Disruption as a reputation risk

“Disruption” turned out to be more than a buzzword meant to be forgotten and replaced with “the new shiny object”. For over a decade so called “disruptors” – innovative technology companies – are radically transforming their industries. The way they change the game is often controversial. Communications experts from Enterie, the network of tech PR agencies, present reputation challenges in the age of digital economy.

Text: Andrzej Jędrzejczak, CNO at Enterie; Photo by Hans Vivek on Unsplash

Technology companies commonly called disruptors are probably the most innovative ventures of modern economy. They introduce new business models, transform traditional sale channels, often ruthlessly cutting out the middlemen. They also develop new products, services and niches, which may create new stars and doom old players.

They evoke a lot of interest and emotions. Disruptors are admired, but also easily become a subject of criticism, which may lead to a serious reputation crisis. Here are some common issues that must be considered and managed by disruptive companies.

Protection of personal data

Most disruptors are businesses providing digital services, gathering and processing user data. Personal data is mainly used to provide services, but also for marketing purposes as well as profiling clients to propose them better-suited offerings. It leads to several common issues, such as:

  • storage of personal data and possible leakage, which may harm users privacy or cause financial losses
  • usage of personal data for profiling clients and other aggressive marketing activities, without clients’ authorisation or awareness
  • third parties access to collected data, from selling it for marketing purposes, to sharing sensitive information about users with administration and authorities of undemocratic regimes

Leakage and hacks happen even to very privacy-sensitive services, such as dating apps.  Ashly Madison case is probably the most famous, as the service was dedicated to people looking for extramarital affairs. In effect thousands of “cheaters” were exposed for public shaming. More lately there was also a serious (and newsworthy) leak at Grindr. Media also broadly took up a story of Donald Daters, a special dating app for Donald Trump supporters (it actually exists!). Interesting (and embarrassing) thing – the leakage took place on the day of the app’s launch.

The real scandal concerning client/ user profiling has broken out when it was publicly revealed how Cambridge Analytica had harvested Facebook users data and used it for a manipulative political campaign. It has caused the biggest and most serious reputational crisis in Facebook’s history, undermining user and public trust, making Mark Zuckerberg testify before US Congress and European Parliament.

Speaking of personal data privacy issues, it is impossible not to mention PRISM. A huge program run by US National Security Agency was processing loads and loads of private data, obtained from such internet giants as Yahoo, AOL, Skype or Google in order to detect potential security threats. The program was legal, but secret. Over 5 years after Edward Snowden has blown the whistle, the issue of cooperation of tech companies with administration and law enforcement agencies is still unclear and problematic.

The lack of regulations

New technologies, and products and services based on them, most of the time get ahead of law. It happens in case of services which are totally new, opening new industry or niche, but also in case of those already known, but provided in an innovative way.

The first case can be illustrated with the example of Lime, a US fast-growing startup providing electric scooter rental. As an alternative urban mean of transportation, they were not listed in any traffic or road safety regulations. It is not clear where it is allowed to ride it – on the street, pavement or bicycle lanes. It is also not clear if and where it can be parked, which irritates pedestrians. As scooters can ride as fast as 25 km/h, it raises safety issues.

Respective regulations are just being developed, both in US and Europe. It can largely decide on Lime’s business success. In several cities public systems of urban scooters are also considered, so providers will compete for licences and contracts. Meanwhile, they try to build their reputation running charity projects.

The second case involves market challengers such as Uber. Its services (taxi rides) have a history almost as long as the history of motorization. But the way they provide it – based on the app and the network of “private” cars and drivers – is completely new, and brings a wide range of regulatory and reputational issues. The nature of the business model, but also the cocky/arrogant attitude and some communication mistakes, lead to massive, even violent protests (as in France) and even banning Uber from the market (as in Denmark).

The lack of oversight

Unlike their traditional competitors who have to fulfill numerous conditions and obligations, disruptive companies usually avoid a regulatory supervision. Even if their services are known and activity is regulated, disruptors are usually not listed as subjects of specific laws. The lack of public supervision itself brings up following issues:

  • Protection of customers is an important function of market regulations. Companies who refuse to submit to supervision can be suspected of violating customers rights and interest.
  • Fulfilling regulatory obligations usually means extra duties and spendings. It generates costs. So savings from not being regulated can be seen as unfair competition.

Apart from ridesharing platforms (such as Uber, but also French Blablacar) you can find many interesting examples in the fintech sector. One of them is Wonga (and other similar businesses), offering loans online. Mostly such loans are short term, with high interests, targetting borrowers already rejected by a normal, regulated banks. The bad reputation of such institutions, together with bankruptcies of their clients who couldn’t pay their loans, has created a need of introducing usury laws.

Online payment solutions providers had to face communications challenges as well. Such companies as German Sofort (acquired by Klarna) made online payments extremely easy. However, to do so, they required clients to provide their e-banking credentials. Is it safe to give your bank account password to a third party operator?

Payment disruptors had to earn their credibility, and traditional banks were surely not helping. Smart fintech companies were not only stealing their customers, but also using their infrastructure. And still banks remain responsible for safety of clients accounts and money. In the end, digital access to bank accounts was regulated with EC Directive PSD2.

Shared issues of sharing economy

Some year ago a Polish e-commerce platform Allegro (owned by e-commerce gigant Naspers) had to face a wave of criticism for allowing to sell nazi artifacts. Its representatives claimed, that it is a transaction between two third parties, and they have no ground not to allow it. When anti-fascist activists have produces a graphic suggesting nazi inclinations of Allegro, the company has responded with a lawsuit. The court has finally dismissed the accusation, and the case was broadly reported by the media. This crisis has lead to changes in terms and conditions of the platform.

Reputation risks seems to be an immanent feature of most sharing economy models. The exchange of goods or services, which takes place within sharing economy platforms, is made by private users. The platform is just a marketplace, and infrastructure designed to match people with different assets. Sellers and buyers, travellers and hosts, lenders and borrowers, drivers and commuters. There is a lot of risks associated with these exchanges, and they are mostly beyond the control of the platform operator.

The operators are mitigating them using different methods of authorization, references, reviews and scoring. Most of the time they are very successful. Still, they don’t want to take the full responsibility for what they don’t fully control. Even if it is understandable for users, negative incidents can have a significant impact on reputation and credibility of the respective services.

In case of sharing economy there is also a sensitive issue of avoiding taxation. Operators of platforms usually pay taxes only from its profits, not from the value of transactions made. Shall a person who sells old furniture on eBay pay tax? What about a driver giving a (paid) lift to another user of a ridesharing platform? Should there be a tax from profits from renting a private apartment (even if only a couch)?

Disrupting too much

Typology of risks related with disruptive business models should be completed with these specific for respective industries. Often not predicted but causing significant side effects.

Alternative means of transportation can serve as a good example. Such as electro scooters, which disrupt not only market of transport services, but also city traffic itself. Dockless bike-share systems have also caused unusual problems. Increasing number of units available in the city was the strategy to win the market. Providers – mostly Chinese companies such as OfoMobikeBluegogo – literally flooded the streets with loads of bikes, often broken and abandoned, obstructing the pavements. No one bothered to collect them, as costs of repair were relatively high comparing with cheap, chinese-made equipment.

Sad pictures of bike graveyards spread around the internet, being a shocking warning for new locations. Ofo, the leader of the market, had to change its expansion plans and gave up European markets. At least for now.

Another example of industry-specific problems would be flat-sharing services, such as Airbnb, that disrupt more than just the hotel industry. The possibility of short term apartment rental has caused increased rents in central city districts. This way flat-sharing is contributing to gentrification, and its new variant – touristification. Residents are moving out to more affordable, peripheral districts and city centres are turning into a tourist theme park.

No wonder that many cities, such as Paris, Dublin or Barcelona, try to constrain the business model, which is disrupting city management. On the top of that, the French hotel association is suing flat-sharing services for unfair competition.

Killing – the hardest charges!

For the phrase “Millenials are killing…” Google browser returns over 215 000 hits. It also suggests related, often searched phrases, listing possible victims – from “beer” and “napkins”, through “applebee’s” and “mayo” to “capitalism”. But it is not millenials who is responsible for these crimes. It is innovative companies using new technologies to create disrupting business models. Therefore we cannot forget about one more reputation risk: murder charges.

  • Napster was accused of killing records industry
  • Airbnb – of killing hotel industry
  • Uder – taxis
  • Flixbus – bus services
  • Sofort, Worldremit, Wonga – banking
  • Duolingo and Babel – language schools
  • Netflix – cable TV

Even if these accusations are exaggerated, issues outlined above can become serious reputation risks and have serious consequences for an innovative business. Therefore it should be carefully managed and included in communications strategy of every disruptor.

The article has been oryginally published in Polish tech magazine Antyweb

Andrzej Jędrzejczak
Andrzej Jędrzejczak

Let’s keep in touch!

Sign up to our newsletter and be first to learn about our network news.

    This website stores cookies on your computer. Privacy policy