Continued disruptions from the pandemic: Strategic Leadership Crossroads - Part 3

This is the third in the "Strategic Leadership is at a Crossroads" series of four articles. The first article (Strategic leadership is at a crossroads) introduced the series. The second article (The end of easy ways to finance operations) discussed the changed landscape for investment and spending decisions. This article addresses continued disruptions from the pandemic. The fourth article (Strategic Leadership Crossroads Part 4 -- Where we stand today) addresses what leadership need to do differently to adapt.

Article summary:

The supply chain, operations, talent pipeline, and in-person work disruptions the pandemic introduced have not gone away. Global supply chains were already reshaping due to geo-political tensions between China and the United States; the pandemic accelerated that trend while creating greater urgency for redundancy. The operational impacts included rapid shifts in product and services offerings, followed by recovery and evolution in consumer preferences, which are still playing out. The impacts on the talent pipeline – across industries – have been much more hidden than the supply chain disruptions, yet they are just as pervasive. And the new normal for balancing in-person, hybrid and remote work won’t be fully resolved for quite some time, which means adjustments to real estate strategies.

To get through the most critical times of the pandemic, some big issues had to be addressed quickly in 2020. Which products could be provided reliably in the face of disrupted supply chains? What were customers willing to purchase? And, what were employees willing to do?

After the lockdowns ended and the ability to easily work in person returned, it seemed like just a matter of letting time pass: the new normal would be reached fairly quickly. However, we are not there yet because residual impacts from the pandemic today still disrupt strategic decision making around operations, consumer preferences, and the tradeoffs among in-person, hybrid and remote work. Each is a challenge on its own, and there are interdependencies among all three.

Continued disruptions to operations

The global supply chain trends detailed in the second article (The end of easy ways to finance operations) were ongoing before the pandemic happened, and will continue for many years into the future. The shock of the pandemic introduced a different, though related set of operational and supply chain issues that had major business impacts immediately in 2020 and 2021 – which are still being worked out five years later.

To keep operations afloat in the initial stage of the pandemic, companies reduced, sometimes drastically, the number of options available to their customers. They did this to preserve core products and services that accounted for the largest volume and/or most profitable sales – and to focus operations and supply chain on the inputs and processes that needed to be shored up during a period of massive supply chain disruptions.

Since that initial stage of the pandemic, companies have steadily expanded their offerings, growing the number of SKUs available to their customers. Yet there continues to be uncertainty in terms of what people are willing to buy, and what can be reliable delivered, given continued evolution in consumer preferences and global supply chain reconfigurations.

Annual planning and budgeting operate best in stable macroenvironments, where year-over-year comparisons enable effective growth planning, goal setting, and accountability. Yet the rapid changes and convulsions in the consumer space, inflation, and interest rates have rendered a lot year-over-year comparisons much less relevant than they used to be, pre-pandemic. In many cases, we still do not know the optimal mix of products and services to provide your customers, nor how to highly accurately benchmark performance year-over-year. Which means that senior leaders need to have the agility to do dynamic budgeting throughout the year, and not rely exclusively on the predictable-yet-inflexible annual budgeting cycle.

Continued impacts on consumer preferences

The story of what people wanted to buy where and when has changed quite dramatically, multiple times, since the beginning of the pandemic in early 2020.

When the shutdowns happened and many people moved from in person to remote work, online commerce exploded. The increase happened against a backdrop of steadily increasing online sales, so many companies were already inclined to expand their offerings. The onset of the pandemic super charged those plans.

Even after the shutdowns were over, consumer demand for online commerce continued at elevated levels into 2023. But the gradual return of in-person commerce slowed, and in many cases reversed the growth of purchasing online for many businesses.

Today, five years after the onset of the pandemic, things have not fully settled down:

• Shopping patterns continue to evolve: with more people working from home than before the pandemic, in both remote and hybrid arrangements, most downtown shopping districts have not recovered their previous levels of activity.
• At the same time, demand for commercial office space continues to be depressed, which feeds into the slowly unfolding commercial property meltdown. So long as interest rates continue to be high (The end of easy ways to finance operations), the carnage in the commercial property market is certain to continue.

Taken together, these two challenges mean many more years of adjustment in the prices and occupancy of commercial buildings. All of which feeds into the uncertainty surrounding the cost of real estate, and how leaders price the tradeoffs of maintaining or cutting back on their office footprint; and this further impedes leaders’ ability to do once-per-year annual planning and budgeting. At the same time, a lot is still being worked out in terms of the optimal amount of in-person versus hybrid and remote work (see below). All of which means ongoing disruptions to traditional real estate strategy and investment decisions.

Continued in-person work and talent supply impacts

We are still very far away from any equilibrium (new normal) for how many days per week knowledge workers are expected to be in the office.

The prevailing rules pre-pandemic included a strong bias towards in-person work, even as evidence mounted year after year, that much more work could be done hybrid or fully remote. This meant that leadership was the sole barrier preventing exploring those options more aggressively. Once the pandemic pushed people outside the office for extended periods, leadership’s bias towards only doing work in person was shown to be more of a preference than necessity.

Despite many proclamations designed to get people back in the office more regularly, we are still a long way away from a new equilibrium for how many days in the office people will be working. It’s virtually certain that most office-based work will never be going back to five days a week in person, despite leadership’s protests to the contrary. Which has continuing impacts on how people navigate their team and cross-functional work, and the ability to launch new teams effectively (see the Sloan Management Review article Figuring out social capital is critical for the future of hybrid work).

An important related issue has received very little attention. Large swaths of frontline workers in manufacturing, health care, transportation, warehousing, retail, hospitality and other business segments have no option for doing any work remotely or hybrid. Yet their supervisors do not face the same constraints: while much of their work is best done in person, large amounts can be done away from the physical sites where their teams have to stay tethered all day long.

Companies always have a mix of internal promotes and external hires for those supervisors; with the external hires coming predominantly from the ranks of college-educated workers. In today’s post-pandemic labor market, the college-educated have many options for doing remote or hybrid work in other organizations, which impacts their expectations and demands for doing hybrid work.

For the indefinite future, people whose career options include more flexible hybrid work are going to be harder to keep in a job that requires a lot of in person work – unless the work is really interesting, they like the team, they like their boss, etc. So these supervisors of in-person staff now have more power than ever before; and that exacerbates longstanding inequities in who gets to work hybrid and who does not.

Challenges with office design and real estate footprint decisions

The disruption to the pre-pandemic status quo of in-person work has also reignited a longstanding challenge organizations face on the real estate front: office design. If people aren’t going to be in the office five days/week, do we really know the right way to design office space?

When the number of hybrid employees was small pre-pandemic, the answer for those without status in the hierarchy was hoteling or hot desk space. But is that the right answer if 80-90% of your people are not in the office 5 days/week? Much of the innovation in office space that occurred in recent decades was well meaning but ultimately not particularly effective at meeting the needs of the people who worked in it.

Moreover, a lot of the reduction in office footprints from people working hybrid assumed that schedules would be staggered: if you have a team of sales people working partly in the office and partly off site, for example, it was a reasonable strategy to assume not everyone would be in the office at the same time; so the number of available hot desks/hoteling spaces could be set to a fraction of the total headcount. And if the entire team came in and needed to meet, they could reserve a conference room.

In contrast with the hybrid sales team pre-pandemic, the real estate strategy has to evolve when the vast majority of your people work hybrid. The ideal is to plan on regular times when everyone or most people come into the office at the same time. In that scenario, historical formulas used to determine the optimal amount of office space can become outdated very quickly.

In the decades leading up to the pandemic, dedicated offices were removed for the vast majority of people and replaced by open office plans or cubicles – which did nothing to create the kinds of quiet and private space most people need to work effectively. The result was people being overly distracted while working, or having to resort to extreme measures such as wearing headphones to drown out surrounding noise. And the lack of private office space and limited meeting rooms led to excess demand for quiet meeting spaces.

Now, post-pandemic, if everyone comes in at the same time yet most people do not have dedicated office space, how can all teams find quiet meeting spaces at the same time? Solving that means most likely radically reconfiguring the existing space, and possibly also maintaining a much larger real estate footprint than historical formulas would suggest.

The failures to unlock employee productivity while downsizing real estate footprints in recent decades do not inspire confidence that the impending challenges of greatly expanded hybrid work will be dealt with any better. Yet meeting those challenges effectively in a way that works for both the staff and the bottom line is imperative to maintain competitive advantage.

Article #4: Where we stand today: Addresses what leadership need to do differently to adapt (Strategic Leadership Crossroads Part 4 -- Where we stand today)