Becoming Uber: why is it important not only on the taxi market?
Internet companies are preparing expansion in markets that are far from IT. Is your business already at risk zone? Learn how to “uberize” it with an example of equipment maintenance project.
Many managers of big Western companies answering the question “Which competitors are you afraid of mostly?” saying: new companies, dark horses. According to the practice these scares are justified. Young companies like Uber or Gett were unknown few years ago. And today they take a leading position in the taxi markets with billions in turnover. . And these companies are not limited themselves just with transportation, they are seeking access to new markets, where they will be able to fully take advantage of their proven technologies. Who will be the next victim and is it possible to secure your business? Let's try to figure it out ...
Task: make unprofitable business profitable
Reflecting on the reasons for the success of companies, like Uber, I started, not following fashion, but working on a very specific project. Half a year ago, one large company supplying trading equipment from Europe and China to Russia entered into an agreement with us to develop a strategy for its new service unit and controlling its implementation. The company's own service should replace the service of dealer companies in large cities, on the one hand, to increase the satisfaction of end-users of products and increase sales, and on the other hand, to establish direct contact with customers. In the regions, it is supposed to use service partners from a number of dealers who were supposed to work under the supervision of the Moscow division and according to uniform standards.
Work began with the collection of market information and organizational diagnostics. The situation did not look very encouraging. The own service of the company in fact has been working for more than a year, but despite the rather large turnover of the company (over a billion rubles), it was unprofitable. Trading equipment was not technically complex and unique. Competitors and freelance engineers quite successfully performed its repair and maintenance. And although the company offered part of the equipment under its own brands, spare parts for it could be freely selected and purchased on the open market.
It was clear: the development of the service according to the “classical scenario” will take many years. Given the need to discourage their customers from competitors and provide customers with the best conditions, they hardly had to talk about profits. In this case, the task was to reach the figures for turnover and profits, similar to the service of competitors,, within one and a half to two years. The idea of cutting costs using cheaper freelancers was rejected at the outset. Our client insisted that only full-time employees should provide operational services. So, it was necessary to find a solution that would give the company a significant competitive advantage.
As a matter of fact, our choice wasn’t so wide: it was necessary to improve the efficiency of business processes. The universal indicator that determines the efficiency of operational service in Western companies is called Utilization and represents the proportion of time paid by the customer to the total working time of engineers. This ratio in Russian companies is usually not more than 40-50%. In Western companies, by optimizing business processes, using lean production technology, investing in software, training, development, staff motivation, it can reach 80-90%.
We estimated the company's service potential at $ 3 million per year. About half of the turnover could give the sale of spare parts and half - operational service.. At the same time, spare parts could be sold with an average profit margin of 30%, and prompt service, according to our calculations, considering the market value of the work, the planned costs and Utilization 50% should work to zero or with a small loss. As a result, considering all costs, the profit before tax (EBIT) was about 12%.
But for our client business with a profit of 12% was not interesting, although the profit from the company's main business, sales, was much lower as a percentage of turnover. So, it was necessary to increase the coefficient Utilization. I had a similar experience while working as a service director at German companies DMG Mori and DEMAG. In DEMAG, in particular, I managed to increase Utilization from 45% to 85%.
Put into account the utilization indicator of 80%, we obtained very interesting results. Even with extremely low prices for service services and high salary costs, tools, service car leasing, etc. We could offer our clients the services of a professional service organization about 20% cheaper than the market average, actually at the level of freelancers. This, in our opinion, was one of the most important conditions for the rapid growth and increase in the customer base of the service organization. At the same time, the marginal profit of the operational service was calculated at a level of 35%, while the net profit (EBIT) of the entire service was about 22%. These are quite real results that I used to get in my practice.
But first of all, we decided to focus on checking external constraints. In particular, it turned out that due to the high competition in the market where the company worked, many competitors either did not charge for the engineer’s departure to the client at all, or they took a small fixed amount. In conditions when the engineer spends up to 30% of the time on the way to the client, the absence or insufficient payment during this time makes the Utilization coefficient 80% unattainable. And this was the main problem that prompted me to carefully study the experience of companies like Uber.
Solution: time saving
According my point of view, Uber conception has two main advantages. Firstly, convenient way of communication with a client. To call a taxi it’s enough just to press a button in the cellphone and to see when a car will arrive. There is no need to call. Secondly, money saving thanks to absence a big department of dispatch. And even greater savings are obtained by increasing the proportion of paid time, the Utilization coefficient. After all, the order is transferred to the nearest free car, thereby saving the driver from having to travel a long distance to the client through traffic jams, increasing unpaid time.
The same principles can be applied to the work of the service organization. If 30% of the engineer’s time is spent on the road to the customer and is not paid at all, then these losses should be minimized. Employees must operate in the home base mode: everyone must be responsible for their area, and the time lost must be minimal. The dispatcher here is an extra link, you need a direct connection with the customer through a mobile application.
We calculated that, using Uber technology, we can reduce the time spent on the road from 30% to 10%. What does saving 20% of the time mean for an organization that has 50 on-site engineers, as our project suggested? Considering the cost of an hour of work in this market, this saves about 1.7 million rubles per month. Add to this the savings on the dispatchers (200 thousand rubles per month) and you get 1.9 million rubles. Plus, savings on gasoline and car maintenance. Given the cost of developing a mobile application for iOS and Android, as well as the server part (about 3 million rubles), this option was clearly worth considering.
And now 80% of Utilization does not look so unattainable. But I didn’t want to lose even 10% of the time. And what if the cost of an engineer’s departure will be a very small amount, no more than 5-7% of the cost of repairs? Will the customer be ready to pay these costs considering other advantages: such as convenience of a call, the minimum time of arrival and the cost of work is 20% lower than that of competitors?
Obviously, the situations are different. For some, equipment breakdown means stopping the production process, and they are ready to pay for the road. In another case, the faulty mechanism will simply be put somewhere in a corner until better times. Therefore, it was decided to offer customers two options:
- Emergency repairs, in which the nearest free engineer comes to the client.
- "Application mode", which the client can leave as a mark with coordinates on a map, and which can be accepted by any free engineer, traveling within a certain distance (or time) from this mark.
According to our calculations, if 50 engineers are located in different districts of Moscow, the arrival time will be no longer than 20 minutes. With the cost of a minute of working time of 25 rubles, it turned out that the cost of even an urgent call would be no more than 500 rubles.
Our goal was to carry out repairs on site in 80% of cases already on the first arrival. This means that the engineer must have in his car a certain set of spare parts for repair. In addition, he must see the availability of spare parts in the stock through the integration of the mobile application with 1C, as well as in special mobile stock, vans located in different parts of the city. In addition, such vans must transport large equipment that cannot be repaired locally to a service center. The spare parts spent by the engineer should be automatically included in the list for a new order, and special couriers who leave the central stock in their spare time should fill them.
Reports on the time spent by engineers on order fulfillment should be automatically transformed into accounts for customers, as well as transferred to the service manager for analyzing the efficiency of resource use. The client can pay for services through a mobile application or by invoice. In addition to convenience and economy, the use of mobile applications allows you to receive other benefits. For example, you can use the resulting system not only in Moscow, but also in other cities to organize the work of service partners for a specific commission. There are a lot of nuances, in each case the specifics of a particular business and the wishes of the customer should be taken into account.
Who will be affected by uberization?
As a result, we prepared a technical task for the development of mobile applications and server-side, which was transferred to our customer along with other documents developed by us: budget, marketing strategy, staff structure, business process diagram. Calculations made in the process of work, clearly showed the effectiveness of a combination of lean production methods and IT-technologies. Actually, I was always sure of this, but the work on the project prompted me to dive deeper into this topic. In this case, it was a question of a company selling a non-unique product in a highly competitive market with a very low profit margin. There are a lot of such companies and saving (and even getting profit) is an important task in such conditions. But is it just about saving?
Imagine, that you are the owner of a medium-sized dealership trading company that has long and firmly occupied its market share with four or five other similar companies. And suddenly several of your dealers start complaining that the competitors offer service at dumping prices, and the quality of this service is better than yours, and it is more interesting to work with them. "For a long time, they will not be enough, they will soon be blown away," you say, reducing the prices for your service or giving additional discounts to dealers. But bad luck: competitors are not blown away and feel great. And your service has ceased to pay off at the expense of spare parts and you have to send money received from equipment sales to maintain it. You have to save, the quality of services falls, people work as much as you pay them, the motivation is zero. What's next? Competitors reduce prices for the main product, work to zero (they can afford it, they have two profit centers) and start taking your dealers and customers. Unpleasant situation.
This is only one of the options, but quite probable. And there may be others. What prevents the same “Yandex”, Uber or Gett Taxi to start working in your market? Yes, they do not know him, but they have money and they have ready-made technologies, which make it possible to greatly improve the efficiency of the service and offer customers prices that you cannot offer without loss of quality. All they need is to hire good managers, buy a ready-made service organization and adapt their technologies for new tasks. And maybe they are doing it right now. Seems fantastic? But remember, four or five years ago in Russia no one hear about Uber or Gett. And today in Moscow, 80% of taxis are ordered via mobile apps. And this happened primarily due to the quality, convenience and dumping prices.
How to get out of the blow and hit by yourself
Primarily under the blow are the markets where the advantages of existing technologies of IT-companies are obvious. This, for example, repair of household appliances in large cities with problem traffic and a large concentration of customers. It is important that the market is large enough to not require too high qualifications of employees and expensive training, and travel time occupied a significant part of the working time. If you work in such a market, your employee (technician, installer) spends 30-40% of the time for the road and fulfills three to four orders a day, then you have cause for concern. These guys will carry out five to seven orders, and their services will be 20-30% cheaper. For example, Gett-cleaning has already appeared. Who could imagine that taxi drivers will become competitors in the market of cleaning services?
Well, sales are not concerned - there is such an opinion. And this is a mistake. Where the service is - there is sales. It happens very often. We started as a service organization, got satisfied and loyal customers, and customers were “persuaded” to start selling equipment because they want to buy from those they trust.
In other markets, the development of technology also carries risks, especially for small companies. If, for example, several years ago, due to remoteness and low prices, the owner of a service company servicing industrial equipment somewhere in Perm could not be afraid of competing with official services, now thanks to the development of remote diagnostics systems, the official representors may know better than technicians which are on the spot. Machines themselves determine which parts require replacement, and the official representors are carried out replacement in the framework of maintenance. The number of emergency calls is reduced, the cost of the contract with the official representors decreases. It’s time to think what else besides low prices can be offered to customers so as not to stay on the sidelines.
The development of technology is very rapid. New opportunities are emerging, the boundaries between many markets are blurring. It is quite possible that in the coming years we will witness increased competition of professionals and technology companies. The leaders will be those who are the first to be able to find the best use of new technologies on the market, and the chances, in my opinion, are almost equal.
There is a saying: if a revolution cannot be prevented, then you need to lead it. Successful solutions will be copied very quickly and the maximum benefit will be given to those who are the first to be able to use them on the largest scale.
The article was first published on the e-xecutive.ru on February 3th, 2017 in the section "Corporate Practice"