Gig economy at Uber: digitalization and data won’t be enough to make it sustainable

Gig economy at Uber: digitalization and data won’t be enough to make it sustainable

Uber is the highest valued unicorn at $68 billion and it leverages the gig economy and independent contractors to gain competitive advantages over incumbent players in terms of cost, reach and convenience. Though the gig economy has existed for a long time, digitalization has allowed a much tighter integration between Uber and its contractors. Uber has great power and control over them via its app platform, and yet it is so reliant and vulnerable to them.

As Uber scales and becomes more responsible in preparation for a potential IPO, can this reliance on independent contractors be sustainable and how could Uber mitigate this risk?

 

Reliance of Uber’s business on independent contractors

Uber is a transportation technology company that connects users with drivers via a mobile app. Its ride-sharing business became feasible due to the rise of mobile and connectivity, allowing users to connect to Uber’s platform anytime and anywhere. However, feasibility does not mean economic viability and another key pillar of Uber’s business is contracting with partner drivers under legal arrangements as independent contractors.

Its reliance on contractors reflects the changing way some companies are managing their resources and workers1 amid the rise of customers’ connectivity and demand for cheaper, better and faster services. Resorting to independent contractors allows Uber to minimize labor costs (estimated 20-30% cost reduction2), scale more quickly and greatly extend coverage, but it also reduces the level of control and customization that Uber has on its service. As a result, Uber can’t force drivers to work at a specific place or time, and retention rate is low3.

 

How Uber manages independent contractors

Through its sophisticated algorithm, Uber aims at achieving a perfect balance between customer demand and driver supply at the highest revenue and margin.

Uber has several tools to control its partner driver supply. Firstly, Uber can unilaterally set fare rates, including surge prices, as well as commissions. It also strictly monitors service quality through performance metrics (customer rating, number of accepted and cancelled rides)4.

In addition, Uber uses several psychological levers (e.g. video game techniques, graphics, non-cash rewards and earning goals) to influence drivers3 to not only work longer but also at hours and locations that might not be the most profitable for them. Uber also tries to create more stickiness for new drivers by providing a signing bonus after reaching a certain milestone (25 rides).

Beyond this control through tools and psychological levers, Uber also tries and improves its image with drivers as they have recently become a scarce resource due to competition and higher demand. In order to improve their satisfaction, Uber now remunerates drivers better (time spent waiting compensated, extra pay for carpool rides, tipping feature) and provides more support5. However, Uber still does not want to budge on the contractors’ status6.

 

Driver control and retention can only be achieved through a different legal arrangement

I propose that Uber converts part of its best contractors to part-time employees in areas where the supply/demand is often unbalanced to maintain quality of service and coverage. On top of smoothing the system, this would also prevent steep price surges that alienate customers.

As the industry leader, I believe Uber has to set the standard. I would encourage the firm to take the initiative to work with national governments and regulators to establish a new status for digital platform on-demand gig workers, providing more security and benefits while maintaining flexibility7,8. Uber is already caught up in several ongoing employment lawsuits9 and by being proactive and accommodating, it might be able to achieve a less constraining status than “employee” for its drivers. By leading the change, Uber could benefit from an important PR boost and get drivers’ favors, resulting in an easier way to scale its fleet. Competition will also have to follow the new regulation and customers will bear part or all of the additional costs (up to 30% more2).

I believe Uber will also have to spread this additional cost across more revenue to keep its services attractive and affordable. Uber should encourage the use of Uberpool more, which provides higher revenue to drivers and lower cost to users. With a larger fleet now possible, I am convinced Uber could also expand its activities and provide delivery of other products such as food, groceries or parcels, therefore maximizing the utilization of its fleet capacity in the process.

Uber’s woes might in the future come to an end with the rise of autonomous vehicles but until then, Uber has to find a way to remain the uncontested leader.

In order to be successful, who do you think should Uber prioritize, drivers (supply) or users (demand)? Do you think Uber can solve the issues with its contractors in another way?

(784 words)

 

Sources:

  1. https://www.weforum.org/agenda/2016/06/gig-economy-changing-work/
  2. https://www.nytimes.com/2015/12/11/business/a-middle-ground-between-contract-worker-and-employee.html
  3. https://www.nytimes.com/interactive/2017/04/02/technology/uber-drivers-psychological-tricks.html
  4. https://hbr.org/2016/04/the-truth-about-how-ubers-app-manages-drivers
  5. https://www.ft.com/content/c9a8b592-a81d-11e7-ab55-27219df83c97
  6. https://www.theatlantic.com/business/archive/2016/01/lyft-drivers-uber-sharing-economy-employees/431631/
  7. The Brookings Institution, A Proposal for Modernizing Labor Laws for Twenty-FirstCentury Work: The “Independent Worker” (2015)
  8. Benjamin Means and Joseph A. Seiner, Navigating the Uber Economy (2016)
  9. https://www.nytimes.com/2017/07/12/business/uber-drivers-class-action.html

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7 thoughts on “Gig economy at Uber: digitalization and data won’t be enough to make it sustainable

  1. I’ll agree with you on one point: Uber sure did not have a good year. Between external bad press (e.g., the #DeleteUber movement) and internal woes (cough, Kalanick, cough), finding additional revenue streams through new services like UberEATS and UberRUSH seemed the least of their worries. That said, it would seem to me that it’s demand and not supply that should be top of mind for the tech giant moving forward.

    Contractors and driver-less cars aside, let’s think about the competitive forces Uber faces now and in the (near-term) future. You’ve got regional competitors like Lyft, Easy Taxi and Cabify nipping at their tail. On the food (rather than people) delivery front, you have on-demand delivery services like Blue Apron, GrubHub, and (worst of all) Amazon Fresh. I’m sure there’s a (more public) play where Uber could sell its consumer demand data, in addition to traffic and purchasing patterns, though for the sake of publicity, who knows whether they’ll take advantage of this option (read: how much do consumers care about their privacy?).

    Now, you raise an interesting point in saying all of these cards could come falling down if there are no contractors to support the services they offer in the first. But at its core, Uber is a technology – and not a transportation – company. As such, their priority should always be on the algorithms and data analytics that has been (and will continue to be) their core differentiator.

    I would suggest that Uber provide for their employees what the market demands and no more, as they bide their time before driver-less cars arrive. It seems, as you’ve stated, that they’ve made good strides in that direction – but let’s not get ahead of ourselves in suggesting they make too many sweeping changes to their model or their costs may further curb profitable growth.

  2. If you take into account the incredibly high cost of hiring full or part time employees (often up to 30% of base salary), it would be difficult to foresee a world where any consumer marketplace such as Uber could both scale and hire full time employees as opposed to contractors. However, I’ll push back on the idea that utilizing driverless cars is a better alternative. While this may be the way of the future and happen out of necessity, I do not necessarily think that Uber will stand to drive substantially higher profitability. Pursuing a driverless car strategy whereby Uber owns, operates, and maintains its fleet would ruin the core beauty of their business model – the marketplace. Converting from a technology platform and marketplace to an asset intensive fleet management and services company would signal a fundamental shift in Uber’s business model and core competencies, let alone the tremendous increase in risk. I’d suggest that Uber should find creative ways to more effectively partner with drivers, focus heavily on managing the driver relationship in order to improve supply, and aggressively target markets where an opportunity exists for long-term profitability under their current business model.

  3. One statement that you made is really sticking with me – “As the industry leader, I believe Uber has to set the standard”. I completely agree that Uber should be focused on being a leader in the industry to drive changes that would be beneficially to all parties involved, but I highly doubt that they will. To this date, Uber has shown limited compassionate for its end customers and drivers. This leads me to believe that Uber would not be concerned with taking on the role that you described because they would rather focus on other top priorities such as continue customer expansion and autonomous vehicles.

    With that said, Uber needs positive momentum badly! I can’t agree that working with national governments and regulators to establish a new system for on-demand gig workers is the best priority for them currently, but it would generate a much-needed boost in PR reporting. Outside of the approach that you suggested, I believe there are other ways for them to create positive publicly. A suggestion might be creating woman’s appreciation day where rides are significantly reduced in price.

    Scandal after scandal is slowing crushing the amazing progress that Uber has made in the last few years. It needs to remember there is more than just financial gain targets and that they need to have equality seen throughout their organization and business operations. With the access to data that Uber has, the sky is the limit for how they can digitally improve the experiences of riders and drivers. The question for me is when will this actually be important enough to Uber to out weigh their focus on chasing the next financial hurdle. Have they ever stopped to think how does our treatment of existing customers prevent the success of our future offerings?

  4. Great read Alex – thanks for your thoughts on this topic. It has certainly been a fascinating, albeit sometimes concerning, time in history. The sheer speed of technological development has outpaced regulators abilities to develop satisfactory governance systems to keep these pioneering companies balanced between their own corporate interests and those of their employees and society at large. And even with regulations in place, the advancements in digitization have allowed Uber to often stay one step ahead of their watchdogs (and the competition). In March 2017, it was revealed that Uber had developed a program called “Greyball” that aimed to “deceive the authorities in markets where its low-cost ride-hailing service was resisted by law enforcement or, in some instances, had been banned.” [1] This practice demonstrates one of the risks major of our growing digitized communities and the companies that benefit from (and perhaps maliciously take advantage of) this new frontier. As regulators and governments adapt to the technological advancements of our time, it will be interesting to see if those groups can strike a balance between protecting consumers and employees, or if they will overreach and instead stall further development, competition and supply of superior services.

    [1] https://www.nytimes.com/2017/03/03/technology/uber-greyball-program-evade-authorities.html

  5. I have mixed feelings about this. While I agree that Uber doesn’t treat its employees very well, I feel that an action to convert drivers to full-time employees would contradict their business model. I believe this goes against the “asset-light” operating model that they’ve pushed towards. Owning cars or hiring drivers would decrease the organic nature of being able to scale supply of drivers with demand. At present, the multipliers draw drivers into the market when supply. Additionally, drivers will stop driving when demand is high and there are more drivers than rides. The network of drivers and riders that Uber has created already has a self-smoothing mechanism that creates a natural balance between supply and demand.

    I also believe that Uber pushing for increased regulations and pricing is problematic. If Uber wants to pay their employees more, go for it. But being a lead player in the market gives them an advantage that other companies do not have. Based completely on their funding, Uber would be better equipped to deal with increasing costs than would their competitors. Particularly given Ubers profitability, I take issue with them pushing for legislation that would potentially make the playing field even less level for their competitors.

  6. I agree with Michael’s point that Uber and other gig-economy platforms will not transition from contractors to full-time employees. Uber is already burning ~$2B/year, so, as you said, they’d have to pass along this ~30% cost increase along to their customers. Rather than “setting the standard” for corporate responsibility as you suggested, I think Uber would risk being undercut on price by your competitors and/or shrinking the overall size of the pie that they created for ridesharing in the first place. Moreover, it would be difficult to distinguish between full-time and part-time drivers, and enforce hours for full-time employees. It is possible that they reach an intermediate classification – like Germany’s “dependent contractors” for freelancers who work primarily for one business – but I don’t think this is a focus right now.

    Moreover, I think there’s another interesting labor dimension that is introduced by an autonomous Uber fleet. While the need for drivers will certainly shrink with autonomous vehicles, Uber will have to add a significant number of full-time employees for other positions, like maintenance and filling up with gas. (Maintenance labor costs will be significant due to the high vehicle utilization rates of autonomous cars.) Do you think Uber, in an effort to create some positive PR buzz, should lead the way in job retraining (e.g. for mechanics) in anticipation of a shift toward driverless cars?

    [1] http://www.govtech.com/policy/Employee-or-Independent-Contractor-Its-the-Uber-Important-Question-of-Todays-Economy.html

  7. Alexandre,

    Thank you for the interesting article. I strongly agree with you that Uber has the responsibility as the industry leader to set standards high, because I think that one of the greatest threats that Uber faces is being regulated out of cities. By growing as fast as they have they have angered many municipal governments, and I don’t think that Austin will be the last city to kick them out.

    I would argue that Uber should focus on improving the quality of the contractors they hire. For example, too many drivers are content to block traffic to pick-up/drop-off riders, and this poses a significant safety risk. I have personally been in an Uber when it has been in an accident 2 times. I wonder how long they will be able to afford to insure their drivers, if they do not find a better way to screen/train them. I also think that if they focus on hiring the right people, they will solve many of the other issues you noted.

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