A remedy for the liability of smallness? How digital work platforms augment the smallest enterprises

First, SAMEs have limited ability to identify and utilize external collaboration partners (Rothwell and Dodgson 1991). As a consequence, they have fewer external relationships in their innovation processes (Kaminski et al. 2008), which tends to translate into weaker innovation performance (Zeng et al. 2010).

SAMEs have limited networks because of their inferior capabilities in external search and their lack of qualified technical personnel to initiate and evaluate these search tasks (Rothwell and Dodgson 1991). Additionally, they possess limited recognition in the job market and struggle to attract and retain qualified staff (Ratté 2016). These disadvantages leave SAMEs with weaker searching and selecting capabilities in outsourcing engagements.

Second, managing external partnerships is a challenging task for SAMEs. Overseeing partnerships and ensuring that they yield benefits demands significant management resources and skills—a considerable effort for SAMEs (Rothwell and Dodgson 1991). Further, SAMEs have high contract enforcement costs and find it hard to comply with governmental regulations involved in outsourcing across national borders (Nugent and Sukiassyan 2009).

Outsourcing relationships can involve high uncertainties (Stanko and Calantone 2011) and entail significant behavioral and operational risk (Aron et al. 2005), particularly when they span national, institutional, and cultural borders (Jean et al. 2012). The extent of trust in relationships heavily influences willingness to cooperate (Wu et al. 2008). Because SAMEs have insufficient resources and capabilities to assess providers’ behavior in outsourcing engagements, they are often obliged to trust providers and forego adequate prior assessments of trustworthiness (Pittino and Mazzurana 2013). These disadvantages create challenges for SAMEs in managing outsourcing operations.

To strategically integrate outsourcing, relationships need to develop knowledge-based trust (Smith and Lohrke 2008)—a type of trust that arises when partners’ behavior becomes predictable and understandable (Yao et al. 2022)—or passable trust, which arises when partners gain sufficient confidence that the other is trustworthy, especially as a result of non-work-related exchanges (Neeley and Leonardi 2018). Due to their limited resources, SAMEs may face difficulties in maintaining the frequent and social exchanges between virtual partners that are critical for building trust (Trapp et al. 2023), making building trust particularly challenging for SAMEs.

The extent to which SAMEs may capitalize on outsourcing in the long run may depend on their capacity to coordinate and integrate freelancers effectively. However, SAMEs’ limited human resources and absorptive capacity (Musteen and Ahsan 2013; Pütz and Werner 2024) can make it harder for them to manage and coordinate the diverse freelancer relationships that they build up over time. Thus, SAMEs’ smallness may pose a liability to building strategic flexibility (Brinckmann et al. 2019).

SAMEs seemed to carefully consider which tasks they preferred to keep in-house and which they might outsource. Tasks involving cybersecurity risks or sensitive customer or partner data were unlikely to be outsourced, while those that were not routine business for the firm were more likely to be outsourced.

However, firms were also prepared to hire full- or part-time employees over whom they had more control internally if critical infrastructure such as a website or online shop was involved. In such cases, SAMEs preferred insourcing, even if it incurred greater costs. The outsourcing decision always seemed to reflect executives’ desired level of control. Some only felt comfortable hiring freelancers if there was an existing interpersonal connection, while others considered it essential to meet in person and build trust over time.

Typically, companies seemed to prefer either outsourcing to freelancers within their personal network or contacting freelancers on DWPs they had already used. As an interviewee stated, “Only if nothing emerges from personal contact […] would I Google and search for a platform to identify experts.” (I06) The strategy reduces the search time required and the uncertainty over freelancers’ skills. Knowing freelancers from prior engagements saves time in the onboarding process and during the project, as there might be no need to explain the task in comprehensive detail.

We have someone from Ukraine with whom we have collaborated for some time now. […] Two years ago, we met via Upwork. Now, working together is a lot easier with him. He already knows very well how we work, how our IT is organized. (I04)

DWPs offer two search methods. The first is proactive search, where companies review freelancers’ online profiles and select any that attract them. This search mode is preferred for small projects or clearly definable tasks where freelancers can be directly identified. The second is reactive search, where enterprises publish a task requirement and freelancers contact them. Reactive search is favored when the task is complex and searching for a suitable freelancer might be difficult. Interviewees mentioned that both forms of search could save them time. Proactive search saves time because companies could contact a small group of freelancers simultaneously. When searching reactively, freelancers’ self-selecting according to the jobs’ requirements could save SAMEs time through greater candidate focus. In addition, corporations preferred to give small trial tasks to freelancers before assigning a bigger project. This method offers an opportunity to test the freelancers’ stated skills.

You inevitably have to give him a trial project, which goes in the same direction [as the outsourced task]. And then you have to wait for the result. If I ask him to program JavaScript, and he has no idea what he is doing, I can see that relatively quickly. [laughs] (I06)

Such trial tasks should reduce uncertainty about applicants’ skill level. Some interviewees noted that many freelancers are skilled at promoting their work on platforms, so it can be difficult to distinguish between applicants claiming similar skillsets. Due to difficulties in assessing skill quality, some companies even reverted to hiring freelancers from their personal network instead of via a platform. In such cases, companies preferred continuity and personal ties, which might decrease the uncertainty of the search and onboarding process.

All interviewees stated that they relied on numeric ratings or customer reviews to select freelancers. SAMEs use ratings and reviews to prevent the freelancer from behaving opportunistically. Good ratings are considered more important for tasks relying on confidential information or critical corporate processes than for less sensitive ones. The assumption is that freelancers with better ratings will be more trustworthy. Although the interviewees were aware that ratings were open to manipulation, they still considered them when evaluating alternative freelancers.

All interviewees noted that they factored in freelancers’ experience. In other words, they wanted to see a list of completed tasks or sample works on the freelancer’s profile. Ideally, the previous projects would be very similar, and the freelancer would have carried out several similar projects. The interviewees expected to be able to review sample work to evaluate whether the style fitted their company, especially for creative tasks.

Almost all interviewees were concerned with cost because most had to work within a budget, reflecting SAMEs’ generally limited financial resources. “Of course, the price also plays a role because a limit has to be set somewhere. Of course, I can hire a freelancer for a thousand euros and find the perfect match. But spending a thousand euros on a small thing must also be economically justified.” (I03) The interviewees balanced evaluations, ratings, and costs; for example, if one freelancer was too expensive, they would switch to another with fewer ratings.

To select suitable freelancers, enterprises monitored whether freelancers had carefully read the task description and sketched out a meaningful solution. Through this initial exchange, client firms assessed personal fit and communication effectiveness, paying close attention to freelancers’ responses to their postings and how easy it was to communicate with them. The hiring firm would try to imagine how the collaboration might work, including on a personal level. The communication verified whether the personal relationship, motivation, and competencies would suit the business and the project.

For SAMEs, it seems vital to assess relational aspects first-hand, as ratings of previous work engagements are considered an inadequate reflection of future relational compatibility—particularly when culture and language diverge.

Try to establish a personal contact as quickly as possible to determine whether the person fits in with the company or whether there is simply a personal fit between us. (I07)

SAMEs’ outsourcing motivations—driven by resource constraints and the need for external expertise—directly shaped the process of searching and selecting freelancers. Firms motivated by short-term demand spikes or cost savings tended to opt for offshore freelancers, where labor cost arbitrage played a key role. This decision, in turn, impacted the selection criteria, with cost being prioritized over top ratings or geographic proximity in some cases. However, the process also worked in reverse. As SAMEs engaged in freelancer selection via DWPs, they gathered insights about potential cost–benefit trade-offs, skill availability, and cultural fit, which could reshape their outsourcing motivations in subsequent engagements. For instance, SAMEs that initially prioritized cost savings through offshore outsourcing might adjust their motivations to include considerations of cultural proximity or long-term strategic flexibility after experiencing communication difficulties or cultural misalignments.

Language barriers may make outsourcing difficult for SAMEs. English is not spoken in all countries that provide outsourcing services, and not all English speakers can participate in conversations, particularly when the content is technical. As client firms’ employees were non-native English speakers themselves, misunderstandings were an issue. Interviewees noted that communication could be difficult when they needed to describe tasks in detail and freelancers needed to understand what was expected from them. Interviewees mentioned that oral communication was more difficult than written communication, so they preferred to communicate with their freelancers via online chat services rather than video calls.

Cultural barriers add another layer of complexity to outsourcing. Interviewees stated that freelancers from different cultural backgrounds handled timeframes differently than hirers in German-speaking regions, which led to problems in the planning and execution of projects. While German companies stuck to pre-agreed timetables, Asian workers interpreted appointments more flexibly, as explained by one interviewee:

If they say, “I’ll call tomorrow morning,” you can assume that it can be anything from morning to evening, right? That makes it impossible to work with people, which is a huge cultural difference in some cases. (I17)

We detected six essential aspects of freelancer collaboration: giving a clear task description, having a specific contact person, communicating regularly, setting subtasks, using additional collaboration tools, and confidentiality. Interviewees thought it was crucial to formulate a clear task description at the beginning, as this step defines the requirements and expectations. The task description should be as detailed as necessary to achieve the best possible output.

The most critical thing with freelancers and the largest share of developers worldwide is […] that you define tasks very clearly, so there is no room for interpretation. (I11)

It’s a little like garbage in, garbage out. If you don’t clearly describe the task or what’s important to you, then you won’t get the best results. (I02)

Some interviewed SAMEs had one specific contact person communicating with the freelancer and coordinating the work. If the contact person and the freelancer worked in the same field, it led to better communication, interviewees noted. Further, SAMEs found regular contact with freelancers essential to ensure the freelancer’s work met company expectations. Interviewees used meetings to review intermediate results and request modifications when necessary. Another aspect is that regular communication secures transparency and facilitates the coordination of work. Some interviewees also required freelancers to report on progress daily or weekly to ensure both parties were aware of progress. The intensity of the contact was task-dependent; interviewees specified that creative or complex tasks demanded more communication.

Interviewees mentioned that they set prioritized subtasks for freelancers to avoid overwhelming them with too many simultaneous tasks. Subtasks were noted on a specification sheet and often linked to specific milestones. Subtasks and milestones should increase transparency and accountability for both the client enterprise and the freelancer.

Many interviewees reported using the platform and its functions like a chat forum to coordinate collaboration. Other interviewees explained that they would use outside tools when those provided by the platform were inadequate or when they wanted to limit the number of communication channels used. The main tools used to enhance coordination and communication between clients and freelancers were videoconferencing, Kanban-based task management services, and messaging services.

Surprisingly, interviewees did not regard the threat of intellectual theft as a major issue. Few SAMEs seemed concerned about losing valuable intellectual property, as they would not share it in the first place. Those who did share confidential information either considered a non-disclosure agreement (NDA) sufficient protection or carefully selected which tasks to outsource to protect their interests. Client firms also parceled larger jobs into smaller ones that denied freelancers access to entire projects, thus reducing the potential harm that could be caused by intellectual property theft. One interviewee stated:

I wouldn’t let any freelancer handle things that are extremely confidential or very important. And they sign an NDA or something like that. (I02)

The connections forged by DWPs between freelancers and their customers are crucial to digital outsourcing. SAMEs can identify, connect, organize, manage, and pay their external workers via the digital interface. A central feature of digital platforms is facilitating trust between freelancers and customers. Our interviewees only used platforms they considered trustworthy for online outsourcing. The interviews revealed three different ways in which platforms enable companies to place trust in freelancers.

First, some interviewees believed that platforms establish a certain degree of confidentiality through their own rules and regulations, such as terms of service. Those general terms and conditions provide a cooperation framework that acts as a blueprint to govern the fundamental exchange relationship between the parties. Within that framework, the parties already largely know what to expect from the counterparty. Additionally, companies work with non-disclosure agreements to improve data security. If doubts remain, they will not reveal sensitive data. While platforms’ rules and features are essential to establish trust and control to safeguard against breaches of confidentiality, companies also seek ways to enhance data safety. Overall, SAMEs reported that concerns about trust played a minor role in their DWP outsourcing considerations.

Second, platforms can arbitrate in disputes between enterprises and freelancers. In addition, freelancers’ incomes are strongly affected by the reviews of their completed work posted on the platform. That review system provides some degree of security to the client company, because a freelancer will usually endeavor to meet the client’s expectations, even if the client demands changes.

Third, companies could punish bad behavior by giving bad reviews:

If you take someone who already has many good ratings, which are obviously important to his business, that person also has an interest in you not writing on the platform that he stole your IP. (I01)

Therefore, the interviewees presumed that it was in freelancers’ interest to work well because poor performance can be denounced publicly. In serious cases, platforms may even offer the option to withhold payment until the client approves the freelancer’s work. A dissatisfied client can terminate the collaboration with no obligation to pay. One interviewee described it as a “means [to apply] pressure.”(I02)

And with Fiverr, it’s basically like this: if the person doesn’t deliver, if they can’t do the job, then you don’t pay anything, and that’s a good thing. (I02)

Interviewees generally seemed to trust the DWP as it gave them control over the entire outsourcing process, and some platforms also insure against non-delivery or quality issues.

It already feels safer, of course, if we can pay after delivery. Then it is no stress. If the freelancer does not deliver, we will just have to look for someone else. (I11)

The process of searching and selecting freelancers influences how SAMEs manage their outsourcing operations. The way freelancers are selected—whether based on ratings, reputation, or trial tasks—can determine the intensity and complexity of managing the relationship. For instance, freelancers with good ratings or those known from personal networks typically require less managerial oversight, allowing for smoother project execution. With freelancers sourced reactively through platforms, however, SAMEs may face greater challenges in task supervision, communication, and managing expectations. The platforms’ trust-building mechanisms—such as reviews and ratings—also play a crucial role in shaping how outsourcing operations are managed, as they provide a form of social control. This dynamic interaction highlights how the selection process feeds into the management stage, requiring continuous monitoring and adjustments.

In addition to specific theoretical contributions, our findings also contribute to broad management theory. Transaction-cost theory, one of the most frequently used theories in outsourcing research, posits that outsourcing (the “buy” option) is preferable to insourcing (the “make” option) when transactions are infrequent, transacted assets have low specificity, and uncertainties can be minimized (Williamson 1979, 2008). DWPs seem to reduce the set-up cost and ongoing investments required in outsourcing relationships with freelancers. As a consequence, platforms lower the barrier to outsourcing tasks, even when such tasks occur infrequently. Our findings show that SAMEs primarily use digital platforms for outsourcing occasional tasks that do not justify hiring full-time staff. Some interviewees planned to choose the “make” option if they needed freelancers regularly. Therefore, platform-enabled outsourcing may be considered a stepping-stone to replacing contractual work arrangements with hierarchical ones.

As SAMEs have limited managerial capacity, especially to oversee outsourcing relationships, uncertainties in the outsourcing relationship discourage the use of the “buy” option. Using DWPs reduces the uncertainty involved when hiring freelancers, whether for the first time or on an ongoing basis (Aron et al. 2005; Jean et al. 2012; Yao et al. 2022). Furthermore, platforms lower the barrier to outsourcing tasks characterized by high asset specificity (Vita et al. 2011), allowing SAMEs to outsource more specific tasks that require specialist knowledge (e.g., design or programming). With facilitated access to outsourcing, SAMEs are less pressured to build these high-skilled capabilities within the organization (“make” option), which in turn reduces their liability of smallness. With easier access to specialized skills, they are enabled to fulfill orders or production requirements that used to be outside their scope. Thus, our findings show that platform-enabled outsourcing may facilitate SAMEs opting for “buy” instead of “make,” giving them advantageous resource flexibility and access to specialized capabilities.

In terms of the resource-based view, SAMEs’ reliance on external resources (via outsourcing) is driven by internal resource constraints and the need to enhance competitiveness through cost-effective access to skills (Edvardsson et al. 2011, 2020; Lu et al. 2015; Musteen et al. 2017; Musteen and Ahsan 2013). Qualitatively, SAMEs often outsource tasks that fall outside their current capabilities, such as specialized IT or design work. The resource flexibility of DWPs allows them to focus on core tasks while utilizing external resources to handle those that require specialized knowledge. Quantitatively, SAMEs utilize DWPs to rapidly scale their operations. The ability to access a global talent pool through digital platforms also helps mitigate the internal resource and capability limitations faced by SAMEs, which is especially crucial for startups that are uncertain of the products and services they offer and the type and number of customers they serve (Wu and Knott 2006). The dynamic capabilities framework (Teece et al. 1997) extends this view by highlighting that SAMEs continuously adapt their outsourcing strategies, learning to better manage external resources and integrate them into their strategic objectives. The recursive relationships throughout the outsourcing process identified in this study suggest that SAMEs’ ability to reconfigure their outsourcing practices over time is a critical dynamic capability, facilitating their competitiveness.