Transforming a $500B professional services market with blockchain technology.

Bitcoin price in USD on 2nd Jan 2017

I decided to apply the open-source approach to my business ideas. This one is about a co-owned, demand driven market, focused on quality. Here are some ideas for design and token economics based on the software development services market.

The Current Situation with Software Development Services and Other Non-commodity Markets

My work background is in construction, renewable energy and most recently, software development. With each industry, I was involved in business development/sales to some degree and then moved into the execution of the project itself. As different these industries are, they still share a lot of similarities.

I noticed that clients tend to work with suppliers/subcontractors they already know unless these suppliers do something terrible or run out of the capacity to do additional work. Only then does anyone think about hiring someone new. Then it all begins…buyers dealing with problems of discovery and trust. Quite frankly it all boils down to the asymmetry of information.

The buyer receives offers. Each offer has a price and a potential value as perceived by the buyer. Before engaging and actually working with a supplier, the buyer does not know the actual, real value of the offer. So, buyers pick the best offer based on the perceived value to price ratio. The seller has problems of competing with others and pricing based on the perceived value of competitive offers. In simple terms: really good software developers in a client’s eyes might look and sound similar to mediocre developers who speak the jargon.

Not until a project starts does the client see the real value compared to the perceived value. If they are similar, everyone is happy. The client will most likely continue to work with the supplier. However, the client will never know if the other offers they received could have provided an even greater real value.

If things go wrong, however, and the real value is much lower than the perceived (maybe even negative) there’s a big mess. Unlike manufacturing, with services, there is no ‘undo’ button or option of returning a faulty product for a refund or replacement. The client now must clean up the mess and go through the process of selecting a supplier all over again.

This is why, in many cases, clients choose big companies with big marketing budgets providing average results. Or, they believe they are operating in a commodity market and choose the lowest price (often resulting in terrible quality).

The bottom line is that the seller always knows more about the product or service than the buyer. In cases of complex services, like software development, this gap is even more obvious. Most of the time, a buyer hires highly specialized suppliers because they don’t have the required skill or expertise in house.

Discovering a new supplier who is a perfect match for the buyer’s project is expensive and time consuming. Sometimes this search is more costly and takes longer than the project itself (like developing a simple mobile app). So, buyers do their best to find suppliers based on the information available to them (usually marketing materials prepared by suppliers). Suppliers, of course, do everything they can to get the buyer’s attention. They push the perception of their value up by advertising, sending hundreds and thousands of automated emails, numerous phone calls, in office visits, invitations to lunches, etc. Interestingly, most of the marketing cost and effort is wasted (if 5 companies bid for a job, only 1 gets it and 4 wasted their money and time in the bidding process). Additionally, this cost is paid for through the contracts the supplier has won. In other words, the client is the one paying for all of the wasted marketing efforts of the supplier.

Both parties would be better off researching verified, detailed information about each other, and the quality of the services offered, in a transparent and tamper-proof environment.

Vision of the Co-owned, Demand Driven Market Focused on Quality

I believe that with blockchain technology and properly designed token economics, we can create a market that will be demand driven, self-regulating and focused on quality. It will minimize the risk of engagement for both parties and lower the costs of discovery (shared by the buyers) and marketing (shared by the sellers).

From a Buyers’ Perspective, the Market Would Look Like This:

There is a website that gives buyers access to a database of suppliers. Each supplier is rated and ranked based on their previous and current interactions with other buyers. Each transaction and interaction (comment, rating, value of the job, time of completion, feedback) is recorded on a blockchain, so it’s tamper-proof.

A buyer can search this dataset of suppliers and contact every company directly or post a RFQ (request for quotation) and let suppliers contact them. They might specify what kind of suppliers are invited to send quotes. They can also define the preferred way of communication (for example: they don’t want to receive any unsolicited messages or phone calls).

Every interaction and step of the process is recorded and can be rated and commented on: the quality of the offer sent, the quality of the communication, and the understanding of the problem, not just the final product. This way, buyers know which sellers will be good to talk to and will not waste time.

During the project execution, evaluation is continuous in a monthly or bi-weekly (every agile sprint) fashion. These evaluations would create abundant specific data with a very fine level of granularity, giving a more in-depth profile of the supplier’s quality and the real value provided. This way the issue of trust is solved. The buyers don’t have to trust the suppliers and their marketing materials. They can trust other buyers because their needs are similar. They can finally make a decision based on verified data they understand. For example, they can decide between working with a very specialized, small team with great technical skills but lacking in project management or a big, polished company with developed processes having average teams with generic skills.

For every comment, rating, and piece of information the buyer provides to the system, they are rewarded with tokens representing a share of the market (let’s call them Market Coins or MC for now and I’ll explain more on how they work below). The buyers can also recommend the platform to other buyers and receive MCs for this also. Finally, buyers can ask suppliers to deposit some MCs into their escrow account as a performance guarantee.

From the Seller’s Perspective, the Market Looks Like This:

The seller must deposit some MCs into the market escrow account in order to offer its services on the market. (The minimum amount has to be discussed, I don’t know yet. Maybe new comers have to deposit at least the lowest amount that is already deposited?). The amount of deposited MCs is reflected in the supplier’s score and rank and visible to the buyers. Score and rank is determined by: 1. the number of MCs deposited (this reflects commitment to the market) and 2. feedback received from clients (this reflects the quality). The details for scoring and ranking needs to be discussed further.

Sellers working with clients can also rate and comment on the clients’ activities. This way, all suppliers share information about potential clients who are bad actors (out of ignorance or deliberately). They also have full visibility of all other suppliers and their scores so they can act accordingly: they might discover a market segment not served well enough, decide to partner with other companies or even leave the market altogether deciding they are not a match.

Suppliers are also rewarded for introducing new clients to the market. This means they get paid a referral fee even when they don’t make a sale themselves. If they know a company in the market that can deliver a specific project better, they can refer it to the client an still generate some revenue. Marketing efforts and budgets can be focused on promoting the market itself. This is much easier to communicate to potential clients. A message about a supply driven market that is designed to promote quality is much more interesting to clients than a message saying ‘my company is the best and you should just trust me even though I I have no way of proving this to you’. Rewards will be also paid for introducing new suppliers to the market.

Finally, suppliers are rewarded in MCs for the quality of the service. Once a month, the quality score for each supplier will be calculated (I’m thinking contract value and score received). Companies with the highest score and biggest project value will receive the highest reward. Companies with a negative score will have to pay the deficit with their MCs deposited in the market escrow account. Bad actors will be quickly depleted of their MCs and will be forced out of the market.

Why is This a Better Approach

There are already services and companies focused on bringing transparency to the market and promoting quality. There’s https://clutch.co/ and similar, that post verified reviews of software projects. There’s https://www.accelerance.com/ and similar, who act as agents for clients by screening and finding the best software teams.

There are 2 major problems with both of them. 1) the problem of trust — again, the buyer has to trust the review platform or the agent. So instead of a problem of finding and screening a supplier, we now have a problem of finding and screening a review platform or agent. 2) the interests of all of the parties is not aligned. The review platform wants to sell subscriptions to developers. The agent wants to generate as many sales commissions as possible. They get paid by the developers and the clients know it. No one is rewarded for creating and maintaining a transparent marketplace.

There’s also the extra cost of each solution (agents charge about a 15% fee from the developers) that points back to the question of perceived vs real value = is the 15% fee the client ultimately pays worth 15% more of the real value?

I think a market with the token incentives I’ve proposed has many advantages and eliminates the 2 biggest issues: (1) the market is transparent. Buyers can benefit from other buyers’ experience (and suppliers from other suppliers). (2) everyone who contributes to the value of the market and works in line with the rules is rewarded. Actors who are not in alignment (purposefully or not) are forced out of the market automatically.

The entire system is self-serviced so costs will be much lower than a 15% fee and will be easily offset by benefits for both parties: clients will be able to find better quality for less, suppliers will spend less on marketing resulting in more revenue and fair price adjustments for both the supplier and client. Basically, the costs of discovery, risk of engagement and marketing will be shared by all market participants and diminish with time, as the market learns.

Market Coins

There will be a finite amount of MCs issued. Hence, MC is a deflationary token that is designed to increase in value over time. The total pool of MCs will reflect the total value of the market. Increased value of the MCs will reflect the increased value of the market. Suppliers have to get ahold of and deposit MCs into the market escrow account in order to offer services on the market. The earlier they join, the easier to buy a significant share of MCs. (I’m also thinking about imposing a maximum limit of MCs, to prevent one company from owning the entire market. Maybe 49%? This needs further discussions).

MSc are NOT meant to be used for payments between buyers and sellers. In specific cases, they can be used in transactions (like with a performance guarantee or incentives paid by suppliers to team members) but by no means are they designed as a replacement of current payment systems. The software development industry, in general, doesn’t struggle with issues of liquidity. There are other industries that could benefit from solving liquidity issues, but this is not the purpose of the solution I’m proposing here. (You need a stable coin with variable supply to provide liquidity, like Bridgecoin by Sweetbridge.

The value of MCs ultimately comes from the fact that they are needed by suppliers wanting to access the market. With a limited supply of MCs and growing numbers of companies entering the market, its value will go up.

Liquidity also helps to increase the value. Each month suppliers will be charged a fee equal to a percentage of the revenue generated on the market. (Say 5%). This money will be used to buy MCs from the market and redistribute them among the actors helping the market and the operator, to cover the cost of running the market. This creates liquidity and a demand for MCs. Both promote an increase in value.

The coins will be divided into 4 pools: 1) coins for the operator, to cover the operating costs — details below, I would think this would be 10%-30% of the coins redistributed. 2) quality pool: coins redistributed to suppliers based on the quality score they received last month. 3) review pool: coins for clients for rating and scoring suppliers. They would receive coins based on the value of the project and the number of reviews/interactions. Bad reviews will be worth the same as good reviews to ensure neutrality. 4) business development pool: coins distributed to anyone generating new sales to the market. Everyone (clients, suppliers, independent business developers) would be allowed to participate using a unique referral link. I think of a split of 30/30/30 between the 3 pools, but the ratio can change allowing for an elegant way to steer the market and focus more on quality, client involvement or generating new business.

I’m thinking of having an initial reward pool (say 20% of the MC supply) and distributing it over the first 3–6 months, to get the market started. Once it’s depleted, the 5% revenue charge will be implemented to replenish it.

Initial distribution of the MC would look something like this: 20% pre-sell, probably to software development companies willing to create such a market. After launching the market and attracting the first clients, 30% will be offered publicly to investors and other software companies. 20% initial reward pool. 10–20% reserve, 10–20% for founders and advisors. This needs further discussion.

Operator

The market will be operated by a non-profit foundation. It will be financed by the operator pool. Its job will be: 1) development of the technology — the code, smart contracts, website and 2) overlooking and maintaining it after its launch. The operator will also handle community service and relations (making sure market participants know how to use the platform and are happy with it).

Especially in the beginning, the operator will also be responsible for marketing and community building.

Part of the market maintenance will also be research and development, coming up with improvement or discussing community requests. I can imagine some sort of voting mechanism in place based on proof of stake (number of MCs deposited): someone needs x MCs to propose an idea, then anyone who has y MCs can vote on the idea and the operator implements it. I don’t have details now. This needs further discussion.

Quality

As mentioned above, quality can only be determined based on past and current performance evaluations and maybe some additional information verified with documents. Here are some ideas for what would be taken into account when calculating a suppliers’ score and rank: amount of MCs in the market escrow, number of full time staff and their skills, any processes and management systems in place (ISO or any other, can be developed in house and published or available to the client), number of records on GitHub, number of years on the market.

Reviews would be performed for every interaction (submitting an offer, answering questions, providing required documents, delivering on time the agreed scope, quality of the code delivered) and later, during project delivery at least once a month or every agile sprint. Reviews would be possible for both sides , where suppliers would be able to comment on billing or quality of feedback received from clients.

I could imaging the rating being done on a scale from negative (-1) through OK (0), good (+1) to exceptional/amazing (+2). An amazing or negative rating would require additional explanation, not just clicking a button, so people must explain why they chose this rating. A negative review would be delayed 24h before posting. The other party would be notified and have time to discuss and maybe fix the issue or decide to go to arbitration.

Monthly Process

The market will run in monthly cycles to reflect the billing cycle of most companies. Every month the following will happen (the exact timing and order needs further discussions):

1. The sales of every supplier will be calculated based on monthly data regarding projects completed every month. Sales information generated by every project will be confirmed by both the client and the supplier. It can be private, invisible to third parties, if needed. But it will be visible to the system, to calculate rewards.

2. Each supplier pays the 5% fee to a smart contract.

3. The smart contract begins buying MCs from the market. Details need further discussion regarding timing, amount spent per day, price volatility limits etc.

4. MCs are sent to 4 pools: operator and 3 reward pools.

5. Rewards are calculated and distributed for each pool: quality, business development and reviews. Each market participant is ranked and receives a proportion of the rewards pool based on his contribution. Companies who contributed by providing the highest amount of reviews on big projects get the most, similar with high quality delivery of big projects, generating the biggest sales etc.

Arbitration

The market will self-regulate in most cases. In case of a market related dispute, the only option for resolution will be arbitration. There will be a pre-determined list of available arbitration options. National courts will be opted-out under the smart contracts market participants will use.

Again, arbitration will only be possible for cases related to the functioning of the market. Arbitration will NOT be possible for processes outside of the market, like payments, breach of software development contract or copyright. This will be done the same way companies work now (mainly through national courts). Basically, arbitration will only relate to issues happening on the market, recorded on the blockchain and related to MCs (reviews, ratings, transferring MCs, referrals). This way the result of the arbitration can be enforced immediately on the blockchain.

The arbitration process will be paid for with MCs. Details need further discussion.

Marketing and Competition

Marketing and the idea of competition is transformed by this approach. Marketing becomes more about offering the best solution for the client based on quantifiable and verified criteria. Competition is no longer cutthroat and price driven. It’s much more respectful by being quality and results driven. Suppliers can look around the market and find a specialized niche for themselves: focus on a specific technology, geographical location, or industry. They can become subcontractors to other software companies and start forming alliances. And they would all have a much more interesting message to tell to their potential new clients.

This is in stark contrast to the current situation, where giving referrals only has downsides (I put my name on the line to recommend another company and I don’t know how good they really are) so cooperation almost never happens and every company always claims they are the best one for every project.

Model for Non-commodity Markets in General

This idea, in general, can be a model for building markets for many services. Every time there is a situation where a service is relatively expensive and purchases are infrequent, this model can be used: dentists and dental surgeons, used car dealers, management consulting, specialised tax advisors, house builders, construction subcontractors, solar panel installers…

Supposedly the market for professional B2B services alone is $500B a year.

Join me

If this idea makes sens to you please get in touch on twitter (https://twitter.com/HiEnergyPeople) or Linked In (https://www.linkedin.com/in/michalbacia/ ). Maybe we can work together on making this a reality.