Tuesday, February 10, 2015

Manage Your Risks Like Uber Does


I love Uber.  The car-on-demand service has changed how I think about transportation. It’s allowed me much more flexibility in my plans, by giving me confidence that I can secure a car within minutes, from virtually any metropolitan location.

At the center of the Uber proposition is the question of risk.  I think of this in three forms:

1)    What is my risk, of NOT being able to secure transportation via Uber? So far, in my experience this risk is very low.

2)    What is Uber’s risk, of there not being enough customers using its service to cover its fixed costs? Based on their reported volumes, so far so good (with the notable blip around reputational risk from misuse of customer data!)

3)    What is the average Uber driver’s risk, of there not being enough demand for their services to pay for their cars and their time? I ask every Uber driver how the deal is working for them. Every one of them has been positive.

Do you want more risk in your life? Do you wake up each day and ask, “How can I increase my risk today?”  It’s natural for you to seek rewards in abundance, and minimize the your risks. 

Did Uber go buy a fleet of cars and hire a herd of drivers in the hope that the demand would follow? Nope. 

Uber’s business model spreads the risk. Uber doesn’t bear the burden alone. They achieve this lighter-risk mode of service in a way that makes it easy for their customers to do business with them.

Why are you bearing so much risk?

Most businesses grow slower than Uber, but take more risk. That is illogical.

For many years, common wisdom said that you must own and operate the assets that you use to serve customers. Look at the history of corporate acquisitions that were motivated by collecting scale in hopes of creating a dominant market capacity.

The world is shifting from a focus on economies of scale, to one that celebrates economies of skill.

Uber is skillful in making it easy for travelers to secure a car. They are similarly skillful in vetting their drivers as positive extensions of the Uber brand. They own the processes necessary to do this, but not many of the underlying assets.

Look at the increasing frequency of crowdsourcing for new ideas (paying for actionable outcomes, rather than for the effort to think), or the adoption of robotics/automation for business processes. These are examples of techniques that tap into intellectual assets without carrying much risk.

In the old world, R&D costs were substantial and focused on features; marketing was about promotion; sales was about closing deals; and service was about implementation and repair.

The shift of risk manifests across that lifecycle. Companies such as P&G spend considerably less today on product R&D than they did in the past, despite having a culture of product innovation. They’d rather pay for a good idea from an external source than carry the costs and risk of owning this responsibility themselves. P&G’s contribution to success comes through the brands that it manages and the promises those brands make to the consumer.

Ask yourself this: why does my business need to carry so many costs, and bear so much risk?  There must be a better way. 

Peter Allen has many years of operating experience as a top executive of rapidly-growing multi-billion dollar companies and in assessing sales and marketing effectiveness. He is now a Boston-based Managing Director at Alvarez & Marsal.


Image: afagen/Flick

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