Is Your Company Scalable?

Is Your Company Scalable?

I guess the first question is, “Why should it be?”

If you can scale your company, it provides you with FREEDOM. If you don’t, you get stuck in the “Owner’s Trap,” where you do everything yourself. Eventually, in the Owner’s Trap, revenues flatten, and profits fall because the owner is spread too thin. So, how does scaling provide you with Freedom?

Provided you scale correctly, growing your business provides you with Wealth, and Wealth is correlated with “No!” Your ability to say “No” gives you FREEDOM because you get more:

TIME – You get out of the Owner’s Trap. You have the ability to say No, you get to choose when you want to work, so you have more time to spend with family and friends.

MONEY – With more money, you can say no to more things, and you have money to spend on things that matter to you.

 OPTIONS – With more Wealth, you have a much better BATNA (“best alternative to a negotiated agreement”), which increases your poker hand. Your choices concerning your business increase so that you can:

  • Keep it and be effectively a coupon clipper.
  • Pass it on to your children or employees
  • Become a Non-Executive Chairman and leave the day to day running to your President or CEO.

As we can see, through scaling, you increase Wealth, which provides you with more Freedom and Options.

So if we want to scale, how can we determine if we can? To scale effectively, we have to change our Mindset and ensure our products meet the TVR requirement.

Mindset

Our Mindset needs to be that we “want to sell a few things to many people, rather than many things to a few people.” Many business owners aim to sell a few things, but they are not strategically dependent and have different consumers. Such a strategy is limiting, and they are not adhering to the Mindset. 

Strategically dependent services mean the consumer who purchases A is also likely to buy B, and both A and B meet the same “Job to be Done.” The late Clayton Christensen said that when consumers purchase a product or service, they are essentially “hiring” it to help do a job. If it does a good job, they will rehire it, if not they will fire it. Here as Christensen noted, “Job” is shorthand for what an individual seeks to accomplish in a given “circumstance.” The circumstances are more important than customer characteristics, product attributes, new technologies, or trends.

In Know Your Customers’ “Jobs to Be Done,” Christensen et al. discussed a construction company that was selling condominiums aimed at couples looking to downsize or divorced single parents. The units had high-end finishes providing a sense of luxury. However, although they had much traffic from prospective clients, they were not selling. The company made changes based on focus groups, but still, sales didn’t budge. A consultant decided to look at what differentiated a serious buyer from a tire kicker.

The data didn’t provide a clear demographic or psychographic profile of the new-home buyers, even though all were downsizers. However, from discussions with buyers and tire kickers, the issue of the “dining room table” raised its head. The condos had no formal dining room and just a breakfast bar. However, what they heard was many people saying, “When I figure out what to do with my dining room table, I will move.” The consultant realized that every family event is spent around the dining room table, from homework to birthdays, to holidays. Thus, giving up the dining room table asked buyers to give up something with profound meaning in their lives. So, the decision about whether or not to buy a high-end condo revolved around this one piece of furniture. The company realized that they were not in the business of building condo, but “in the business of moving lives!”

With this understanding of the Job to be done, the company:

  • Changed the layout of the condos to allow for a dining room table,
  • Provided moving services,
  • Two years’ worth of storage, and
  • A sorting room within the condo development where new owners could take their time making decisions about what to discard.

With all these changes, the company raised the condos’ prices to cover the moving cost and storage, and in 2007 when industry sales were off by 49%, they saw their business grow by 25%.

The condo’s strategic dependent service was not a second home or special finishes but moving-related items. Therefore, understanding the “Job to be Done” helps decide on much more effective strategic dependent services.

TVR

The TVR requirement for all services is that it is:

  • Teachable. Others can do it so that you don’t have to do everything. If you look at the entire process from sales to production, if there is any step that only you, the CEO, or business owner can do, you are in the “Owner’s Trap.”
  • Valuable to the consumer – A Need, not a Want! If you are meeting a want, your products and services are easily substituted or given up when bad.
  • Repeatable. Consumers need it regularly.

There is one other item, that is not technically are part of TVR but needs to be kept in mind, what is the market size. If you are providing services for. a very small market, then no matter how effectively you can scale, your growth is limited by the number of competitors.

Some of you will note that I said, “Services,” and you ask about selling “Products.” Unfortunately, all products become commodities. Once that happens, you are in a race to the bottom in terms of price. Suppose you want to maintain product differentiation. In that case, you need to wrap your product in a service that has a TVR model. For example, the iPhone is a product, but it is also a service. Apple provides an environment where apps and your data is safe, so it demands a much greater price for its phones, generating a considerable margin for the company. Google’s Android phones are a commodity, and the prices are much lower. The only way to stop falling prices is to increase the available options. Of course, this irrelevant to Google as it is only providing the operating system, so the more phones (commodities) its operating system is on, the better.

In the condo story above, they had moved from selling condos (a product) to providing life moving (a service), and thus it could not be commoditized. To reiterate, if you sell Products, figure out a way to wrap a service around it so that you can defend your position and make it comply with the TVR model.

However, the TVR model does pose an internal contradiction. “Things that are teachable are often not valuable, and things that are valuable are often not teachable.”

If what you do is not teachable, then your work depends on those who know-how, limiting its scalability. The challenge is to (a) make it teachable so that more people can do the work, or (b) offer a different scalable service based on the core service. A company I know builds unique websites using its platform. They have done this to ensure that once a feature is improved, it is automatically available on all the sites that use its platform. However, because of the intricacies of its platform, it does something very valuable but not teachable. It is developing a scaled-down version that anyone can use, offered at a lower price, but with many of its platform features. Thus, it is producing something teachable and valuable.

Another example is Cook’s Warehouse in Atlanta, which provides kitchen appliances and wares. They compete with many other companies from Williams Sonoma to Target. Cook’s Warehouse has wrapped a service around its products by offering cooking classes. In these classes, chefs cook with you and teach you how to use many of Cook’s Warehouse’s products. As a result, customers develop an appreciation for the service, see the stores as a place of education, and are more likely to increase in-store purchases while attending a cooking class.

The other part of the TVR is that it has to be repeatable. We want customers to purchase it continuously. To use a simple example, wedding photographers do valuable work, but it is not that repeatable. Most of us get married once, or in some cases, twice, but rarely more. Also, there are usually several years between the events, so a customer is not a repeat customer. With my above example of the web design company, they sell their lower-end customers a monthly subscription to use their platform, meeting the repeatable requirement.

Some service providers will say what they do, is teachable and repeatable but do not have much value. In that case, look at your service offering and see if there is a way you can turn into a Rundle – a repeatable bundle. Creating a Rundle of your various offerings in ways that provide value to your customer is a possible solution. For example, an accounting firm providing tax returns for small businesses is teachable but not that valuable – you can get any other accounting to do it. However, suppose the accounting firm were to bundle – tax returns, bookkeeping, payroll, and business financial planning into a rundle with a fixed monthly payment. In that case, it is now offering something that not many others are and has value.

Suppose you cannot make a rundle of your services. In that case, unfortunately, you are in the commodity business. You can expect your competition to be internet-based, e.g., TurboTax, or available from service providers on Upwork or Fiverr.

So, examine your offering portfolio and ask the following questions:

  • Is there a service we can wrap around a product to differentiate it?
  • Are our services strategically dependent and meeting the same “Job to be Done?”
  • Are our services teachable so that others can do them?
  • Are our services a “Need” of the customer and not a “Want?”
  • Are our services demanded repeatedly?

If you can answer these questions in the affirmative, then you can build a scalable business and achieve business freedom.

 

Copyright (c) 2021, Marc A. Borrelli

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Where Exactly Are We Headed?

Where Exactly Are We Headed?

What is happening out there? Airbnb confidentially filed for its IPO last week. In the spring, the company laid off 2,000 employees and was negotiating over the terms of two fundraising deals totaling $2 billion in debt and equity.

However, total consumer spending on Airbnb in July was 22% higher than in the same period last year, according to Edison Trends. According to the company, it surpassed 1 million bookings on a single day that same month, led by an increase in stays at nearby destinations.

So, are we returning to normal? I would answer no, but there is hope. Normal is a long way away as people are still scared and want to social distance. However, given we can only take so much of staring at the same four walls, we are heading on vacation. Those vacations may not be the ones of pre-COVID days with cruises, trips abroad, or all-inclusive resort, but booking a house for just our family or close friends that we trust, works! Thus as the company reported, bookings are up for close to home destinations, basic economic substitution.

Along with other reports, consumer spending has increased during the pandemic, and I put that down to the fact that we are not spending as much on other things, e.g., commuting, sports, and meals out. However, will that spending last? Last week the Labor Department reported first-time jobless claims increased to 1.1 million, and it was the 22nd consecutive week claims exceeded those during the worst week of the Great Recession. On the positive side, the total number of Americans collecting unemployment fell from 15.5 million to 14.8 million, the lowest since early April. This data goes to show that the recovery will not be quick and a V-curve.

Where exactly are we headed, I am not sure. I hear lots of talk of continued layoffs ahead with about Wells Fargo and Boeing announcing more cuts as well as many smaller companies planning layoff. There is a sense of uncertainty over Q4 2020 and Q1 2021, and expect many are taking a wait and see approach. However, with school restarting, albeit in a confused manner, the Federal Unemployment Benefits in unchartered waters, and Congress in gridlock, there is a lot of confusion out there.

However, as an old Keynesian, the amount of stimulus that the government has poured into the economy is why we are experiencing a robust recovery to date. According to economic theory, in a world of excess capacity and mass unemployment, a combination of vast government borrowing with monetary expansion will not fuel inflation until most of the excess capacity is exhausted, which is where we are now. A Keynesian fiscal stimulus financed with negative real interest rates will boost private consumption and investment and should generate above-trend economic growth. Before the cry of “Crowding Out,” arises from many as I heard during the Great Recession, where all indications showed none. Currently, with central banks worldwide committing to financing this Keynesian stimulus with zero or negative interest rates for years ahead, there is no risk that public borrowing will crowd out private investment.

Thus, will this Keynesian stimulus lead to a healthier and longer growth economy? I would put that down to two factors.

  1. As always, public health. The sooner we adopt and proactive, data, and science-driven approach to the COVID crisis, the sooner we return to a functioning economy. Cases are rising again in Europe, which indicates that this is a marathon and not a sprint. I know for many, it already feels like a marathon, but the more apt analogy is the British in September 1939 saying, “It’ll all be over by Christmas!”
  2. The Stimulus. The actions by the Fed and the Congress, through the CARES Act, have injected substantial stimulus into the economy. However, as these have ended, we will have to observe to see what happens. As in the Great Recession, Congress stopped the stimulus too soon, for political reasons, which lead to a much weaker recovery than there should have been. Hopefully, this time, they will put the country first and give the economy what it needs to recover.

A lot of economists are arguing that the stock market is pricing in continuous stimuli for the economy, and if Congress fails to deliver the will, a market correction to accompany the economic contraction.

For those gnashing their teeth and anguishing over a Keynesian expansion, it is worth remembering that the 20 years of broadly Keynesian macroeconomic policy in place from 1946 until the late 1960s saw the most robust economic growth and productivity advances ever recorded. At the same time, we experienced generally moderate inflation and almost continuous bull markets in equities, property, and other real-value assets.

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Built to Last? Hopefully Not.

Built to Last? Hopefully Not.

The picture above is of the bridge over the Choluteca River. Honduras, known for its extreme weather, namely hurricanes, commissioned the bridge in 1996 to withstand any storms. A Japanese company competed the bridge in 1998 when Hurricane Mitch tore through the country. Mitch dropped 74 inches of rain, killing 7,000 people, leaving 1.5 million homeless, and causing $2bn of damage. Also Mitch damaged or destroyed nearly all the bridges, but the new Choluteca Bridge survived with minor damage.. Thus it met its requirement, it withstood the worst storms. However, with deluge from Mitch the roads on either end of the bridge had completely vanished, leaving no visible trace of their prior existence. Also, the Choluteca River, which is over 100 metres (300 ft) at the bridge, had carved itself a new channel. It no longer flowed beneath the bridge, which now spanned dry ground.

Roads have since been reconnected to the bridge; however, the moral of the story is that things should not be “built to last,” but “built to adapt.” As I have mentioned before, most people get Darwin evolution wrong when they use the term “Survival of the fittest.” In Darwinian terms, fittest refers to biological reproduction, so what Darwin meant was “Survival of the form that will leave the most copies of itself in successive generations.”

Well, COVID has once more shaken our core processes and what “got us to here, is not going to get us to there.” To survive we have to adapt and change what we do. Due to the failure to understand that this is public health crisis first and foremost, and until we deal with that the rest cannot be fixed, I expect we will be living in a COVID environment for at least another year. So new methods and models have to determined for survival.

In one of my Vistage group meetings this week we shared how we had adapted to the COVID world doing things that we had never considered before. Some of the wonderful new practices were:

  • Enabling piece production to be done at home by providing the employees with the materials and tools and paying the by the piece rather than hourly. The company then did full QA on all pieces when they were picked up. The company found that production levels rose slightly. Employee satisfaction rose too, as people were able to work at home and deal with kids who cannot go to school.
  • Entering new markets to provide COVID related solutions and then expanding within those market to offer more services. These new markets are providing sufficient revenue to make up for those markets damaged by COVID.
  • Training and recruiting people in areas that the company expects will be active soon as a result of COVID. Building a bench of talent to meet new demand.
  • Having weekly video calls with the entire global team where each week one person presents on their passion project within the organization. These calls have lead to great connectivity between employees and departments. Employees now have a better understanding of the challenges faced in other departments, and people are contributing to other’s passion projects across deparments.
  • Restructuring the sales department as the existing sales team was struggling to prospect in the virtual world. Have younger more tech savvy people doing business development work and connecting with prospects. Once the connection is made these relationships are handed over to old sales team.

The above is why Vistage groups are so wonderful! The sharing of ideas that work and those that don’t help everyone.

So what are you doing? Are you waiting for the return to a pre COVID world, aka Waiting for Godot, or are you being proactive to find new ways to drive sales, production, product development and improve internal processes? As a leader, you need to lead the way for your organization so that you will around and relevant in a year. It is hard during times like this, but that is why you are the leader. If you need help, join a Vistage group, help is there.

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SPACs Anyone?

SPACs Anyone?

Special purpose acquisition companies (or SPACs) are back! They are not new, but become trendy during overvalued financial markets are frothy, e.g., before the last crisis and now. 

Over the last few years, SPACs have raised record amounts. Everyone including hedge fund billionaire Bill Ackman, sports executive Billy Beane of Moneyball fame, former Citigroup dealmaker, Michael Klein, and ex-Blackstone rainmaker Chinh Chus are launching a SPAC, or three. Some of these high-profile investors believe SPACs have shed the dodgy reputation and seek to raise cash in blank check companies, believing they have the unique eye to find under-appreciated businesses that they can bring to the public markets.

This year 28 SPACs have had IPOs, raising $8.9 billion, and at this rate should reach $16.5 billion for the end of the year. If so, it will beat last year’s $13.6 billion and is far ahead of the 2011–2015 average of $1.7 billion.

SPACs have a simple business model:

  • Raise funds from the public markets. 
  • Find a target company with which to merge.
  • On the announcement of the merger, shareholders can either accept stock in the new company or redeem their shares at the original price of the offering.

Thus, the SPAC is a deconstructed IPO with a very short roadshow. However, as the target is negotiating with a few SPACs to attract the highest bidder, there is an argument that most SPACs overpay for the target reducing shareholder returns. To the SPAC investor, it’s a subpar money market fund with a Kinder Surprise Egg-style option attached: invest, and for the cost of tying up your capital for a while, you have the opportunity to get… something.

SPAC advocates have three arguments for SPACs over IPOs.

They are cheaper than traditional IPOs. Also, they avoid the “IPO pop.” However, as Matt Levine noted,

“Compared to an IPO, the SPAC is much less risky for the company: You sign a deal with one person (the SPAC sponsor) for a fixed amount of money (what’s in the SPAC pool ) at a negotiated price, and then you sign and announce the deal, and it probably gets done. With an IPO, you announce the deal before negotiating the size or price, and you don’t know if anyone will go for it until after you’ve announced it and started marketing it. Things could go wrong in embarrassing public fashion.
***
The SPAC structure is less risky for the company than an IPO, which means that it’s riskier for the SPAC (than just buying shares in a regular IPO would be), which means that the SPAC should be compensated by getting an even bigger discount than regular IPO investors.”

Thus while cheaper, it comes at greater cost to investors.

SPACs are quicker.
SPACs advocates argue that the traditional IPO process is too slow and prevents people from taking advantage of opportunities as they arise. A company undertaking an IPO would spend months working with the Securities and Exchange Commission to finalize a prospectus that detailed its financial information and operations. SPACs dramatically shorten that process. However, as a recent article put it, “The SPAC is the Vegas wedding chapel of liquidity events; it seems like an urgently good idea at the time, but it doesn’t always turn out that way.” However, as we consider the craving for speed, it is worth reflecting that the regulations are there to ensure high standards of “IPOs” as WeWork demonstrated.  As a result, the IPOs minimizes a financial meltdown for many rather than the original backers.

A Rebellion Against the Investment Bankers
Founders, companies, and investors are rebelling against the investment banks and their high fees and see SPACs as a way to minimize them. However, if no cash needs to be raised by the target company, a direct listing offers a low-cost alternative that provides the original investors with liquidity and a market. 

However, SPACs also have a dodgy reputation.

An analysis of 145 SPACs organized between 2015 and 2019 by the Financial Times shows that two-thirds are trading below $10 per share, the standard IPO issue price. About a third have not found a target, and less than half are still trading. This poor performance is not just limited to novice investors, the private equity firm, TPG, has three SPACs, none of which are trading above $10.20.

The poor performance record of these SPACs may be a reminder that when Wall Street is pushing a new product, financiers inevitably find a way to shift the risk on to ordinary investors.

However, while SPACs have improved some, most ordinary investors forget that these vehicles hold out the prospect of great riches for Wall Street’s finest, and their advisers. Otherwise, they wouldn’t do them. As Warren Buffett so aptly put it, “If you’ve been playing poker for half an hour and you still don’t know who the patsy is, you’re the patsy.”

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Knowing the profit of your core customers is key to building a growth model. Many companies have identified core customers that are generating a sub-optimal profit and so they cannot realize the profits they seek. Identifying the correct core customer allows you to generate profits and often operate in “Blue Ocean.”

The Greatest Own Goal or the Greatest Collapse

The Greatest Own Goal or the Greatest Collapse

The European Super League collapsed within days of launch due to hubris and the founder forgetting the key parts of their business model, value creation, sales, and value delivery. The collapse might bring a high price.

Does Your Financial Model Drive Growth?

Does Your Financial Model Drive Growth?

Working with many companies looking to grow, I am always surprised how many have not built a financial model that drives growth. I have mentioned before a financial model that drives growth? Here I am basing on Jim Collin's Profit/X, which he laid out in Good to...

COVID = Caught Inside

COVID = Caught Inside

As we emerge from COVID, the current employment environment makes me think of a surfing concept: “Being Caught Inside When a Big Set Comes Through.” Basically, the phrase refers to when you paddle like crazy to escape the crash of one wave, only to find that the next wave in the set is even bigger—and you’re exhausted. 2020 was the first wave, leaving us tired and low. But looking forward, there are major challenges looming on the horizon as business picks up in 2021. You are already asking a lot of your employees, who are working flat out and dealing with stress until you are able to hire more. But everyone is looking for employees right now, and hiring and retention for your organization is growing more difficult.

Why is there not MORE common sense

Why is there not MORE common sense

“Why don’t they use common sense?!” You may have said this phrase yourself, or heard it with your managers, when discussing an employee’s actions. However, the frustrated appeal to “common sense” doesn’t actually make any meaningful change in your organization. We all make decisions based on the information we have and the guides we have to use. So if the wrong decisions are being made in your organization, it’s time to examine the tools you give decision-makers.

Do You Understand Your Costs to Ensure Profitability?

Do You Understand Your Costs to Ensure Profitability?

You can only determine profitability when you know your costs. I’ve discussed before that you should price according to value, not hours. However, you still need to know your costs to understand the minimum pricing and how it is performing. Do you consider each jobs’ profitability when you price new jobs? Do you know what you should be charging to ensure you hit your profit targets? These discussions about a company’s profitability, and what measure drives profit, are critical for your organization.

Sunk Costs Are Just That, Sunk!

Sunk Costs Are Just That, Sunk!

If you were starting your business today, what would you do differently? This thought-provoking question is a valuable exercise, especially when it brings up the idea of “sunk costs” and how they limit us. A sunk cost is a payment or investment that has already been made. Since it is unrecoverable no matter what, a sunk cost shouldn’t be factored into any future decisions. However, we’re all familiar with the sunk cost fallacy: behavior driven by a past expenditure that isn’t recoupable, regardless of future actions.

Do You REALLY Know Your Business Model?

Do You REALLY Know Your Business Model?

Bringing clarity to your organization is a common theme on The Disruption! blog. Defining your business model is a worthwhile exercise for any leadership team. But how do you even begin to bring clarity into your operations? If you’re looking for a place to start, Josh Kaufman’s “Five Parts of Every Business” offers an excellent framework. Kaufman defines five parts of every business model that all flow into the next, breaking it down into Value Creation, Marketing, Sales, Value Delivery, and Finance.

The Future of the Gig Economy

The Future of the Gig Economy

On Monday, a court in California rejected Uber, and Lyft claims that they didn’t need to treat drivers as employees under AB5, a state law passed in 2019. Under AB5, there are three criteria a company must deem to meet to consider workers, independent contractors, namely:

  1. Weighing the employer’s control over how the work is performed;
  2. Whether the services are within the normal course of business; and
  3. Whether the workers have an independently established role.

Uber CEO, Dara Khosrowshahi, has said that if the court doesn’t reconsider, Uber will shut down its services from the state. This strategy seems to follow Travis Kalanick’s approach – If you own the market, the regulators will have to placate you. Following that strategy should bode well for Uber as the Customer always wins. If Uber were to close down Californian operations, there would a massive cry from both customers and drivers, which could force the state to back down. How this unfolds will be observed by other states, e.g., New Jersey, Massachusetts, and Connecticut, which are using the same standard to determine who is and isn’t a gig worker, and New York and Illinois are considering similar legislation.

Gig work describes independent contractors, remote work, part-time employment, and temporary employment. If someone works for a platform like Fiverr, Uber, or Lyft, then they are part of the gig economy.

While there has been tremendous growth in the gig economy over the last few years, most of it is unskilled work such as driving, delivering, and doing simple errands. A vibrant gig economy for knowledge workers — engineers, consultants, management executives — has not yet materialized. 

 

The Stats and Facts of the Gig Economy

  • From nothing in 2014, 57.3MM people performed gig work in the U.S. in 2019.
  • 20% of gig workers earned over $100k in 2019.
  • 85% of gig workers make less than $500 a month from a single side-job.
  • 40% of gig workers had medical insurance.
  • 39% of gig workers have no retirement savings.
  • 55% of Baby Boomer gig workers have medical insurance.
  • 59% of gig workers are satisfied with their financial situation.
  • 95% of gig workers say flexibility is essential.
  • 19% of gig workers would want a traditional job.
  • The main reason for gig work: 18 – 29-year-olds: Need extra money, Gen X: Need money to make ends meet, Men: “Love being their own boss.”
  • Only 35% of America’s gig workers are female.
  • Almost half of all millennials use online gig economy platforms to find work.
  • The total gig income is almost $1 trillion.
  • On average, gig workers earn 58% less than full-time employees.

Where are the gig workers?

Source: Statista

As can be seen from the above, the Gig economy is significant, is here to stay, and absorbing more jobs and professions. So what are the issues? 

 

Pros of the Gig Economy

  1. Workers have more flexibility. As noted above, 95% of such workers say flexibility is essential. They use this flexibility to gain the work-life balance they need. 
  2. Gig workers like their independence. As note above, men identified the main reason for gig work is that they “Loved being their own boss.” Gig workers are not micromanaged and can enhance the quality of work for some.
  3. Gig workers have access to a greater variety of employment opportunities. Freelances often stay in control of their assignment, deciding whether or not to accept a client. They are not stuck with the same monotonous tasks every day.
  4. Some gig workers work from home, so they have zero commuting costs. Before COVID, this could save $30 to $50 a week commuting to work.
  5. Lowers companies’ costs. Businesses only have to pay for the labor they receive and don’t have to pay for equipment. Besides, they don’t have to provide benefits or pay state unemployment taxes, and in many cases don’t offer space.
  6. It allows companies to scale quickly. Startup and small companies find gig workers enable them to scale at a lower cost promptly. They can race to meet market demand and budget restrictions.
  7. Workers don’t need to cater to the company culture. Gig workers have their own culture. They don’t have to be involved in team-building exercises, corporate rallies, or pander to office politics.
  8. It is suitable for the creative worker. The variety of work enables some workers to explore their full creativity, increasing the quality of work.

 

Cons of the Gig Economy

  1. Less flexibility than thought. While many experienced gig workers, e.g., graphic designers can pick and choose clients and projects, many of the ordinary gig workers don’t have that luxury. Several online platforms use variable pay, rating systems, and notifications to push people to accept specific jobs and work certain hours. These practices, called algorithmic management, limit the flexibility of work. 
  2. No benefits. Most gig workers do not receive any benefits, regardless if they are working 40+ hours a week. Thus they are responsible for their health insurance and retirement contributions, as is seen above. COVID has shown the problems with this. Many gig workers suddenly have no income, but cannot claim unemployment benefits. Furthermore, with a public health crisis, few having health insurance slows the solving of the crisis. Many who don’t have insurance will not seek treatment as they cannot afford it or cannot take time off work to get it, and second those that do, face bankruptcy because they cannot pay for whatever treatment they have.
  3. More taxes. Since gig workers do have tax withheld, they have to pay income tax and self-employment taxes from their pay, requiring them to withhold 25+% for those purposes. Also, concerning self-employment taxes, gig workers pay both the employee and employer taxes, unlike full-time workers. Finally, gig workers have to manage cash flow as they have to file taxes quarterly, so they will have to save enough to make those payments.
  4. Gig workers considered lazy. Since many gig workers work from home, many will consider them lazy and nonproductive, which causes social issues.
  5. Gig workers have high levels of isolation. Gig workers miss the social element of work, discussions around the water cooler, chats with teammates, office events. Lack of the office environment leads to isolation, which can cause mental health issues, as we are seeking with the COVID work from home and suicided rates.
  6. Gig workers drive more. While gig workers don’t have to commute daily, they end up driving more during a week as they move to pick up and deliver projects or from work site to work site. This increase in driving increases costs and stress.
  7. More stress for gig workers. Full-time workers know that their employment position is relatively secure. Although layoffs can happen, the risk of such a circumstance is relatively low for the average person. Gig workers have several different stresses. They are always looking out for the next job. They have to be prepared for changes to occur in their current assignments, including being let go in the middle of a task. Thus, their income is never really 100% secure.
  8. Companies may find their workers are not as reliable. This lack of reliability is a result of workers not adopting the corporate culture. Since gig workers are external, they don’t have to adapt to the corporate culture, and cultural fit is not a hiring requirement. Furthermore, since they are interested in their well being over the corporations, thus, while they will work, they may not work as hard, do what the organization considers “right,” and go the extra mile. Since happy employees lead to satisfied customers, this will reduce customer satisfaction if they interact with customers.
  9. Gig workers must continuously up-level their skills. Gig workers must continue to up-level their skills to get better because new gig specialists enter this field every day. The levels of industry knowledge that they receive must increase if they want to keep receiving contracts or employment offers. Thus, gig workers have to build in continuing education into their schedules. While this will keep them relevant, it is time that they are not earning.
  10. Gig workers need to budget for vacations. Gig workers don’t get paid time off, so they need to budget for the fact that while on vacation, they will be spending money and not earning money. Furthermore, many have to give one to three months of advance notice to clients that they will not be available. Finally, if a job comes up as they are about to leave, they may not want to turn it down as they could lose a client.
  11. It takes longer to build a depth of experience. In an organization, employees are often put on cross-functional teams to address issues. As a result, they create networks and knowledge across many areas of the organization. Gig workers are siloed and don’t build any skills or experience outside their narrow field, limiting their development and earnings potential.
  12. Us and Them. Many companies have large numbers of gig workers, e.g., Google has more gig workers than full-time workers. Since gig workers are not part of the organization, earn less, and have less opportunity to work in cross-functional areas, they are considered fungible and, in many organizations, are considered less than employees, creating an Us v. Them environment. Furthermore, most gig workers perform specific tasks, not the “package.” The package is more complex and requires working and information sharing across the organization, which gets harder for gig workers who don’t where the information lies due to their lace of organizational knowledge.
  13. State Tax Revenue. While gig workers have to pay FICA taxes, they are not obliged to pay state unemployment taxes. A study found that if Uber and Lyft had classified its drivers as employees in California, between 2014 and 2018, they would have paid $418 million into the California unemployment insurance fund.

 

Race to the bottom

A trend that has picked up during COIVD is the race to the bottom. As many people found themselves jobless, they applied for gig jobs. Upwork has seen a 50% increase in freelancer sign-ups since the pandemic began. Talkdesk, which launched a gig economy platform, witnessed 10,000 new applications within ten days. Instacart hired 300,000 additional workers in a month at the beginning of the COVID crisis and, in April, announced it would add 250,000 more.

On platforms like Upwork and Fiverr, many freelancers are already feeling the pinch. With a large number of new workers, given the laws of supply and demand, many gig workers are now vying for freelance work and pitching their services for lower rates to make money.

Now there are too many would-be workers to make the gig economy viable for many of them, and this may be irreversible as companies adapt to the reality of a global recession. By keeping headcounts low, companies will drive more desperate people into the gig economy, expanding the potential labor pool for jobs and driving down the prices that workers can command. 

 

The Recovery

The pandemic has shown that as business recovers, digital economy companies will benefit from their ability to be more flexible than other industries in certain aspects. COVID will probably intensify investors” growing scrutiny of the path to profitability for companies, making them increasingly wary of startups” strategies that favor scale before profitability. Thus gig workers will be vital in meeting this metric.

Also, many governments are now leveraging gig work to fast-track recovery. Having seen how digital platforms have contributed to crisis management and recovery using their nimble operations, flexible thinking, and technological prowess to get things done quickly, India and China are promoting gig work to drive growth in the economy. 

 

So What

Gig work is here to stay, and it will be vital for economic recovery. We must realize; however, that gig workers are not just drivers and delivery people. Presently many occupations are effectively gig jobs, e.g., journalists. However, the issues laid out above are massive and require addressing for gig work to be successful for all. Otherwise, we continue our move to a Hunger Games society.

As Dara Khosrowshahi recently said in an oped in The New York Times, we need to redefine “workers” and have new laws rather than the binary system today. We need to address the reality that this is how millions of people earn some or all of their livings. As a result, we need to ensure that:

  • Gig workers can move easily from job to job;
  • Gig workers receive healthcare benefits. During a pandemic, we have realized that public health is an essential requirement, and the U.S.healthcare system is not designed to meet it. While ObamaCare causes a visceral reaction for many, much of the thinking behind it was to enable workers to have health insurance not tied to employment. While it may not work well, it needs improving to meet this need for now and the future, not removal and reversion to the past.
  • Gig workers receive retirement benefits. Our outdated IRA and 401ks need to restructuring so that gig workers can more easily contribute to them. Today a quarter of Americans have no retirement savings.
  • Gig workers need to receive unemployment insurance of some form so that when we have a second COVID like situation, millions are not driven into financial distress due to lack of protections.
  • Companies need to contribute towards these benefits so that it doesn’t fall on those who can least afford them, or bore by all taxpayers.
  • Changes the balance of power structure between gig workers and corporations in negotiating rates. Our current system encourages a race to the bottom that is detrimental to the gig workers and beneficial to the shareholders. This system reinforces the current U.S. system or rewarding capital at the expense of labor and winnowing out the middle class. It needs addressing, but that will be complex and not easy.
  • Companies need to develop better ways of onboarding gig workers to remove the Us v. Them situation. Also, even though these workers are task-specific, smart organizations will start to ensure that gig workers share their core values to ensure that they get better results from them and can use them for the “package.”

If we can address these issues, then the economy should be able to recover quicker and have a flexible, practical framework for future growth while protecting many. If not, the migration to a Hunger Games society will continue, creating more problems and social unrest. However, I believe we up to the task.

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