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?
- The Brookings Institution, A Proposal for Modernizing Labor Laws for Twenty-FirstCentury Work: The “Independent Worker” (2015)
- Benjamin Means and Joseph A. Seiner, Navigating the Uber Economy (2016)