Uber’s Lessons in Risk Management

Companies that can manage risk stand to have a significant advantage in the marketplace, says Karan Girotra, Professor of Technology and Operations Management at INSEAD, France’s leading business school. Unfortunately, risk is seen as a bad thing, as Girotra points out. Companies tend to shy away from it and don’t confront how to manage it like they should. In a recent interview with Big Think, former Treasury Secretary Timothy Geithner said that one of the key lessons he learned from the 2008 financial crash was that businesses must have the humility to prepare for the worst, even during the good times.

What’s a popular example of a company that gets risk right? Girotra points to Uber. The popular taxi service which rose up quickly in recent years has risk built into their core business model. Girotra explains:

“So we can think of in the transportation industry a company like Uber, which is this transportation network provider company with taxi hailing apps, as some of you might know, compare that to a traditional taxi service provider or a black car service provider.  Now a black car service provider has much more risk in its business model because it has to invest in a heavy asset load before any demand shows up.  A company like Uber on the other hand has a business model which has a lot lower risk, because it’s the cost and revenue scale up together.  If a lot of people want taxi rides, Uber ends up bringing in a lot of drivers on board.  If nobody wants a taxi ride there are no drivers who are paid.  And that business model manages the demand risk in a superior fashion than a traditional taxi model does and that allows it to differentiate itself from the traditional model and provide a superior service to consumers…”

For more on Girotra’s discussion on risk management and how it can breed innovation, watch this clip from Big Think’s interview: