It’s not a new problem. But I think it’s a growing problem: managing the risk in your business especially in regards to concentration of customers.
As technology has shifted and the gig economy has taken hold many of the big players are making money by providing infrastructure to gig economy workers. Examples are everywhere: Uber, Lyft, AirBnB, and now, even, Amazon.
It is a tempting prospect. Tie your small business to the demands of a big business and many of your problems go away. You have a built-in huge customers. There goes all the hassles of sales and marketing.
It’s really a new take on an old problem.
For years businesses have dealt with the problem of having one big customer. It’s what accountants often call “concentration risk.” Many businesses have had, and managed, this risk for years.
But with the future economy taking shape it’s going it’s a bigger risk than ever.
Let’s jump into what’s going on and discuss this often undiscussed risk.
What’s Really Going On With Uber, Lyft, AirBnB, etc.
Uber, Lyft, AriBnB and other similar service providers are usually providing one core function: They are matching suppliers of a service with a buyer. Need a ride: Uber or Lyft’s technology matches you. Need a room: AirBnB matches you.
To them, the driver or homeowner is the supplier. You supply the needed service and they match a buyer.
From the app company’s side this model solves a long-standing problem: the cost of inventory and infrastructure. The cost of building a hotel or buying a fleet of cars is huge. But if you can match a customer to the rooms or car of someone else you can remove a huge cost. No longer do you have so much money tied up in physical “assets.”
Accountants know that paying the cost of buying and maintaining physical assets can be huge. And these companies have, amazingly, removed such expenses from their finances while keeping a strong revenue source.
Amazon Is Ready To Jump In In A Big Way
Amazon has had amazing growth and has to be one of the smartest companies around. And I am sure they have teams of people keeping a close eye on what other leading companies are doing.
And Amazon recently announced a big push to build a group of delivery partners. Essentially Amazon will give you, the business owner, packages to deliver. They’ll also help you get your business set-up to be their delivery agent.
It’s a model that Federal Express has been using for many years. It’s basically a private version of Uber, Lyft and AirBnB. There is stuff to be delivered and Amazon’s computer will match it all up to a service provider and pay them to deliver.
With Amazon jumping in it is clear about the economic plus of this arrangement for Amazon. We wouldn’t see them jumping into this business model without an upside for them. We can also expect that other companies will want to jump in too.
So what does that mean for the business owners working with these companies? Let’s jump into that.
Who Owes Who What Duties?
As a lawyer (see disclaimer below) I often want to jump into situations like this and look at who owes who what. What are the duties?
And looking deeper at this most everyone owes everyone nothing. These are generally contractual arrangements. In the case of Uber, Lyft and AirBnB you can generally just walk away. But so can they. If you get enough bad reviews, or whatever, they can just stop dealing with you.
Unlike employment relationships, where the government layers on more protections, such as unemployment benefits, workplace safety standard and retirement contribution rules (if there is a retirement plan) these relationships generally just have the duties set forth in the contracts.
So the business owner dealing with an app or program where they are provided work by a big company is pretty much at the whim of that big company. Except, potentially, there are no unemployment or other benefits available if things shift against the business owner.
Control Is Key
These companies are generally careful to make sure the businesses, and business owners, they deal with don’t become employees. There are generally standards, set by the states, the IRS and other government bodies, where if an employer exercises too much control over a contractor the government makes them treat them as an employee.
If someone is deemed an employee it generally means more paperwork, compliance and things like minimum wage obligations for the employer. And these tests to determine whether someone needs to be reclassified as an employee generally comes down to the degree of control of the employer.
Uber has lost some of these cases nationally, reclassifying some of their drivers as employees, but most companies want to avoid this. That’s why many companies work to have some control of their suppliers but not too much.
If You Have No Control, What Do You Have?
If there is no control then we are back to just the contract between the parties as discussed above. The companies hiring help love this as it means less obligation, and more flexibility, for them.
No assets on the books, no duties to the service providers you use and a lot of freedom. This certainly looks like a good deal for the big companies.
And they pay their suppliers on demand – as rides are given, rooms are used, etc. This is great for minimizing risk. If a hurricane comes through your area causing no one to want to visit and use your room it’s super easy from them to just forget your town. Ditto for ride sharing services that see a decrease in traffic in a particular town. They aren’t left holding the unused assets and wasted hows, the supplier is!
And this risk/reward trade-off becomes key for the future of business.
They Are Already Looking To Replace You
Amazon has already said, years ago, they want to use drones to deliver packages. Uber is working on driverless cars.
What does this mean for Uber driver and Amazon logistics suppliers? It means, on a date the other company determines, you may no longer be needed. The contract will end. Or the rides will stop coming in.
Quite simply at some point new technology will just replace the small businesses relying on the big businesses.
Could It Be Worse Than Losing Your Job?
And if that isn’t scary enough it could be worse than losing your job.
When most people lose their jobs it’s pretty bad: unemployment, wasted time and the start of a frustrating job search.
But what happens when you bought a bigger house for an extra room to rent and a room rental site determines that they need so many rooms in your area they’ll move traffic to their own mini-hotel they’ll build? Who pays the mortgage? I think we know the answer – you pay and they don’t help.
What happens to you, and your car, when the car rider service starts using their own self-driving cars? I think we know.
What happens when a delivery company gets their drones going and they no longer need you? I think we know.
This potentially leaves the small business owner with the worst of all worlds: no work, no unemployment benefits, unused assets and payments due on those assets.
Talk about the potential of being left in the dust!
Know Your Risks
The key here is to know your risks. There is a lot of risk and, as our courts have generally said, it’s your job to know the risks: “buyer beware.”
So research and investigate all growth possibilities, particularly when you are relying on one customer as the center of your business. What protects you if something changes?
The issue of overly relying on one customer is not new. Businesses have faced this issue for centuries.
What is new? More and more businesses are supplying businesses that are already aggressively planning to change the relationship.
Do you know your risks? What will you do if the rug is pulled out from under you? How do you protect yourself? Join us in the comments below to discuss.
By: The Our Shawn McBride, is the man you call when you want a keynote, training or a consultant to get your business ready for The Future of Business. He’s the host of The Future Done Right(TM) Show and a long-time business attorney. If you want regular content on the future of business subscribe to get new blog posts from us here.
**NOTE: Any discussion of legal ideas in any of my public facing materials is not legal advice. You must consult counsel to get legal advice based on your facts and circumstances. Do not rely on the content of this message without consulting a lawyer. No attorney-client relationship is formed by this content (video, blog, etc.) Unless you have retained my firm and I have specifically acknowledged I am your lawyer you should not rely on any of my statements as legal advice.**
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