Upwork’s Achilles’ Heel

Photo by Surface on Unsplash

Upwork’s apparent strength in the freelancing industry conceals a surprisingly obvious — and significant — problem.

Buried deep in the “Risk Factors” portion of Upwork’s 10-K Annual Report to the Securities and Exchange Commission dated February 15, 2022, is a seemingly unremarkable comment:

“Users circumvent our work marketplace, which adversely affects our business.”

In reality, circumvention’s impact on Upwork is greater than other risk factors. Circumvention, also known as “disintermediation” in this context, is a massive, existential problem for Upwork. Far from being just another material risk faced by the company, it uniquely threatens the firm’s survival and viability to a degree not reached by the other risk factors listed in Upwork’s public filings.

I’ll explain why.

Upwork’s raison d’être

As a freelancing intermediary, Upwork serves two primary functions.

First, it collects an otherwise disparate pool of freelancers and clients and brings them together in one place. Clients no longer need to scour the web for available talent, and freelancers — at least theoretically — don’t need to advertise to find work.

Upwork does this very well. The firm doesn’t disclose the number of freelancers or clients on its platform, but its undoubtedly in the tens of millions.

Second, Upwork acts as a trusted intermediary between two parties — freelancer and client — who don’t (at first) know or trust each other. That’s why it’s registered as an escrow service and offers dispute resolution services.

It’s this second, “trust-bridging” function that makes Upwork more sophisticated than some rando Facebook Group or web forum. It allows two parties who wouldn’t otherwise trust one another enough to work with each other to connect in convenient and efficient way.

Upwork’s accidental benefit

If Upwork had its druthers, those are the only services it would offer. It would connect people in an online marketplace and provide the tools necessary to facilitate transactions between them in a consistently low-trust environment.

But Upwork offers one key accidental benefit to its clients and freelancers. It builds trust over time between clients and freelancers who work together.

Once reliable freelancers and clients have had the opportunity to work together once, twice, or ten times, they begin to trust one another. And this newfound trust completely demolishes the need for the trust-bridging aspect of the service Upwork offers its users.

Once client and freelancer trust one another, Upwork ceases to be a necessary intermediary. It becomes, instead, a hoop through which each party has to jump. It becomes an extra step in the transactional process they wouldn’t otherwise have to endure.

In short, it becomes an annoying hindrance, rather than a service.

Trust falls

And what do freelancers and clients do when they begin to trust one another? They fall off the Upwork platform. They disintermediate. They circumvent.

A research study published in July of 2020 in Management Science called “Trust and Disintermediation: Evidence from an Online Freelance Marketplace” by Grace Gu and Feng Zhu explored the phenomenon of disintermediation/circumvention on an unidentified freelancing platform that sounds suspiciously like Upwork.

A portion of the study’s abstract is telling:

“We find that enhanced trust increases the likelihood of high-quality freelancers being hired. However, when the trust level is sufficiently high, it also increases disintermediation, which offsets the revenue gains from the increase in hiring high-quality freelancers.”

The authors of the study also say that “…disintermediation can sometimes render less effective a platform’s strategy to improve its profitability through enhancing trust.

Enforcing compliance

Well, so what, you might say. Every firm faces challenges enforcing its Terms of Service. Why would Upwork be any different?

But Upwork’s dilemma is unique. It says as much in it’s 10-K:

“Despite our efforts to prevent them from doing so, users circumvent our work marketplace and engage with or take payment through other means to avoid the fees that we charge, and it is difficult or impossible to measure the losses associated with circumvention.”

Upwork essentially admits that it’s got effectively no way to know who is circumventing the platform and, therefore, no way of recouping the losses caused by circumvention. The 10-K also reveals:

“In addition, our efforts to reduce circumvention may be costly or disruptive to implement, have results that are difficult or impossible to measure, fail to have the intended effect or have an adverse effect on our brand or user experience, cause users to cease using our work marketplace, reduce the attractiveness of our work marketplace, divert the attention of management, or otherwise harm our business.”

In other words, any efforts that Upwork takes against disintermediation might make the platform itself less desirable. In still other words, the trust-disintermediation problem is arguably baked-in to its business model. They can’t eliminate circumvention without eliminating trust.

What this means

What this means for Upwork is — in my view at least — pretty clear. Without foundational reorganization, Upwork will never be the go-to platform for the high-end, big-dollar, long-term freelancing arrangements that would allow it capture substantial fees. Those arrangements require a great deal of trust and, as we’ve established, that amount of trust is too closely associated with disintermediation.

Instead, Upwork will remain the unprofitable Bumble or Tinder of online freelancing. A place we go to meet interesting people and, if we trust them enough, meet them elsewhere, on our terms.

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Steven Toews, JD, MBA

Steven Toews, JD, MBA

Former lawyer. Now a copy and content writer. Writing about achieving success as a freelancer. Find me on Twitter: @freelancemba