Evaluating & Operating SaaS Companies: Mechanical Turk
Last week we dove into the standard metrics and minimum growth thresholds for evaluating & operating a SaaS company. Today I want to talk about the red flags to look out for within the SaaS startup. Whether you’re an investor, a founder, an operator, or even an employee, it is wise to look out for red flags that can create significant obstacles in the long-term growth of the startup.
There are many red flags to look out for, but the specific red flag I want to focus on today is mechanical turk.
Mechanical Turk: 🚩
Mechanical turk is when a company hires or assigns employees to perform work that the product is supposed to do. The name comes from an 18th century chess-playing device where people thought they were competing against an automated machine when in reality, it was an illusion. Instead, they played against a human operating the machine inside (image at the top ☝️).
Mechanical turk is a standard red flag among startups, although it’s not common amongst startups scaling and receiving funding. So in a way, it’s a good darwin test.
An example of this would be a user filling out a customer form, thinking everything is automated to the site, but in reality, there are employees on the other end receiving the info and manually typing the data into the product. So there’s only an appearance the software is doing the work when in reality, it’s a manual process.
Why Would a Startup Perform Mechanical Turk? 🤷♂️
So why would a company indulge in mechanical turk? Well, there could be a couple of reasons.
The startup could have some partnerships with some legacy providers.Usually, in this case, these legacy providers don’t have any APIs. Not having an automated tool like an API will result in creating the friction of mechanical turk.
The startup thinks it’s the right thing to do early in the startup’s lifespan. This is usually when the company gets “over its skis” and starts operating products before the software is finished. Of course, they’ll usually make the excuse that this is only temporary, and once they finish the software, they’ll automate the service - I’ll explain below why that usually isn’t the case.
Why a Startup Should Avoid Mechanical Turk: 🙅♂️
One of the biggest problems with mechanical turk is that it manufactures a dependency on humans instead of the software. Again, you’ll usually hear the founder/operator argue that it’s only temporary, but in most cases, even if that is the intention, it’s usually not the case. It’s tough to come off mechanical turk once it starts. It’s like a drug.
One reason it’s hard to come off mechanical turk is it creates an internal constituency of employees that have a lasting fear for their jobs. Once you hire or assign employees to these tasks, they typically don’t want their position to be automated away, resulting in a culture filled with distress, fear, and insubordination.
An additional reason to avoid mechanical turk is that it creates a culture of throwing bodies at a long-term problem. You’re putting a towel on a gunshot wound. It may be a short-term solution, but it’s going to stop working pretty soon, and you ( the startup) will die. A culture of throwing bodies at the solution is not a successful one.
Humans should be engaging in more creative work like strategy, analysis, R&D, building products, and implementing company culture, not transferring words and numbers from one page to the other. Also…this strategy usually results in the startup running out of money 10/10 times.
How to Identify Mechanical Turk: 🕵️
One way of identifying mechanical turk is by looking at the employee structure. By avoiding manufacturing and shipping costs, SaaS startups are supposed to be about having perfect gross margins. Therefore, they should be lean and mean. So if a SaaS startup has a long list of employees, you should immediately ask why that is and investigate it. You should especially explore it if there’s a long list of “non-technical” employees. Successful SaaS startups scale elegantly, so there should not be any friction of having 60+ employees doing non-technical work.