A Digital Magazine by American University's Kogod School of Business
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The New Source of Labor

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    The New Source of Labor: How crowdfunding, crowdsourcing, and social media are empowering the crowd to new levels of autonomy and potential

    In the newest wave of the Internet revolution, the traditional middlemen are out, and the new middlemen — also known as “the crowd” — are in. Increasingly, whether individuals want to produce a documentary or extend microloans to an impoverished African village, they have the capacity to join with other like-minded folks to get the job done themselves—big names, and big money, not needed.

    Crowdfunding, crowdsourcing, and social media are empowering “the crowd”—the worldwide population of individuals online—with newfound autonomy and potential. People everywhere are discovering just how many doors the Internet can throw open when the power balance shifts.

    One of the best-known crowdfunding websites, Kickstarter, pairs individuals who want to pursue a project-business, technology, artistic, or otherwise—with individuals who fund them, in small or large amounts. Unlike traditional venture-capital or angel investing arrangements, crowdfunding liberates entrepreneurs from the need for moneyed investors, and anyone can register.

    “This is a revolutionary way to open up opportunities to anybody who wants to start a new business or undertake a project,” said Associate Professor Gwanhoo Lee, director of the Center for IT and the Global Economy at Kogod. “A 16-year-old in North Texas can raise a million dollars in funding. Nothing is impossible.”

    What’s more, there is virtually no limit to the pool of potential backers. “Instead of convincing a few people, you’re dealing with millions of them who can invest $5, $10, $20, $50, so there is tremendous opportunity,” Lee said.

    From 2009 through press time, Kickstarter has facilitated over $1 billion in funding for 57,331 projects, from art to publishing to technology. That money came from more than 5.7 million backers— most of them average individuals who chose to divert a little extra money to support a project they believed in.

    But, as with every revolution, the changes are complex, messy, ever-evolving…and not as simple as they first appear.

    NEW TERRITORY

    With Kickstarter, as with many social startups, there are wild success stories. Lee pointed to the makers of the Pebble Smartwatch, who hoped to raise $100,000 but instead brought in $10.3 million from 69,000 backers. Creators of the Ouya video game console set a goal of $950,000 and raised $8.6 million.

    These are the standouts, of course; most Kickstarter projects seek $5,000 to $100,000. But Lee and his research partner, Jungpil Hahn of the National University of Singapore, had probing questions about this radical funding alternative:

    Who are the backers? Are there different types of backers? Does participation by certain types of backers influence others, or the outcome of a campaign? Are longer campaigns more successful? What kinds of projects succeed — those seeking small amounts, large sums, or something in between?

    Crowdfunding is new enough that research is scant, so Lee and Hahn needed to cull exploratory data. Their research findings sketched the first notable landmarks on a map of territory that is still being settled.

    Amid the modest previous research on the topic is a surprising nugget: Even though Kickstarters can, in theory, raise money from anywhere, individuals usually fund projects that originate geographically close — although this may be due to family and friends of the project’s founder. “In theory, geography shouldn’t matter online, but it does. People are more likely to attract nearby backers, and people do fund what’s closer to them,” Lee explained.

    Lee and Hahn created a software agent that crawled through Kickstarter to collect data on 6,880 projects and 414,737 backers. Analysis confirmed their theory that four types of backers exist:

    • Category enthusiasts, who back many projects in one or a few categories;
    • Portfolio masters, who back many projects in diverse categories;
    • Focused supporters, who support a few projects in a few categories; and
    • Casual wanderers, who fund a few projects in many categories.

    Intriguingly, they found that funders’ composition does influence project outcomes.

    Most people would assume category enthusiasts and portfolio masters to be the most desirable backers. But the facts showed otherwise: campaigns fare best when they attract support from focused supporters and casual wanderers.

    Projects were more likely to attain their fundraising goals when they appealed broadly to a mass or casual “crowd,” Lee and Hahn found. Lee posited that individuals who are new to crowdfunding may be more cautious with their dollars, backing only projects that appear likely to succeed.

    Kickstarter differs from other crowdfunding sites in that it awards funds only if individuals raise 100 percent of their goal. Indiegogo and RocketHub, for example, allow campaigns to keep whatever percentage they raise, regardless of whether the target goal is met.

    Another surprising finding was that longer Kickstarter campaigns succeed less often, perhaps because they weaken backers’ confidence. “A shorter period of duration sends a signal that ‘I’m confident,’” Lee said.

    He and Hahn also found that campaigns on the extreme ends of the spectrum—those seeking less than $500 or $1 million and up—were more successful than projects in the modest middle.

    Although more involved projects can experience greater difficulties in fundraising, these projects’ ambitious goals appear to be of higher quality, and often hit the mark with their funding objectives. Audacity may also fuel backers’ confidence, Lee said: “If someone sets a goal that ambitious, there must be something there that is exceptional.”

    On the surface, crowdfunding models seem to present few drawbacks. Such sites are always evolving, however, and Lee speculates that crowdfunding will eventually assume a layer of gatekeeping or quality control governance mechanisms. He points to Wikipedia, which started as a free-for-all source that anyone could edit. That quickly changed, and Wikipedia now restricts editing on certain types of articles.

    “I suspect that type of governance is going to take place in crowdfunding mechanisms as well, because what is at stake is people’s money, and it could be a lot of money,” Lee said.

    That said, he describes Kickstarter as far more egalitarian and democratic than the traditional investing relationship. “With Kickstarter, you are an equal partner,” he said. “If your idea deserves attention and investment, you get that. You don’t really have to sell your soul.”

    WORK FOR HIRE

    Whereas crowdfunding solicits money from the crowd, crowdsourcing taps it for labor. Companies and individuals hire workers, who may be in India or Indiana, to work on tasks large and small. The most creative use of crowdsourcing may be from writer A.J. Jacobs, who published a popular 2005
    Esquire story about his experiment to hire “remote assistants” in India for both work research and personal tasks. Among other assignments, the assistants helped Jacobs order gifts online and organize his wife’s birthday party.

    More common, of course, are sites like Elance, where freelancers bid for jobs in web design, editing, and other fields, and Amazon Mechanical Turk, which promotes itself as an “on-demand, scalable workforce.”

    “WITH KICKSTARTER, YOU ARE AN EQUAL PARTNER. IF YOUR IDEA DESERVES ATTENTION AND INVESTMENT, YOU GET THAT.”
    GWANHOO LEE, ASSOCIATE PROFESSOR

    Mechanical Turk specializes in microtasking, the 21st-century equivalent of old-fashioned piece- work. Microtasks are often tedious and not terribly remunerative (4 cents, for example, to locate each Twitter handle of a list of colleges and universities), but more than 330,000 tasks are available and nearly anyone can participate.

    Professor Erran Carmel believes crowdsourcing is nothing short of a paradigm shift. “It could actually be quite revolutionary,” he said. “What’s novel here is the increased ability to go to people all over the world for work.”

    Carmel is an expert on offshore outsourcing and authored the first book on global software teams in 1999. Currently, he is completing an enterprise crowdsourcing study funded by a grant from the Society for Information Management.

    To Carmel, crowdsourcing is a clear example of the way “the Internet has changed the rules of the game.” And he does not expect it to slow down: “I think we’re just at the beginning of this.” Elance, for example, as of January 2014 boasted more than 2.5 million freelancers from more than 170 countries serving half a million businesses.

    Crowdsourcing isn’t revolutionary simply because it presents a new way to work and a new way to hire. It is game-changing because it is available to small and large companies alike, a huge leap forward in leveling the playing field. For small enterprises, crowdsourcing is both cost-effective and supremely customizable.

    Of course, large companies do use crowdsourcing, sometimes in unexpected ways. Take Zappos. When the online shoe retailer learned that proper English in customer reviews is a major sales predictor, it turned to Mechanical Turk to hire people to correct the grammar in reviews. (The integrity of making reviewers seem more educated than they are has, of course, been debated.)

    Carmel points pointed out that no matter how many tasks technology takes over, certain jobs will always require a human touch. But he believes microtasks, in particular, may bring dramatic change to the workplace.

    “This is where the revolution in labor will come from, because we’re just beginning to understand that a lot of work can be sliced up into small tasks and sent out to the crowd,” he said. “And the crowd sits all over the world—the Philippines, India, the United States. They might be homemakers, people who are moonlighting, people who enjoy doing a few things instead of playing computer games.”

    Crowdsourcing holds special promise for developing nations, potentially bringing income opportunities to regions that sorely need them. Impact Hub, for example, seeks to facilitate Internet-based work outsourcing and training to disadvantaged communities in Africa.

    GREAT POWER = GREAT RESPONSIBILITY

    Like crowdfunding, with its lack of quality control, crowdsourcing also has potential drawbacks. A likely challenge, Carmel predicts, will be protecting workers from exploitation.

    “There’s concern about that, and for good reason,” he said. “Whenever we’re talking about low-skilled labor with very little political clout—we are hiring them because they’re cheap—there is fear of exploitation.”

    The centuries-old struggle between good and evil is reflected in the potential outcomes of crowd- sourced labor; that is, the opportunities that an unscrupulous employer could use to exploit a worker are the same opportunities that could boost that worker up the economic ladder.

    “The companies that specialize in taking the bottom-of-the-pyramid labor pool,” Carmel said, “are bringing them into the more globalized labor market and improving their livelihood.”

    Crowdsourcing also adds a new wrinkle to a global economy some observers already criticize for favoring cheap, distant labor at the expense of US industry. Crowdsourcing hardly jibes with the “buy local” movement, so critics of overseas outsourcing may not embrace crowdsourcing, either.

    Carmel’s take is that employers can still choose to hire the “worker next door.” On Elance, for example, job creators can see exactly where workers are located and hire accordingly. Close-to-home hiring also may prove true if crowdsourcing comes to resemble crowdfunding, where Kickstarter backers tend to fund projects that originate nearby.

    As crowdsourcing grows, it also generates opportunities in the marketplace itself. Companies that specialize in crowdsourcing are springing up to help businesses use this resource, and a new position has emerged of “crowd manager”: a person who selects and manages the workforce.

    Carmel expects to see “real-time crowd- sourcing,” which he likens to a call center. Instead of workers waiting for phones to ring, however, they would receive labor requests to execute immediately—say, “Categorize this list of items and send it to us in 30 minutes.”

    “THE COMPANIES THAT ARE SPECIALIZING IN TAKING THE BOTTOM-OF-THE-PYRAMID LABOR POOL ARE…IMPROVING THEIR LIVELIHOOD.”
    ERRAN CARMEL, PROFESSOR

    “That concept is actually possible now, believe it or not,” he said.

    Considering all the ways in which crowdsourcing may evolve, Carmel predicts potentially drastic consequences. “I think that within a decade or two, it will be dramatic. I think we will see some labor markets being disrupted.”

    Staffing agencies, for example, face a new competitive threat that is twofold. First, companies can now bypass their service entirely by hiring directly through crowdsourcing sites. Second, instead of turning to traditional staffing agencies, companies may hire agencies that specialize in crowdsourcing in hopes of gaining access to quick, cheap, and specialized labor.

    CONSUMERS TALK, COMPANIES LISTEN

    With the bad comes the good. While disruption brews in the labor markets, crowdsourcing also holds the potential for community building with consumers. For example, companies use ideation to solicit suggestions from customers and employees. In the win-win scenario, companies get great ideas and customers get to interact with a favorite brand, often through social media.

    Professor William DeLone cites Starbucks as one company that has leveraged this strategy to the hilt, including MyStarbucksIdea, a website where customers submit suggestions and vote on ideas. Starbucks listens and, most importantly, takes action. He also points to Dell Computers, which in 2007 debuted IdeaStorm, inviting customers to help Dell become more innovative. Three years later, customers had offered 14,500 suggestions and Dell had adopted more than 400 of them.

    What is striking about these developments is the new power they give the consumer. Never before have average individuals had the capacity not only to engage with a company, but also to join forces to exert influence and build communities. In February, for example, designer Marc Jacobs made headlines when his new fragrance was distributed to customers in Manhattan who paid only in “social currency”—that is, by mentioning the brand on Twitter, Instagram, or Facebook.

    Yet before DeLone and his coauthors, Murray Scott and Regina Connolly, no one had actually measured whether all this goodwill and communication actually drove customers to buy more and to recommend a company to friends.

    CUSTOMERS’ PERCEPTION OF SOCIAL MEDIA DOES, IN FACT, INFLUENCE THEIR LOYALTY AND PERCEPTION OF COMPANY VALUE. INTERACTIVITY TURNED OUT TO HAVE THE STRONGEST EFFECT.

    To address this research gap, DeLone, Scott, and Connolly developed a new model to evaluate the components of customer-facing social media and measure their impact.

    “Our premise is that if the platform itself is more effective and if [customers] get a good experience, that’s going to cause them to want to buy more and recommend more,” he said.

    They adapted an existing model to account for the community-building attributes of social media, adding measures of interactivity and empathy. They also developed a construct to measure “social value,” reflecting users’ participation in social media in terms of influence (believing your opinion matters to a company), trust (believing a company is trustworthy), participation, and well-informedness.

    The importance of interactivity may seem obvious, but its value goes far beyond merely connecting customers with each other and with a company.

    A deeper benefit, DeLone said, is the group cohesion that emerges when customers interact. Another study showed that customers receive six kinds of social support from online interactions, including intimacy, social participation, and guidance.

    Interestingly, the more customers receive this support, the more loyal they feel to the company facilitating it. The cycle feeds itself, according to DeLone: “If customers take the time to be engaged, they’re going to be more loyal customers because they’ve put their time and energy into this.”

    A customer can have a good or bad online experience, of course, just as in a brick-and-mortar store. Someone who tries to engage a company but gets frustrated may go elsewhere. “The worst thing you can do is put an email address on the site with no one monitoring it,” DeLone said.

    He explains why it is so important for companies to understand the inner workings of social media. “In this new environment, with intensifying competition for online customers, service quality has become a key differentiator for online vendors.” Increasingly, that service takes place online, where “consumer loyalty and peer recommendation have become key indicators of success.”

    The research team used an online survey to investigate the social media habits of 267 students, faculty, and staff of universities in the United States, Ireland, and Scandinavia, based on research showing this population as a prime sample for e-commerce analysis thanks to their heavy use of online services. In particular, DeLone targeted users who frequent the social media of companies such as Groupon, Dell, Vistaprint, and others.

    The results confirmed that customers’ perception of social media does, in fact, influence loyalty and perception of company value. Interactivity turned out to have the strongest effect. Trust, participation, and influence also are important, helping to determine whether customers promote a company to others.

    Like crowdfunding and crowdsourcing, social media can give a leg up to small business and empower consumers with a voice. Yet here, too, the issue is complex. We are, DeLone notes, in the era of Big Data. The more customers engage with a company’s social media, the more that company learns about them.

    Social apps connected to consumers’ Facebook or email accounts, among others, essentially trade a customized user experience for users’ personal data and behaviors. Social media may empower consumers, but it also gives companies unprecedented access to information that helps them persuade their target markets. Increasingly, companies use that data to deliver the right message, at the right time, through the right medium.

    “They know so much more about their customers,” DeLone said, “and social media is an important part of that.”

    This revolving, evolving influence makes these new forms of online community both fascinating and unpredictable. The researchers agree, however, that the crowd is quickly becoming a force to reckon with. Members of the crowd, connecting online, can now harness resources to achieve great things, regardless of who or, increasingly, where they are.

    Yet the researchers also see clouds on that bright horizon. Such connections are clearly a two-way street. What defines “the crowd” may well depend on who is watching, and for what purpose. People submitting ideas to a huge corporation may consider themselves activists shaping the capitalist system. Meanwhile, that corporation sits back and collects more data from individuals it views merely as consumers, a source of profit. Similarly, those who embrace crowdsourcing see the promise of empowered workers; those who seek to exploit it, a cheap labor source.

    As crowdfunding and crowdsourcing continue to develop, best practices will come to the surface—often by trial and error, and based on recommendations from the crowd itself. The precise future direction of these new resources is hard to predict, but one thing is certain: they will certainly be revolutionary. KN mark


    Academic papers that gave rise to the cover story:
    “Archetypes of Crowdfunders’ Backing Behaviors and the Outcome of Crowdfunding Efforts: An Exploratory Analysis of Kickstarter,” Jungpil Hahn and Gwanhoo Lee, was presented at the Conference on Information Systems and Technology, INFORMS, in October 2013.

    “Successful Social Media: The Impact of Service Quality and Social Experience on Customer Behavior,” Murray Scott, William DeLone, and Regina Connolly, is under review at Information Systems Journal.

    “The Human Cloud,” Erran Carmel, was published in Sloan Management Review in 2013.

    Erran Carmel was leader of an Enterprise Crowdsourcing Study sponsored by a Society of Information Management APC grant in 2013.



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