An ode to operations
For the likes of Amazon, Uber and Airbnb, the biggest problems to solve are human, not software.
|Nov 16, 2020|
When many people think about technology companies, the visual is expensive software engineers sitting in an office in San Francisco writing code and deploying apps over the internet. The appeal of starting a software business is the incredibly low cost of distribution, and the global reach of the web.
Now this is true for many companies who are taking advantage of the economic benefits of the internet. When Whatsapp was purchased by Facebook for $14 billion in 2014, the startup had 55 employees. Meanwhile Facebook and Alphabet (Google) bring in over $1 million in revenue for every employee they have. There are a lot of software businesses who avoid the complications of manufacturing, logistics and other “physical world” problems by taking advantage of online business models.
However, some of the world's most valuable and game-changing technology companies are also tackling very “real world” problems and industries. And a lot of these challenges can not be solved with lines of code.
This year Amazon will hire its one millionth employee. For context Starbucks has around 350,000 global employees. For every Amazon software engineer sitting in Seattle, there are many more folks in operations and logistics, ensuring packages move from warehouses to your front door. This does not include the delivery partners Amazon contracts with, such as DHL, Hermes and dozens of country postal services. As Royal Mail delivers less business mail, they’re delivering more parcels as Amazon orders rise. From CNBC in September 2020;
“Amazon announced 33,000 openings for corporate and technology workers. It announced 100,000 and 75,000 new operations jobs in March and April, respectively.”
That’s a 5:1 ratio for job opportunities in operations to corporate and technology jobs this year at Amazon, for one of the fastest growing and valuable “tech” companies in the world, that’s a lot of vacancies not directly related to building the Amazon.com application.
Meanwhile at Uber, the business reported five million drivers on its platform in 2019. That’s five million people who need to be onboarded to the platform and pass the required checks and balances to earn an income from riders who order on the app. This includes not only the obvious things like licensing, vehicle and criminal background checks, but also KYC and AML checks to ensure booking payments can be appropriately deposited into the drivers accounts. All of this in over 65 countries with different laws and regulations. That’s a profoundly complicated business problem to solve.
What has made Uber and Amazon so wonderfully popular is the fact that they have taken physical world tasks, like ordering a taxi or shopping for goods, and improved them exponentially by breaking down the horrible parts of the experience, like not knowing where your taxi is, or whether the retailer has what you want in stock before you drive five miles to the store. These are tough problems to solve.
Many of these technology companies have endeavoured to remove barriers for people to secure an income. In 2019 and only 10-years after its launch, Uber generated $65 billion in booking fees in a single year, within that Uber takes a 25% commission, meaning it generated $49 billion in value for its flexible workforce. In 2014 the cost of a New York City Taxi Medallion, the required license to drive a yellow cab in the city, exceeded $1 million. People's lives were being devastated by private loans equivalent to a mortgage to purchase a Medallion to earn a living. Uber does not charge a license fee to start driving on the platform.
Now it should be said that many policymakers believe Uber should treat their five million drivers as employees, rather than independent contractors. And that is certainly a healthy debate to have. California made this decision through application of its labour laws, however that application was successfully challenged by Prop. 22, a ballot proposition that appeared in the state in the November 3rd election.
The success of Prop. 22 meant Uber drivers would continue to be treated as contractors, albeit with some improved benefits such as a minimum hourly wage and basic health benefits. This topic is less urgent in many parts of Europe with national health services like the NHS serving the general public, including Uber drivers without private health insurance.
In America Prop. 22 was funded by Uber, along with other “gig economy” peers, such as Lyft, DoorDash, Instacart, and Postmates, collectively to the cost of over $200 million. Again, these very much physical world issues are not something many think about when they look at how software companies out of the Valley come to be.
Airbnb, which allows people to rent out a spare bedroom, or a second home to strangers who book online, face the very real problem that humans are unpredictable. And when you operate a marketplace which boasts over 150 million guests and 7 million hosts, there are bound to be cases of damage, theft and all sorts of “real world” problems that software can’t alone solve. Airbnb forks out a tremendous amount in insurance premiums to provide hosts with a $1 million liability cover when they host a guest who books on the platform.
These are examples at the top end of the scale, but what I think is often overlooked is that tech companies are not able to automate everything. So many of their business processes still rely on human decision making, which can be messy and complicated by problems of the real world. However, when a technology company makes managing real world problems easier, their value is all the more profound. Hence the brand equity companies such as Amazon, Uber, and Airbnb have rightfully earned, along with other “real world” problem solvers in tech.
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After a few weeks of digging deep into company earnings and particular businesses like Snap, Ant and Twitter, I was keen to think and write about this broader topic which has bubbled away in my mind for a while, hopefully it resonates.
Also consider this a nod to all the wonderful people who work in technology companies in roles such as operations, customer support, legal and other business services that make tech products such game changing experiences. It wouldn’t be the case without you!