Tag Archives: On-Demand

economy

3 Questions About On-Demand Economy

Last year, as Airbnb’s $25.5 billion valuation surpassed Hilton Hotels’ and Uber became the world’s most valuable privately owned company, it became clear the on-demand economy is no passing fad but is, in fact, a force to be reckoned with.

The on-demand marketplace is growing at a dizzying pace as new companies emerge daily, helping connect a diverse workforce of tradespeople, licensed professionals and unskilled laborers to a market of willing buyers through the company’s platforms. Intuit projects the population of U.S. on-demand workers will more than double by 2020, which means that, if you can’t already summon a doctor, lawyer, babysitter or dog walker right now via an on-demand app, then sit tight—they’re coming soon to a smartphone near you.

But the scale and speed of the on-demand economy’s growth also means policymakers, regulators, insurers and on-demand companies will have to huddle quickly to resolve the issues that arise with this expanding marketplace and its workforce. Here are the three key questions we need to address immediately:

  1. When the safeguards of the traditional corporation no longer exist, how do we protect the on-demand workforce?

Uber is currently appealing a case it lost against the California Labor Commissioner last summer regarding whether a driver is an independent contractor or an employee. While establishing this distinction is a critical issue, we still need to address some big questions about the vast self-employed workforce in the on-demand economy.

A good primer question: How do we get the information we need to make informed policy decisions? Independent contractors in the on-demand economy are classified as part of a larger pool of temporary, seasonal, part-time and freelance workforce called “contingent” workers. A 2015 U.S. Government Accountability Office report cites this workforce as somewhere between less than 5% and more than one-third of the country’s overall labor pool. The big gap in this measurement is because it depends on how jobs are defined and on the data source; the broad definitions and lack of clear data on this workforce makes on-demand independent contractors and their needs tough to track and evaluate. How much of this workforce depends on this income for supplementary purposes as opposed to relying on this income as a full-time living?

According to Intuit’s study, contingent workers will make up 40% of the U.S. workforce by 2020. That’s a lot of people working without the safeguards provided by the traditional corporation—guaranteed minimum wage, steady income, unemployment insurance, healthcare, workers’ compensation and disability insurance. What kind of safety nets do we need to put in place to protect this workforce? And what does this growing workforce mean in terms of policy development? How does the social contract change?

  1. How should we regulate hybrid commercial/consumer activities?

A sticky issue surrounding the on-demand economy is how to regulate commercial activities that are conducted by individuals rather than by traditional businesses.

While some argue that an Airbnb property should be as heavily regulated as a hotel if a host is accepting payment for lodgings, drawing an apples-to-apples comparison between the two is a challenge. For example, treehouses, yurts, igloos and lighthouses were among the top-10 most desirable vacation destinations on Airbnb shopper’s wish lists last year, some fetching upward of $350 a night. Who exactly should you call about making sure the igloo is up to code before guests arrive?

Some of the services and products offered by the individual through on-demand platforms have never been available through traditional enterprises; they’re unique, intimate experiences and, before on-demand platforms made them accessible, were difficult to find. We’re entering a new frontier where many tourists covet a culinary experience they can book at a local’s house via apps such as Feastly or Kitchensurfing rather than a fine dining restaurant, or they prefer offbeat accommodations booked through Airbnb to a 5-star hotel. We can’t assess how to best regulate these individual commercial activities until we have more data and understand the risks. How do we collect that data? How do we ensure the safety and protection of the individuals operating and participating in these activities until we have the information necessary to adequately regulate them?

  1. How can a square peg workforce function in a round hole system?

Mortgages, loans, credit cards, leases … these are just a few of life’s niceties (or necessities) that are challenging for an on-demand independent contractor to secure. Our current financial services, systems and policies were built to work for employees who collect a regular paycheck as well as freelancers who have reliable cash flow through long-term contracts and monthly retainers. Independent contractors working through on-demand platforms tend to rely on short-term gigs often generated through multiple sources, and they have difficulty predicting their day-to-day income, never mind their annual net or gross.

This isn’t a niche workforce. If independent contractors represent 40% of the U.S. working population in 2020, they’re significant drivers of the economy. They generate income and pay taxes; they need homes, cars, work equipment and all the other stuff that keeps their businesses running and makes their lives worth living. We can’t dismiss their needs, because we are measuring their 21st century income with a 20th century yardstick. How do we retrofit our round-hole systems to include this square peg workforce?

If we want a thriving economy in which people enjoy the benefits of the on-demand economy, and doctors, lawyers, drivers, plumbers and everyone else serving the on-demand marketplace have equal opportunity to succeed, then the time to talk about these questions and issues is now.

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.