomena. Long-lasting firms often have to reinvent themselves to stay in business. IBM, for example, started out manufacturing machines, moved into calculators, then computers, and then finally went on to consulting.
This is a perfectly natural development. Economically speaking, the firm is a temporary solution. As I argue in my book The Problem of Production: A New Theory of the Firm, the firm allows for implementing new production beyond what can be created through simple contracting. In other words, firms do what markets cannot. However, markets eventually catch up with the firm, subsuming it.
The same is true for whole industries — born from a novel innovation, competitors emerge and break down into more specialized firms, supporting the core innovation. While this process can take decades or even centuries, the pace of change seems to steadily increase. In the market there are few, if any, constants.
How to think about hiring
What this means is that entrepreneurs should expect it to get both easier and cheaper to outsource functions. This, in turn, means the relative cost of doing things in-house will increase. As an entrepreneur, it is important to recognize that this is the overall trend and incorporate this knowledge into the firm’s strategy. It should also be recognized in how the startup deals with hiring. Here are three rules of thumb to consider:
1. Delay hiring as long as you can
This is already standard practice in startups, since hiring is expensive and the cashflow situation is tenuous. But there is good reason to hold off on hiring unless necessary, even if there is enough cashflow to afford it. Consider the state of your industry: Is it in a growth phase, and are competitors and partners expected to grow or shed employees? There is a risk that hiring means biting off more than you can chew. This is especially the case in mature, standardized industries.
2. Consider outsourcing
Entrepreneurs tend to avoid outsourcing because it is costly. Costs should be avoided, but not at the expense of flexibility. Outsourcing means it is much easier to adjust the scale of production to changes, so the additional expense can be part of a cost-cutting strategy. It all depends on what you expect from your industry — if firms are likely to shed employees, hiring may turn out a disaster.
3. Focus on your core competency
It is common for entrepreneurs to want to keep things in-house to be able to control their operations. But you probably do not have a full-time bookkeeper or CPA on staff. Why? Because bookkeeping is now a standard service offered competitively in the market.It used to be done in-house, and businesses were reluctant to outsource this service because the information is so sensitive. The same will soon be true about I.T. departments. What else will become standard market services? The best way to avoid expanding into the wrong place is to focus on your core competency — where your startup creates value.
Considering the nature of the marketplace, the gig economy is not new. It is just a new name for a development that was always underway, but it is now augmented by modern and highly effective information technology. Entrepreneurs should recognize that every firm is a solution and that it’s subject to a common lifecycle. Doing so helps when formulating strategies and making decisions in the startup.entrepreneur • MAKE MONEY • side hustle