One of the greatest myths of outsourcing is that small companies do not want to outsource; it is a sophisticated management idea, the value of which only few understand.

Nothing can be farther from truth. In reality, it is not the intent of small companies, but the inability to outsource that mars their outsourcing drive. Moreover, the pace at which the large corporations are embracing outsourcing has left large service providers with little incentive to look beyond them for business acquisition. They have little time for the Small and Medium Enterprises (SME).

“It is not a question of intent; they [SMEs] want to do it,” says Akshaya Bhargava, Head, BPO Investments, 3i, a U.K.-based private-equity firm. “Small companies have no know-how, no management bandwidth; and large suppliers are not interested [in spending time to educate],” he adds.

If large service providers are not interested, what of the smaller ones? Is it a supply side problem? A walk along any street of Chennai, India or Manila, Philippines will convince one that that is not so. The number of smaller players who ask how to “get business” while proclaiming their technical competence can make the agnostic believe that it is not a supply side problem.

The problem is: To make the twain meet.

That is what online services marketplaces — such as Elance Online, Guru.com and Rent-A-Coder — are trying to do: make the small and medium buyers meet the small and medium suppliers.

Demystifying Online Services Marketplaces

The principles of most of the exchanges are similar. They follow the eBay model where both buyers and service providers have to register themselves to participate in the marketplace activities. Usually, most marketplaces, except for those that are built more as freelance-staffing services providers, do not require the buyers to pay anything. The suppliers, of course, have to pay a periodical fee, a commission on the revenues earned, or a combination of both. Almost all the freelance online services marketplaces are supplier-funded.

Unlike the product marketplaces, a bidding activity in a services marketplace is always buyer-initiated. That means the bids are almost always reverse auctioned. When the buyer needs the services of a supplier, he posts a request for proposals with a specification of the work. The suppliers then bid for the project in a reverse auction. Usually, there are two variations to the auction process. Some projects are open to bidding from any supplier. They are called open auctions. In contrast, there are invite-only auctions, where only invited suppliers are allowed to bid. This mechanism necessitates the need to have a search facility for the buyers by which they can search the right suppliers. Most marketplaces today provide that kind of search.

MOST MARKETPLACES TODAY PROVIDE AN ESCROW SERVICE THAT PROVIDES SOME PROTECTION TO BOTH BUYERS AND SUPPLIERS.

Moreover, deciding to buy is not the ultimate but the initial step in the business cycle. “That certainly makes the services marketplace a lot more complex than an eBay,” says Inder Guglani, Founder and CEO, Guru.com, Pittsburgh.

Once a supplier is selected, most marketplaces require the buyer and supplier to sign a basic agreement. After the project is completed, the payment is made to the supplier. Most marketplaces today provide an escrow service that provides some protection to both buyers and suppliers. And, of course, there is the feedback mechanism, through which both buyers and suppliers rate each other, as in eBay, and they are the most valuable assets for building a reputation in a marketplace. Many marketplaces also provide a dispute-resolution mechanism, by which they mediate and even arbitrate if and when required.