Work From Home: Here Comes the Downside.

Before the lockdowns of the previous two years, we operated in a market for people’s time where their physical presence was usually required in expensive cities and/or difficult-to-reach places. Career roles were largely limited to the people who could be physically present and they paid local-equilibrium wages. The lockdowns were a shock to this balance in two vital ways:

  1. Many employees learned they could do their work from home and much preferred the loss of commute, and some even switched locales.
  2. Companies learned that many jobs could indeed be performed remotely, and then quickly realized that remote could be anywhere in the world. 

Most Work(ing)-From-Home (WFH) related articles only talk about its benefits, with little thought to the trade-offs and consequences of this shift. In our M&A role, we talk to a lot of Buy- and Sell-Side companies and a common theme of late has been the escalating costs of acquiring/retaining talent and the resulting interest in expanding into new resource markets. 

This article tries to provide a more contextual view of the risks of a WFH approach. It is not saying that WFH is bad, but there are risks that will only become apparent as the economy tightens – and by then it will be too late for many previously well-compensated office workers. 

Workers Can Work from Anywhere…

Once the physical presence requirement was lifted (via the lockdowns), workers became free to work from anywhere and we have seen a distinct shift to people working from home, either in the same region they were previously residing, or somewhere else altogether (cheaper, sunnier). This is where we are today (July of 2022) with many employees drawing salaries negotiated on the assumption of a physical presence, enjoying their lack of commute or newfound low cost of living – perfectly safe in the knowledge that employers are struggling to find quality resources. 

Now that we are starting to see concerns about the economy and layoffs at countless startups and even well-known digital agencies such as Huge, The Many and R/GA1 the ability to continue to WFH at the previous salary levels is suddenly less assured. The security of knowing the company needed your skills will disappear as soon as growth trajectories flatten (let alone turns down).  

…But Employers Can Now Hire From Anywhere.

With the physical presence requirement lifted, employers also became free to hire from anywhere, we have seen a significant push to acquire/develop talent in Latin America where the education, time-zones, competitive drive and relative costs are all attractive to US employers. Even Canada is seen as an attractive market for qualified, talent at a lower cost than comparative US resources.

This expansion has been led by the need to find talent in a very tight labor market, so to date, employees working from home have felt little pushback regarding their salary levels.  However, if the economy continues to soften over the coming quarter, employers will begin to assess their cost structures and anyone WFH could well be forced out, or into a lower compensation level. 

The first stage of the WFH movement benefitted remote workers who were paid at legacy wages. However, the second stage will result in higher-cost workers being forced to fight off competition from locations that were previously thought to be impractical – and will benefit employers. 

If an individual can do their career role from home, so can everyone else.

If an individual’s career role can be done from home, they need to be doing something special, otherwise their skills are a commodity, competing in an open market where previous (US) wage-levels become almost impossible to retain. The ability to substantially differentiate oneself will be critical to retaining a comparatively high WFH wage. After all, once a high wage is lost, getting rehired at the same real wage rate will be next to impossible when re-competing on a global- or hemispherical- scale. 

Your presence in the office is a differentiator that the rest of the world can’t match.

Recently, Elon Musk caused a stir when he insisted that his Tesla management team be present in the office 40 hours a week (like the factory workers) resulting in considerable online push-back about forcing employees into the office.  Remote-only work for a Freemont, CA Tesla manager – one of the most coveted and nominally well-compensated roles in the world – is a naively short-term view.  It is not clear why any of them would risk opening their roles up to the wider world by arguing that anyone can do their job from anywhere. 

A couple of days later, Elon Musk followed up with an email to Tesla executives stating that Tesla will layoff 10% of their workforce due to a “super bad feeling” about the economy. Presumably a series of Tesla executives suddenly saw new-found value to being in the office.

Many companies are adopting hybrid models where a presence the office is required for a few days a week (or month). Rather than fight this policy, employees should embrace it as a wonderful compromise that returns the local-presence differentiator to their role, while providing an opportunity for growth and interaction.

I am more productive at home than in the office.

The above defense is frequently heard and while we rarely hear of anyone saying they’re less effective working from home, this increased productivity offers little protection against a global market for their core skills. If someone else costs 1/3 as much, local employees need to be ~3X as productive to be competitive. Absolute productivity is not as relevant in a global market, and being 10% more productive because of a foregone commute may not be enough to compete with someone in a lower-cost market (be it Bloomington or Bogotá). 

The other item that this rationalization infers (and is rarely mentioned) is that for it to be true, the individual gains little value from interacting with peers or mentors (let alone customers). This is surely only true for highly-skilled or experienced resources – less skilled employees are exactly the people who need to build some sort of differentiator to compete in an expanded market. Young market entrants who never get the nuanced transfer of knowledge from closely interacting with peers are going to be lagging their on-site peers. Those who never have the opportunity to pop into the office of a trusted colleague and ask if they “have a minute to bounce an idea around” will always be working with sub-optimal ideas. 

Not everyone is more productive WFH, it takes a certain self-discipline to perform the required tasks without letting oneself be constantly distracted. If WFH is a productivity loss, the risks of being replaced with a cheaper, more productive worker from somewhere else is high.  

To conclude.

Possibly, in a year or two’s time, office presence will return as a compelling component of “work,” but in the meantime, employees are going have to weigh the trade-offs between the convenience of WFH and the associated risks, while firms determine their own optimal composition of remote work.  

The post-pandemic market for skills is much different from the pre-pandemic market. The remote-work genie is truly out of the bottle, so resource markets and equilibrium wage rates are going to be unsettled for the coming months, if not years.


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