We decided to leave money on the table
We shot ourselves in the foot by bringing transparency and allowing 100% of the salary to go to software developers. And we like it.
When we started Remotely Works, we quickly decided on a transparent cost-plus business model. The main reason was simple: as tech entrepreneurs, that is the model we would like our partners to have. We also had decided that we wanted to be developer-centric from the start, as having the best talent would attract the best US technology companies, and there would be a virtuous cycle that started from there. Also, all the incumbents had an opaque business model, and we have rarely regretted doing things differently when entering a new industry.
Our Southern-European genes may be the reason behind the lack of rationality in some of our decisions. But rest assured that it is a conscious one: in these 4 years of building Remotely Works we have realized that our decision was against the industry and has probably made us lose millions of dollars in revenue.
We met thousands of software developers, and we were outraged by what we learned about salary and take rates. It is quite common for us to interview a software developer who is making $3,000 a month, paid in local currency, at a traditional software development shop working for a US customer. The software development agency charges $60/hour for them, and they are working full time (40-hour workweek, 173.8 average month). This means that agency is earning $10,400 minus the $3,000 of salary = $7400 a month and making 2.4x what the developer is making (effectively a take rate of 71%).
Why do US companies use these models to hire talent outside the US?
When opportunity strikes, software companies have to move fast to seize it. It may be that they've hit product market fit, or they've unearthed a new market segment, or they've raised new funding to grow. Time is of the essence and the company needs to shift gears.
Regardless of company size, shifting gears in reality is hard. Often times the team needs to go from frugality, "working with what you've got", wearing many hats, "wait and see" mentality to one in which the iron is hot, and you need to have your ducks in a row. At that point, you often need software development talent for yesterday and you don't even have a pipeline of candidates, let alone the resources, job descriptions to go at it. And why don't you have your ducks in a row? well, mostly because in the previous operating mode (frugality, "wait and see", wearing many hats) the team is already stretched too thin, and having a warmed up candidate pipeline is just not a priority or good use of the bandwidth.
Larger enterprises often need to hire a percentage of their tech resources through outsourcing partners, which helps them keep a less bloated and more flexible engineering org, they can scale up or down with highly skilled talent and keep costs lower.
These are some of the reasons why talent marketplaces and staff augmentation companies provide a valuable proposition to software businesses. Their expertise and always-on recruiting mode, broad reach and deep connections to talent supply pools allow them to offer immediate talent supply.
Traditional staff augmentation models lead to company and provider misalignment
It is an attractive value proposition, that scratches a short term itch, but currently is not very aligned long term.
The main reasons are compensation and incentives. Most talent marketplaces (Toptal, Turing et al) and staff augmentation giants (Bairesdev, Globant et al) "rent" their talent for a fee, but the company is not aware of how much of the rent they pay makes it to the software developer. This is known as an Opaque model. At first, it may not be seen as a big deal, but in the mid/long term, problems will catch up with the company that ultimately is hiring the talent.
As the software developer becomes more useful for the company (has more ad-hoc experience, understands the nuances, has tacit knowledge that is hard to transfer to a new developer), it becomes more valuable and critical to the company. Intuitively a 2-year tenured software developer is more productive/efficient/effective than one that has been only 6 months in the job. As developers get tenure at your company, it becomes more crucial to activate retention levers to prevent talent from leaving. The most important levers for retention are compensation and a career plan, and that's where opaque staff augmentation marketplaces and companies fall short.
Our solution
This was the main design principle behind Remotely Works, a cost-plus transparent marketplace where developer compensation is 100% negotiated between talent and customer, and what is agreed is what the developer receives. Bonuses and raises are encouraged and are also going 100% to the developer. Remotely Works charges a separate fee that is flat so that the marketplace is incentivized to find the fair value of the talent, not the highest price. Allowing the software developer define their salary and apply to the company increases the level of engagement of the talent that has decided to work for a product company and not for a software development shop that then gets assigned to a customer.
The incentive of this model is for the hiring manager to hire as many developers that meet their criteria with their current budget vs the opaque model that has the perverse incentive to sell juniors as seniors to maximize the margin.
The transparent marketplace reduces take rates (the percentage of the overall invoiced revenue to the customer that goes to the marketplace) from outrageous numbers of 70% to 40% to around 20%, giving the excess surplus to both companies and developers.
We are leaving money on the table with our transparent model, but we know it is the right thing to do and that the industry needs to embrace technology to make the model work with lower margins and in the end both the developer and our customers will be better off.
What the future holds
One of the core consequences of having a cost-plus model is that we immediately cannot afford to do business in the same way our competitors do business. We can have the same GTM strategy: our finances would not hold the weight at a lower price point revenue. That forces us to sharpen our pencils and use different GTM strategies.
We recently learned that most staff augmentation companies rely on traditional outside and inside sales motions. Surprisingly (or maybe not that surprising given the above) they do not get much referral business from their customers.
In our case, most (if not all) our business has come via referrals. And this is our biggest signal our model will eventually win. As Bryce Roberts says, doing things differently doesn't matter if you don't win.
We don't know what our pricing model will look like in the future, but we know that we will continue to operate by caring about our customers and our developers, and that is the strongest assurance that we will continue to do things differently in this industry.