Future of Work is Work From Home! And its implications

“There are decades where nothing happens; and there are weeks where decades happens” - Vladimir Lenin.

For the last few weeks and months, beginning around March, India as well as the rest of the world, has been living through one such time, hit by a pandemic not seen by Humanity for a very long time. For the record, Spanish flu was the last widespread pandemic in 1918, a century ago.

The COVID 19 crisis hit the world like a battering ram. Blowing up economies, destroying jobs and shutting down entire countries. The future is so uncertain that world most highly regarded investor, Warren Buffet, is sitting pretty on his massive stock pile cash, instead of investing it. 

The People, world over want things to go back to as they were, Before Covid, go back to the “normal” times. Unfortunately we are not going back to normal anytime soon. We will though, at some point in the future be in the After Covid period and there will many changes on how we work, socialize, entertain in that future. While some changes will be disconcerting, all the changes will be disruptive.

Whenever we face disruptive change, we observe the most obvious impacts first, followed by not so obvious impact later. This post is about the “how we work” part likely to evolve. The obvious impacts that we see, is called the First Order Impacts, which I shall tackle first. Followed by, not so obvious secondary impacts, called the Second Order impacts. This is going to be a long post, so grab a cup of coffee!

In any disruptive and sudden change that impacts the world, some will be at an advantage as compared to others, because, they were in the right place at the right time. Undoubtedly one of the beneficiaries of the transition to Work from Home (WFH) is the tech sector. Lockdown and social distancing has led to rapid and overnight adaption of technology. People who have never heard of terms like zoom, goto meetings, webinars, before are zooming all day, attending zoom webinar, virtual get together and parties. 

Case to the point is Microsoft. While companies across the world are under tremendous stress, going bankrupt and laying off workers, Microsoft CEO Satya Nadella said “We saw 2 years of digital transformation in 2 months”

To understand the scale of the changes taken place, consider this:

Microsoft Teams now support meetings of all sizes, meetings that scale from 250 active participants, to live events for up to 100,000 attendees, to streaming broadcasts. It saw more than 200 million Microsoft Teams meeting participants in a single day, generating more than 4.1 billion meeting minutes. Teams now has more than 75 million daily active users.

Windows 10 has more than 1B monthly active devices, up 30% YoY. Office 365 has 258m Paid seats.

LinkedIn has 690m+ Professionals, learning on the app went up 50% MoM in March. LinkedIn live streaming went up 158% MoM.

Microsoft reported little to no impact due to Covid. Operating Cash Flow for the quarter: $17.5B (up 29% YoY) Free Cash Flow: $13.7B (up 25% YoY). That’s pricing power!

And it is just one tech major. Then there is Google, Amazon, and Facebook, each of which has many business units all of which helps you to work, play, socialize virtually. 

To underscore the change what has happened, and how rapidly the world has adapted to the new normal, video conference service provider Zoom saw its user’s grow from 10 mil to over 200 million in little fewer than 90 days. And currently it is valued more than the world’s 7 largest airlines put together.

You can argue that global companies have been quickly able to adapt to the changing business realities. What about the Indian organisations which operate at scale?

The USD 147 billion Indian software & Outsourcing Industry is one of the biggest employers in India. Just the top 6 companies, TCS, Infosys, Wipro, HCL, Tech Mahindra , Cognizant employs over 1.2 million people. In the month of March when the lockdown was announced, the work force of the just the top 6 companies - 1.2 Million, equivalent to the entire population of Mauritius, were shifted to Work From Home (WFH) in a matter of days and weeks. Wipro, for example, shifted 165,000 employees to WFH between March 15 and March 25th. While such a large shift obviously required permission and the support of the clients, the Government and had to meet stringent security standards, the Indian ITeS Industry managed a miracle of sorts, overseeing the world’s largest transition to work from Home. 

But can it be argued that once the crisis is over things will go back to normal? I argue that we will not go back to the “Normal” pre-crisis days, because of the not so obvious second order effects and cost benefit analysis.

Future of Work is Work From Home!

The WFH move has been so successful that many companies foresee this transition as the new normal. For example TCS sees 75% of its 450,000 strong workforce, permanently working from home by 2025, in a model called 25/25.

"We don't believe that we need more than 25% of our workforce at our facilities in order to be 100% productive," TCS's chief operating officer NG Subramaniam

Former CEO of Infosys expects work from home to continue even after normalcy resumes. HCL has announced similar intentions saying 50% of its employees will work from home even after the lockdown is lifted.

While it may be difficult to envisage such an eventuality, chances are it will happen. Simply because there are substantial benefits for companies which are successfully able to transition to WFH. One of the largest components of cost of running an ITeS company is the office rent, apart from salaries and equipment. If companies are able to save the office rent, which adds up to a tidy sum, it will. Just so long as they are able to manage the security concerns of their clients.

Such a move will obviously please the management, the investors and the employees of ITeS companies, but it has got severe and ominous implication for many other sectors of the economy and companies operating within those sectors. The unintended but the secondary impact of such moves on other sectors of the economy will be significant. 

Second Order Effects - Impact on Commercial real estate and the office space market.

The first impact of such a move will be felt by the commercial real estate companies and developers who build and maintain large corporate and IT parts across the major business hubs, like Bangalore, Hyderabad, Mumbai, Pune etc.  Most of the corporate and IT parks and support infrastructure built around these hubs are to cater to these very large ITeS companies. If these companies are going to shift to WFH, substantially, then the companies who own and manage these large chunks of commercial and office space will have face a challenge to keep these properties occupied and to manage the rental rates.

To appreciate the impact of such a large transition to WFH on the commercial office space market consider this, according to a report - The IT/ITeS sector accounted for 41% of transacted volume in H2 2019 as compared to 31% in the previous period of all commercial office space market. Hyderabad and Chennai accounted for 51% of the space absorbed by IT/ITeS sector companies during the recently concluded period.

The IT/ITeS sector accounted for 41% of transacted volume in H2 2019 as compared to 31% in the previous period of all commercial office space market.

That is to so say, when ITeS consumes 30% - 40% real estate office space market and some of the largest companies from the sector, like TCS have explicitly stated that their goal is to transition 75% of their staff to WFH by 2025. The result of such a strategy on the commercial real estate market will not be pretty and the impact on the commercial real estate market of the country will be not insignificant.

The impact will not alone be on the developers and the real estate companies, but also on their financiers, banks, REIT funds and trusts which invest in the commercial real estate sector.

Second Order Effects - Impact on Telecom players & Internet service providers.

Our modern digital lives will not be possible without internet data packs and ubiquitous coverage by mobile companies and internet service providers. The mobile companies are able provide such coverage putting up cell towers, also called base stations, across the length and breadth of the country. The cell towers transmit signals to one another and enable us, to connect across the country.

However these towers are expensive to put up and are expensive to run, so telecom companies optimize them. That it so to say, where they expect more traffic, they put up more of these towers and where they expect less traffic they put less. That is why you may observe, villages may have very few towers as compared to cities, because the traffic expected in the village will be much less as compared to the city and also because villages are less dense.

At this point a question may occur to you…How will WFH impact telecom?

Well just like telecom companies optimize their towers between cities and villages; they also do so within cities. Putting up more towers in the congested heavily trafficked areas of the city and putting up fewer towers in the residential areas of the city, where less traffic is expected. Now such an arrangement will work perfectly as long as people leave for their office, which are in the congested office districts, to do their work. But such an arrangement will breakdown when people start working from homes. 

The networks are optimized to handle heavy traffic in the office districts and light traffic from the residential districts. When large sections of the society starts working from home, the networks will have to handle large amount of traffic coming from everywhere except the commercial and office districts. The issue has covered very well by team at Ken in one of their stories.

The telecos will be faced with the challenging situation, where higher capacity dense networks built around commercial areas remain underutilized and while the lower capacity lower utilized networks built around residential areas become over utilized. Thus telecos and network operators will have to relook at their capacity utilization, building capacity where it is required and taking out capacity where it is not. As it is we have only 19 million on wire line broadband. The rebalancing exercise will come at a cost and the telcos and network operators will have to find ways to deal with their stressed balance sheet and stressed networks. 

Second Order Effects - Impact on the Cloud.

Another trend which shall see an accelerated pace of adoption will be the migration to the clouds. As more and more companies adapt to WFH, workers would need to access to the systems remotely, which will inevitably lead to migration of entire processes to the cloud. From managing basic systems like, payrolls, sales & invoices, accounts to more sophisticated systems and entire processes would migrate to clouds.

This means more business for cloud companies like Amazon & MS Azure. It is also good news for integrated system solutions providers, like TCS, Infosys, Wipro, which provide custom solutions to assist clients to migrate to the cloud.

In a study Industry body, NASSCOM predicted the cloud computing market set to grow at CAGR of 30% and hit USD 7.1 billion by 2020. Gartner has predicted the cloud computing market will grow at CAGR 25%. While business maybe hit due to the on-going COVID-19 crisis, it should more than pick up once we are past the crisis.

Second Order Effects - Impact on Start-ups.

The move to the cloud will also provide opportunities to start-ups to innovate around Software as a service (SAAS) products, pricing and business models, which larger players may not be able to respond in a nimble fashion.

Second Order Effects - Impact on e-Commerce.

As more people seek avoid exposure to crowds and shift to WFH due the experience of COVID, it is expected to push up online shopping. With high smart phone penetration and ubiquitous network coverage, eCommerce in the country is expected to grow to USD 200 billion by 2026. 

Second Order Effects - Impact on Electronic sales (laptop/cell phones/ Printers).

As more and more companies switch to WFH format, workers would need to be equipped with basic equipment in order to work, like desktops, laptops, smart phones, wireline or wireless internet connection of sufficient bandwidth. 

Second Order Effects - Impact on Fast-food, QSR, & Catering & segment.

Quick Service Restaurants (QSR) and catering companies feed millions of workers in the ITeS sector daily. These agencies serve all kinds of food, from fruit juice and tea/coffee, to variety of meals and help keep the ITeS sector ticking. However, with large companies planning to make WFH permanent, millions of workers are set to disappear from IT parks across the country, the catering companies will be challenged by the shrinking base of customers. Quick service restaurants situated around these IT Parks and the road side food vendors which grow up around these clusters may face challenging times. 

Second Order Effects - Impact on premium FMCG grooming products.

One of the unintended impacts of large scale switch to WFH will be the grooming products. After all if you are not expected to regularly go out, how much will you consume personal care and grooming products like hair gels, deos, make-up materials? Companies which derive a substantial portion of their sales derived from such products may see a hit on their bottom-line. How much will be the hit will depend on how much the ITeS work force contributes to the bottom line of such companies. 

Second Order Effects - Impact on ready to wear Formals and the Footwear market.

Another impact of such a large scale switch to WFH will be on the formal apparel industry. With everyday going to office cut out of the daily routine the need for large number of formal shirts, trousers and office dresses for women decreases considerably. 

Similar impact will be felt on the formal footwear market. With cut down on the number of visits required to the office, you wouldn’t need as many pairs of formal footwear. With less usage the existing ones will last long.

How much will be the hit will depend on how much the ITeS work force contributes to the bottom line of such companies. 

Second Order Effects - Impact on Private Transport players (office picks and drop services).

There may be considerable impact on the private transportation too. Many of these companies engage private transporters for pickup and drop service of their employees. There are also start-ups operating in this space, providing transportation solutions to large companies. Such companies need to tweak their business models, value propositions or altogether pivot to new models and segments.

Second Order Effects - Impact on Consumer Durables.

The transition of the large work force to WFH over the next few years, one can anticipate an uptick in the sales of consumer durables, particularly air conditioners and air coolers as young workers used to working in air-conditioned office suddenly may have to face the discomfort of working from their homes many of which may lack amenities like the air condition. These workers will look at the first opportunity to upgrade their homes to more comfortable temperatures, thereby fuelling the sales of air conditioners and coolers.

Conclusion

While the impact of WFH will mainly be seen in the ITeS segment and the service sector we can expect certain trends in the manufacturing sector also.

In the field of manufacturing one can expect accelerated adoption of technology, automation and robotics in the production process aided by IoT, AR/VR, 3D Printing, AI, Predictive machine analytics, and cloud computing.     

It is clear, if you have read this far, that stake holders (for eg REITs, Banks, Investment trusts in the case of real estate sector) and companies operating in the sectors which may be adversely affected, need to develop effective strategies to deal with the fall out of transition to WFH.

 In the coming days, the impact of COVID19 will challenge us and change us on how we work, socialize and entertain. While we may yearn to go back to the “Normal” days, chances are we have left the good old “Normal” days behind us and we will have new “Normal” days and routines overlaid by technology in the days ahead. 

Disclaimer: The views expressed are personal. Thanks for spending time reading it, share if you have liked it. Do comment, question, share your thoughts.