Markup, rip-off: what if we rethought how intermediaries are compensated?

• Work

Can someone explain to me why, in the service industry, the intermediary who connects a freelancer with an end client charges a markup on the daily rate (typically between 10 and 30%)? I mean: it seems perfectly normal to me that they receive a commission in exchange for their services; but why for every single day of the assignment, whether that assignment lasts 3 months or 3 years?

One-time service, perpetual compensation?

Let’s draw a parallel: when you buy a property through an agency, you pay a one-time fee, a percentage of the sale price, and then, in theory, you never hear from that agency again. Whoever grants the agency the mandate doesn’t change anything, by the way: in the end, it’s the buyer who pays the agency, either directly (purchase mandate) or indirectly through a higher purchase price (sale mandate).

“The metaphor is misleading,” you might say: we should compare the provision of services to renting a property, where the agency collects a fee every month. Perhaps. The question, then, is to determine precisely what the nature of the service provided is.

“This percentage compensates the intermediary for all the work they do to maintain the relationship with the client,” I’ve heard. Really? Who benefits from this work? It benefits the intermediary, so they can place other clients. The self-employed professional, on the other hand, sees no value in it once the contract is signed.

“This percentage compensates the intermediary for the obligation to find a replacement with the same qualifications as the freelancer should the latter leave,” I’ve heard. Really? Do you actually believe that? Mind you, if it’s just a matter of writing code without regard for maintainability, well, anyone can do that…

“This percentage finances the intermediary’s working capital, because the intermediary pays on time even if the end customer is six months late with payment.” Ha ha, my bad. And I’m the Pope, waiting for my sister.

If I land the assignment, it’s thanks to you; if the assignment lasts, it’s thanks to me.

So no, I definitely don’t understand this compensation model. Allow me, then, to propose a fairer alternative, whose guiding principle can be summed up in one sentence: “If I land the assignment, it’s thanks to you; if the assignment lasts, it’s thanks to me.”

Let’s take a closer look:

• The intermediary has a vital role to play in bringing the freelancer and the end client together. At this stage, the parties do not know each other, whereas the intermediary has a history with each of them. Their role is therefore that of a matchmaker, who fosters the relationship by singing the praises of one party to the other. Despite prior discussions, there is still a great deal of uncertainty at the start of the assignment, and the intermediary’s role can be crucial in reassuring the parties and building their enthusiasm until the contracts are signed. In other words, the intermediary builds trust.

• The assignment begins, weeks go by, then months. The freelancer and the end client get to know each other, write a shared story, and from there a relationship is born. The information asymmetry is reversed: whereas at the start of the assignment, the intermediary knew more about the context than the freelancer, the freelancer is now the source of information, right within the company. When a new need arises, is there really a need to refer it to a third party who knows less than you do?

For a flat-fee payment to the intermediary

This points us toward a flat-rate fee for the intermediary: it might be two full days’ worth of billing, or five, or ten; I have no idea (it’s a matter of supply and demand). You’re free to come up with more nuanced arrangements to account for the fact that the assignment might end after just a few days, among other possibilities. But the general principle remains the same: this fee must be a flat fee.

This line of reasoning implies new contractual terms:

• The independent contractor or the end client enters into a contract with the intermediary for a mandate to find a client or a supplier (XOR: one or the other, not both);
• The independent contractor and the end client enter into a contract directly, without going through an intermediary.

You know how much I love the run-of-the-mill digital service companies (ESNs), the sector’s main intermediaries. In fact, my conclusion will always be the same: ESNs have a place in the market as long as they add value (expertise, intermediation). Having a network of contacts and maintaining it to create business opportunities is valuable. I’ll simply add here: “IT service providers have a place in the market as long as their compensation is fair.”

In any case, that’s more or less what happens: on long-term assignments, the end client usually ends up twisting the intermediary’s arm to bypass the contract and sign directly with the independent contractor…

P.S.: I’ve been self-employed for 4 years, and 99.1% of my revenue has come from dealing directly with my clients.