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How On-Demand Economy Can Prosper

Even some of the most successful innovators in history would tell you, “Don’t quit your day job.” George Eastman worked full-time while tinkering in his mother’s kitchen on the inventions that let him found Eastman Kodak in the late 1880s. A century later, Steve Wozniak worked at Atari while developing the computer that he and Steve Jobs would turn into Apple. The fact is: No matter how great the idea, or how great a worker’s skill, it’s hard to mesh with an existing enterprise or any other group.

The reason is explained by Nobel laureate economist Ronald Coase in his influential 1937 essay, “The Nature of the Firm.” He theorized that people choose to organize themselves in companies and corporations rather than contracting their services out directly because of transaction costs. He cited: search and information costs; bargaining and decision costs; and policing and enforcement costs. “Within a firm, these market transactions are eliminated, and in place of the complicated market structure with exchange transactions is substituted the entrepreneur coordinator, who directs production,” he wrote.

Essentially, marketing, selling, pricing, negotiating and getting paid as a self-employed person isn’t all rainbows and unicorns – the work critical to running a business can be enormously complicated, time-consuming and costly.

Thanks to technology, much has changed since 1937. Mobile connections, broadband and ubiquitous data have reduced transactional search and information costs considerably. It is much easier, faster and economical for a small business to effectively compete with larger firms.

There has been a major shift in our buying behavior, too – consider how profoundly Amazon or iTunes has altered the way we discover, compare and purchase goods. Companies like Uber have used technology to reduce our search and information costs, as well as our bargaining and decision costs and policing and enforcement costs. If reducing one transactional cost shifts the economy, then reducing all three transforms it….

We are now officially unlocking the potential of the on-demand economy – one that will revolutionize the 21st century workplace and workforce. It’s so new, we haven’t decided on a name for it yet; it goes by various monikers like Uberization, the gig economy, the on-demand economy, the access economy and the peer-to-peer economy.

This on-demand economy offers the exchange of goods and services between individuals instead of from business to consumer. The people providing goods and services aren’t necessarily employed by the company connecting them with the customer, either. Many are independent contractors or freelancers.

Technology acts as the intermediary automating the handling of pricing and payments, vetting providers through a user-rating system and matching providers with consumers’ needs. This intermediary speedily brings together supply and demand via a platform that can be controlled by an app on any mobile device. The platform makes information available and accessible in the manner most efficient for the business, ensuring that transactions that are started are more likely to be concluded. The platform often obviates bargaining, directly polices its members, enables community-driven self-policing and enforces the terms of interaction. The costs of this coordination is added to each peer-to-peer transaction.

The new economic model is a highly efficient, productive and cost-effective marketplace. Platforms like Luxe, Lyft and Uber offer transportation services; Caviar, Doordash and Munchery deliver food from local restaurants; Instacart will shop for and deliver grocery orders; AirBnB, HomeAway and Onefinestay connect renters and homeowners offering available space with people seeking accommodations; Handy, Taskrabbit and Thumbtack will help a household find an available plumber, drywaller, cleaner or furniture assembler; and delivery services like Postmates and Shyp will pick up, pack up and send packages.

There appears to be no lack of supply or demand in this rapidly evolving phenomenon. Almost 53 million Americans currently serve as providers to on-demand platforms, at least part-time. Having goods and services on demand satisfies our need for “instant gratification” and allows consumers to find a broad array of competitively priced services 24/7 – they can get what they want, when they want with the touch of a few buttons.

The advantages for providers are many, too. No longer saddled with the time-consuming chores of the self-employed, like marketing and promoting services, negotiating transactions or chasing down payments, the on-demand economy provides freelancers with a turnkey, hassle-free method of accessing a large market of ready-and-willing customers whenever they want to work. It’s freelance freedom and flexibility with almost no barriers to entry.

You don’t need to be an economist to envision how the on-demand economy business model can benefit the marketplace as a whole: The Ma & Pa local restaurant that can easily deliver through a fleet without incurring staffing costs can substantially expand its market and service underserved markets. People can now use their cars to transport passengers and generate income rather than leave vehicles parked in driveways, resulting in a very good use of underutilized resources;. And, when a student can help an eBay seller package and deliver parcels on the fly, a job and professional support network are created that had not previously existed.

The new economy is here. It’s poised to democratize the marketplace and its workforce by maximizing underused assets, creating jobs, expanding markets and meeting the needs of underserved markets, all while creating a faster, easier way for us to get what we want, when we want it.

But this new business model comes with new world challenges as the distinction between personal and commercial activities becomes blurry. To thrive, policymakers, regulators, insurers and the companies enabling the new economy will have to work together to design a platform that protects consumers when they are operating as businesses.

Insurance in a Digital World: The Time Is Now

From market instability to catastrophic losses from natural disasters, insurance companies face many conflicting challenges. But the toughest challenge facing the insurance sector now is the adoption of digital technology.

Digital is transforming consumer behavior and driving insurance executives to reassess their business models. Our 2013 global survey of more than 100 insurance companies explores digital readiness, leadership strength and future strategies. With many insurers on the sidelines of the digital shift, it’s time to make the digital agenda a higher priority and tackle the challenges ahead.

Insurers view digital as a key priority, but are lagging far behind

While the majority of insurers believe in the importance of digitalization to deliver the customer experience, many express concern that they will be left behind as shorter-term corporate priorities lie elsewhere.

79% say they are “not setting the baseline” for digital or are “still learning.”

57% have operating models that do not faciliate digital.

89% don’t consider past interactions when recommending products or services to online customers.

Key findings from the survey

1. Insurers acknowledge their current low levels of digital maturity and the need to take action. Almost 80% of respondents do not see themselves as digital leaders, and are instead trailing the spectrum in customer engagement, analytics and adoption of mobile and social media. The majority believe instead that they “only play the digital game” or are “still learning to use digital capabilities for a competitive advantage.”

2. Companies have high digital ambitions – but are they grounded in reality? While insurers aspire to future digital leadership, they haven’t made the significant improvements necessary to realize their ambitious digital objectives. By their own admission, more than two-thirds of insurers have delivered some easy quick wins, but only 10% cite transformational changes to digital capabilities.

3. Insurers are holding themselves back. Internal factors — legacy technology, slow pace of delivery and cultural constraints — are hindering digital progress. Focusing on key enablers such as culture and innovation will release significant future value and enable companies to better grasp digital business opportunities as they arise.

4. It’s all about retention through improved customer experience. The two biggest drivers of digital strategies are “enriching the customer experience” and “regaining more direct control of the customer relationship.” While the cost of acquisition continues to rise, retaining existing customers is an increasing necessity and should be a critical and measurable benefit of any improvement in the customer experience, digitally enabled or otherwise.

5. Distributors are digital customers, too. Insurers cite intermediary and agent channel strength or resistance as one of the top three inhibitors in implementing a digital strategy. Sharing the benefits of investment in digital and communicating a clear mutual value proposition to deliver a better customer experience will help to minimize channel conflict.

6. Analytics are critical to digital success. Segmentation, customer data analytics and predictive modeling emerged as the digital skill set most in demand, followed closely by technology and marketing capabilities. Analytics capabilities are a prerequisite for extracting maximum value from digital investment.

7. Insurers need to embrace the mobile and social media wave. With mobile and tablet use growing exponentially, neglecting mobile is turning one’s back on the future. Similarly, insurers could be taking social media more seriously, recognizing its value as a relatively inexpensive marketing tool and a means to engage with and influence skeptical, digitally-savvy younger consumers.

How insurers should respond

Adapting to a new digital landscape presents many difficulties for insurers as they face challenges in introducing new channels to market while simultaneously remodeling traditional ones.

While no single solution can seamlessly integrate digital into a business, there are elements intrinsic to all effective digital strategies. Insurers need a vision that focuses on the basics:

  • Framing the investment argument for digital
  • Building the analytics infrastructure
  • Embedding a culture of innovation into the organization

A robust digital strategy begins with a plan and a sound understanding of the practical realities of implementation. Each of the elements – corporate strategies, customer expectations, target operating models and enabling frameworks – will shape each other as digital capabilities develop.

Related Resources
Download the full study
Review an illustrative summary of the survey
View the on-demand webcast
Read the press release

Authors

Graham Handy collaborated with Shaun Crawford in writing this article and in preparing the deeper study based on the survey. Shaun Crawford leads Ernst & Young's Global Insurance Industry across all services; audit, consulting, tax and corporate finance. Although based in London, he spends the majority of his time traveling across the Americas and Asia.