CASE STUDY: UBER

Team Alpha +

Yak Jie Sheng Benjamin

Ou Yiming
Xia Qiran
Deloitte Risk Intelligence Challenge Yong Yu Wen
2017

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Contents

1. Identifying Risks ……………………………………….…………………….…...…..…. 2

2. Development of Risk Criteria ………………………………………………….......……. 3
3. Assessing Risks ……………………………...…………………………………………... 3
4. Prioritizing Risks .………………………………………..….…………………………… 5
5. Insights and Solution …………………………………………………………………….. 6
6. Appendices …………………………………….………………………………………... 7
7. References .......................................................................................................................... 9

1. Identifying Risks
 Regulatory Risks
Uber is currently facing two main regulatory risks: 1) Deregulation of traditional taxis and 2)
increased regulation of Uber. In the past year, the US government has introduced measures to

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level the playing field between Uber and taxis, which have increased the competition Uber
faces. Taxi laws have relaxed while more regulations are being imposed on Uber. At the same
time, Uber is facing many regulatory threats from taxi lobbyists, unions and various state
governments who argue that Uber is an illegal taxi service that operates outside the
boundaries of traditional taxi laws (Labbe, 2016). These factors pose significant risks to both
Uber’s profit margins and business model. Increased deregulation of taxis directly reduces the
number of Uber drivers and customers, resulting in lower revenue. Furthermore, if regulators
succeed in arguing that Uber is a taxi company, as opposed to a technological company,
Uber’s business model as a ride-sharing company will be greatly affected. The company is
also incurring significant costs in defending the independent contractor status of their drivers
and will incur insurance and wages expenses, as well as be liable to provide employee
benefits should this status change.

 Technological Infrastructural Risk

Driverless technology also challenges Uber’s business model (Huws, 2016). If Uber’s
competitors develop this technology first, they will achieve significant labour cost savings
and better meet fluctuating demands by directing vehicles towards areas of higher demand.
This would undercut Uber’s price leadership, eroding Uber’s leading market share with
negative financial consequences. Driverless car technology is in its infancy and Uber invested
heavily in it. However, Uber competes against established firms like Google and automobile
incumbents like BMW which are well positioned to commercialise this technology (Higgins,
2017). Uber’s investments are a sunken cost and they may not even be the first to
commercialise this technology given the tough competition. Even if Uber do succeed, they
face the high cost of maintaining a fleet of vehicles which inflates its operating costs.

Uber’s dependence on GPS application like Google Maps is also a risk for Uber
(Kokalitcheva, 2016). Google Maps now allows its users to book ride through firms besides
Uber while showing fares comparison. Uber risks losing its users if competitors offer lower
prices since cost is compared real time. Also, users can easily opt for alternatives during surge
pricing.

 Reputational Risk
Over the years, the name Uber is often associated with bad public relations. Uber has been hit
by a slew of controversies, including safety of passengers, customer data privacy,
questionable recruitment method etc. All these have led to damages to Uber’s reputation,
which could in turn result in decreased revenue, increased regulatory costs etc. One example
demonstrating this would be the #DeleteUber protest, where over 200,000 customers deleted
their Uber account to protest against Uber CEO Travis Kalanick’s perceived support for
President Donald Trump (Morris, 2017). This event damaged Uber’s already tarnished brand
name, and directly resulted in a loss of customers to competitors such as Lyft. Hence, to
avoid further reputational risks, Uber has to make a concerted effort to restore its public
image.

2. Development of Risk Criteria

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Uber faces a legion of risks including reputational troubles, pressure for statutory regulations,
deregulation of taxi companies as well as the dependency on GPS apps and emergence of
driverless cars in future. We assessed the various risk factors in terms of their impact on
Uber’s business, the likelihood of their occurrence and how promptly will the impact be felt
in Uber’s business. We classified impact into 4 categories from minor, moderate, major to
extreme (refer to Appendix A). The same rubric is applied to likelihood, ranging from
unlikely, possible, likely to frequent and the speed of onset from low, medium, high to very
high. Under each category, we also defined each variation.

3. Assessing Risk
 Regulatory Risk
Impact (Extreme):
The distinction between a technological company and taxi business is incredibly important to
Uber because it allows them to operate in a “legal void” where they provide all the services
of a taxi but are exempt from the extensive and costly taxi regulations (Issac, 2014). These
regulations include sufficient insurance to cover public liability, conducting thorough
roadworthiness tests and adhering to guidelines for public service (CNA, 2016). Uber and
similar companies classify their drivers as “independent contractors” rather than employees
and thus do not need to provide their workers the protections and benefits associated with a
standard employment arrangement (Benner, 2014). Hence, if Uber is regulated into a taxi
company, her entire business model would fail as Uber’s success is largely due to them being
able to circumvent the costly taxi regulations. Furthermore, deregulations of taxis will cause
more drivers to switch to taxis because of lower driver’s fee (Poh, 2016), reduction of taxi
rental fees (Zannia, 2016) and the increasingly flexible working hours that taxi companies are
now offering (Lim, 2016). This results in huge loss of profits as Uber’s revenue comes from
the 25% percentage cut they take from their drivers (IDWU, 2017). Moreover, an increase in
supply of taxi drivers might also translate to an increase in consumption of taxis and erode
Uber’s market share.

Likelihood (Frequently):
The likelihood of greater regulation on Uber and deregulation of taxis is almost certain. There
is an increase in government efforts to level the playing field (Lim, 2016) such as constant
changes to the Taxi Availability Framework that allows more taxi flexibility (Fai, 2016).
Furthermore, Uber is currently fighting numerous lawsuits in various countries (Kelly, 2016).
In October 2016, Uber lost a huge case in UK, which resulted in their UK drivers no longer
being considered as self-employed contractors (Brown, 2016). The debates over whether
Uber drivers are far from over and Uber can expect lawyers to file a string of follow-on suits.

Speed of Onset (Medium):

The speed of onset of the risks involved in deregulating taxis is very low, as there are no
significant signs of customers having a greater preference for taxi companies appearing
(TheEconomist, 2015). Government’s efforts also did not seem to have any impact on Uber

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immediately with Uber responding positively to new regulations and seeing it as an
endorsement of private hire cars instead (CNA, 2016). However, the risks associated with
reclassifying Uber as taxi company and asserting that Uber drivers are not independent
contractors are an immediate threat, simply because the time Uber would have to mitigate the
consequences of the regulatory action is extremely short as her whole business model would
change instantly.

 Technological Infrastructure Risk

Impact (Major):
Uber faces 2 major technological risks: Driverless technology and Google Maps competitor
listing. Driverless technology allows firms to deploy fleets of driverless cars, reducing labour
cost and improving ridership by programming cars to cater to areas of high demands. This
surpasses Uber’s surge pricing by allocating excess vehicles reliably with immediacy. It
provides better customer service at a significantly lower price, undermining Uber’s
dominance and profitability. Google and Ford also invested heavily in this field (Harris,
2016), and if Uber lacks progress, they would suffer financially from cost of R&D and faces
the challenge to regain market share in this price-sensitive environment. Google’s inclusion
of competitors’ pricing on its Maps function may trap Uber in a price war against similarly
listed competitors to maintain its price leadership. The transparency could cost Uber their
users, especially during surge pricing where competitors have significant price advantage.
Uber spent more than 500 million building its mapping technology to reduce reliance on
Google, financially draining themselves (Hook, 2016).

Likelihood (Likely):
Commuters’ receptivity towards driverless cars is uncertain and people are more concerned
with machine causing accidents than humans (Nichols, 2017). Thus, competitors with this
technology are unlikely to displace Uber in the short term. It is highly likely for Google to
expand its service to connect users to more ridesharing firms, since it benefits their cause of
providing satisfactory search experience to the users with more choice.

Speed of Onset (Medium):

While driverless technology expects maturity in the next 5 years (Cava, 2016), it is unlikely
to be fully commercialised soon due to regulations (Spector, 2016) and additional testing
needed before practical application. The speed of onset for Google’s addition is high as
ridesharing companies have integrated Google Maps into their system and Google faces little
technical obstacles to include them.

 Reputational Risk

Impact (Minor):

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Uber has faced a myriad of controversies, such as human rights abuses, poor working
conditions, privacy violations, that have severely tarnished its public image (RepRisk, 2016).
However, the impact of such risks seems to be limited in terms of financial losses. Investor
confidence seems unaffected by these scandals, and Uber’s valuation and ridership continue
to increase exponentially. For example, Uber’s net revenue, doubled from US$2 billion in
2015, to US$5.5 billion in 2016 (Kolodny, 2016). However, one area where reputational risks
have significantly affected Uber is recruitment. Because of its bad reputation, Uber is finding
it increasingly difficult to hire senior executives into critical roles, as well as retain human
talent (Carr, 2016). For example, Uber’s head of HR Renee Atwood left Uber to join Twitter
because of Uber’s toxic working environment (Lacy, 2016). Without the ability to recruit
human talent, there will be a lack of skilled leadership in Uber and thus, company growth will
be significantly impacted.

Likelihood (Frequently):
The likelihood of Uber’s reputation being further tarnished is extremely high. Uber is
currently undergoing many high-profile lawsuits for its controversial business model and
treatment of drivers. For example, Uber recently lost a lawsuit in UK that entitled Uber
drivers to minimum wage (Hodges and Kahn, 2016). Furthermore, allegations of privacy
violations continue to mar Uber’s reputation (Conger, 2016). Hence, Uber’s company’s
direction and current practices greatly increases the likelihood of reputational risks.

Speed of Onset (Low):

Looking at the history of Uber’s growth as a company, as well as the numerous controversies
it has faced, the time it takes for reputational risks to manifest itself is very long. Uber’s
ridership and revenue growth does not seem to be affected by damages to Uber’s reputation,
which suggests that it may take a very blow to Uber’s reputation to significantly impact its
company.

4. Prioritizing Risks
Based on the values we have assigned to each individual risk, we recommend Uber to target
these risks in the following order of severity:

1. Regulatory: 10
2. Technological infrastructure: 8
3. Reputational: 6

5. Insights and Solutions

 Regulatory: Passing new legislation

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Currently, home cleaning sharing-economy service Handy is working with Democratic
legislators and trade group Tech: NYC to craft a bill in the state of New York to allow them to
continue treating their workers as contractors. In the proposed bill, workers of sharing-
economy companies that devoted 2.5% of each transaction to funds that provide benefits for
workers (ie. sick pay), would be considered contractors (Eidelson, 2017). However, being a
small company, Handy lacks the power and influence to push this bill through. Uber on the
other hand, has significant resources and clout. They can leverage on this opportunity and
lobby to pass this bill. The passing of such a bill would act as a stepping stone to legalising
Uber’s business model worldwide, and mitigate the legal risks it currently faces.

 Technology: Big data analytics

To safeguard Uber's position against technological advances, Uber could re-deploy spending
to optimise its driver deployment on road, better meeting peak demands. By developing a
strategic software to predict where to allocate drivers during surge demand periods, Uber can
reduce the impact of its notorious surge pricing on users. Fleet management will be the
differentiating factor when majority of automobile firms are projected to develop their
driverless fleets. The firm with the most efficient ride allocation mechanism will undercut
competitors’ pricing and gain market share. Uber has to tread carefully and keep users’
personal data private. They should only work on impersonal ride data points like distance,
without accessing the rider’s identity.

 Reputation: Goodwill marketing

Uber has proven that it can respond well in sensitive situations. When its automated “surge
pricing” kicked in during the Sydney hostage crisis, causing rates to skyrocket, Uber
responded quickly. Uber offered free rides to people trying to leave Sydney’s CBD, and
reimbursed people affected by the surge pricing. Uber can go one step further and make it a
company policy that their drivers will offer free rides during crisis situations. For instance, in
Singapore they can offer free rides when the MRT breaks down and in the US, they can do so
when there are suspected terrorist attacks. Small gestures like this can go a long way towards
rebuilding Uber’s reputation.

Appendix A - Risk Assessment Scale

Impact Scale

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Rating Descriptor Definition

4 Extreme  Game-changing loss of profit and market share

 International long-term negative media coverage;
 Significant prosecution and fines, litigation including class actions
 Multiple senior leaders leave

3 Major  Significant loss of profit and market share

 National long-term negative media coverage
 Report of breach to regulator with immediate correction to be
implemented
 Some senior managers leave, high turnover of experienced staff,
not perceived as employer of choice

2 Moderate  Potential loss of profits and market share

 National short-term negative media coverage
 Reportable incident to regulator, no follow up
 Widespread staff morale problems and high turnover

1 Minor  Negligible loss of profits and market share

 Local media attention quickly remedied
 Not reportable to regulator
 Isolated staff dissatisfaction

Likelihood Scale

Rating Frequency Probability

Descriptor Definition Descriptor Definition

4 Frequently Weekly Almost Certain Significant chance of

occurrence

3 Likely Monthly Likely High chance of

occurrence

2 Possible Yearly Possible Probable chance of

occurrence

1 Unlikely Every 10 years Unlikely Minimal chance of

occurrence

Speed of Onset Scale

Rating Descriptor Definition

4 Very High Onset occurs in a few weeks or shorter

3 High Onset occurs in a matter of a few months

2 Medium Onset occurs in a matter of several months

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1 Low Very slow onset, occurs over a year or more

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