Virtual reality

The healthcare crisis may jolt us out of conventional practices that are no longer fit for purpose. Remnants of the industrial age, such as nine-to-five close monitoring of employees, a method originally used in factories to measure productivity, are not as relevant in today’s knowledge economy. The kind of deep thinking required for creative problem solving is often better suited to environments outside the office. Then again, Zoom and Teams calls cannot replace face-to-face meetings when it comes to building relationships with teams or clients.

It took the pandemic for some executives to realise “different environments are appropriate for different kinds of work”, says Jonathan Bayfield, head of UK real estate research at Aviva Investors. Old habits are being severely tested and this is forcing companies to re-examine how work works.

Other changes may appear temporary but nevertheless leave lasting scars on the labour market. In the first half of 2020, unemployment spiked across the world, hitting workers at the lower socioeconomic scale and those in developing economies particularly hard. While many of these job losses may be recovered in time, the longer-term challenges of inequality remain.

As a result, training a workforce to continuously adapt to the demands of the global economy is becoming more urgent. According to the McKinsey Global Institute: “Not only has COVID-19 thrown millions of individuals out of work, but the mix of jobs that emerge from this crisis is likely different than those that were lost.”³

Just as national healthcare systems were not prepared for the pandemic, many companies struggled to accommodate their employees as governments locked down societies. Remote working, often reserved for a small fraction of employees before COVID-19, ramped up in short order to cater for entire workforces.

“We were pushed into it rapidly, randomly, with little preparation and without the kinds of skills required to manage from afar,” says Marte Borhaug, global head of sustainable outcomes at Aviva Investors.

Borhaug says that in 2019, it took about six months to gradually transition one person in her team to work remotely full-time. Preparations included agreeing expectations around virtual collaboration and office presence when required for client meetings or presenting at conferences abroad, but also thinking about how to maintain communication and support across the team. “When you look at COVID-19, it was the opposite,” she adds. “For many companies, it was unmanaged and abrupt.”

Most companies are wrestling with questions around how long “the new normal” may last, and what effects it might have on workforce engagement and management.

“Everyone has a view because this impacts everyone,” says Francois de Bruin, head of listed real estate and portfolio manager of a sustainable income and growth strategy at Aviva Investors. “Where will we go from here? It’s not clear. But from my perspective, I feel the longer lockdown continues, the shorter the odds are that the future will be more online than in the office.”

Chris Shipley, co-author of The Adaptation Advantage: Let Go, Learn Fast, and Thrive in the Future of Work, believes “without a doubt that nothing is ever going back to the way it was in the past”. Despite the initial rollout of COVID-19 vaccines in some countries, challenges remain around manufacturing and distribution. There are also questions as to how effective the vaccine will be for certain groups, and how long immunity will last.⁴

“COVID-19 will be contained and understood, and there will be therapies and vaccines, and it can’t happen soon enough,” says Shipley. “But there will be the next novel coronavirus, and the next one, and the next one. The time between new virus outbreaks with the potential to become a pandemic is getting shorter and shorter. It would be naïve for us to think that we’ll knock down COVID-19 and we’re done here. We are now in a new place.”

While some are referring to ‘the new normal’, Shipley encourages companies to manage ‘the now normal’. Implicit in this is a realisation that the current environment is a moving target. Firms will need to adjust as circumstances change rather than wait for uncertainties to resolve themselves, adds Shipley, who has advised hundreds of early-stage tech companies on business strategies.

WordPress founder Matt Mullenweg advocates a “distributed working” model, in five levels. Level one is when a business makes no deliberate investments in remote working, though some employees may be able to function a day or two from home in an emergency. Most companies currently operate on level two, in which they “recreate what they were doing in the office but in a ‘remote’ setting,” Mullenweg wrote in a blog post.⁵

Level three involves investing in technology specifically for remote working, including robust cybersecurity systems. The COVID-19 crisis, for example, has highlighted security weaknesses in the technology infrastructure at many companies due to disruptions from remote working, job changes and cost cutting. The conventional ‘perimeter security’ approach of guarding entries and exits to enterprise systems are increasingly outdated, because threats can come from within as well as outside the organisation. A focus on a ‘zero trust security model’ should help ensure a more secure remote working environment for all.

When teams can collaborate in a truly asynchronous way, that’s level four. Mullenweg points to the ability to tap into a wider workforce geographically, with individuals contributing from different time zones around the clock on projects. At level five, productivity should go further than what can be accomplished in-person in traditional offices.

The impact of working remotely on productivity is not yet clear, but early evidence suggests an improvement under certain conditions. According to McKinsey research, businesses that adopt innovative processes to expand remote working may be able to reduce costs, boost efficiency and access a larger talent pool due to fewer geographical constraints. In a survey of more than 300 companies in the US, each with more than 2,000 full-time employees, McKinsey found 41 per cent of respondents said they are more productive than they had been before lockdown, while 28 per cent said they are as productive.⁶

“Any company that can enable their people to be fully effective in a distributed fashion can and should do it far beyond this current crisis,” Mullenweg adds.

Not all work can be done remotely, however. According to the World Economic Forum’s The Future of Jobs Report 2020, about 50 per cent of employees in developed markets such as the US and Switzerland cannot fully work at home. In emerging markets such as Brazil, Mexico and Bangladesh, the proportion is even higher at 70 per cent or more⁷ (see Figure 1).

The accommodation and food services industry has been perhaps the hardest hit, with about 47 per cent of workers unable to work from home, and therefore at higher risk of unemployment during lockdowns, according to the WEF report. Others in a similar predicament include workers in education, construction, and wholesale and retail (see Figure 2). Within these sectors, small and medium-sized businesses have generally suffered disproportionately: they are more likely to face bankruptcy, staff redundancies and higher costs relative to benefits when they are allowed to reopen.

Markus Hällgren, management professor at Umeå University Sweden, is currently researching how teams work together in a crisis.

“It’s easy to think most organisations will benefit from going more digital, but the reality is that a lot of work has to remain manual,” he says. “Digitisation is not the solution to everything. The police force is just one example: they can’t catch bad guys sitting at home.”

Figure 1: Share of workers unable to work from home, by per capita GDP (per cent)

At the other end of the spectrum, 74 per cent of workers in information technology and insurance have been able to work remotely. But even for those who can telework, the results may be suboptimal.

Kevin Gaydos, co-head of credit research at Aviva Investors, expects a majority of the workforce to eventually return to the operational environment that existed prior to the coronavirus outbreak. Currently, managers may have found that employees can work from home and still be productive, he adds. As the coronavirus puts more financial pressure on businesses, many may decide to cut costs by having a larger portion of the staff work from home, enabling them to reduce their office space.

However, the role of the workplace as a hub to “build cultures, connect through interpersonal interactions and enable collaboration – those types of things” will remain centre stage, adds Gaydos. “As we come out of this, maybe three or five years from now, I think we’ll start to build back the office structure in such a way that won’t really look that much different from where we were, with some marginal changes.”

Figure 2: Share of workers unable to work from home and at risk of unemployment, by sector (per cent)

At stake is whether any gains in productivity can be maintained from a more flexible working mix. Stanford University Professor Nicholas Bloom argues that while remote working can be beneficial, COVID-19 forced people to work from home who might not have been prepared for it, introducing four new variables: children, space, privacy and choice.

“We are home working alongside our kids, in unsuitable spaces, with no choice and no in-office days,” according to Bloom, a senior fellow at the Stanford Institute for Economic Policy Research (SIEPR). “This will create a productivity disaster for firms.”⁸

Establishing new client or supplier relationships, for example, may be more difficult in a remote working environment.

“We cannot judge whether we want to work with a certain contractor on a £120 million construction project without face-to-face negotiations,” says Neal Pickering, real estate development director at Aviva Investors. “You need to see the whites of their eyes. There is no substitute for gauging the potential of a relationship than the interaction of a live meeting.”

Bayfield believes professional networking also suffers in a remote working scenario. “I had a graduate and an intern working with me over the summer. In both instances, we had to put in a lot more time to build those relationships than we would have done in the office. Onboarding and training are just two examples of something that may be more effective in the office. Another is in-person collaboration, which is crucial for new ideas,” he says.

Innovation – one of the key ingredients of success for companies in the knowledge economy – may also suffer, reducing productivity. Spontaneous interactions that happen when employees come together to share ideas, reflect on them and discuss new ideas, are difficult to replicate online.

Take cities. When people work in close proximity, they tend to innovate and create more wealth than their fair share, argues Geoffrey West in his book Scale: The Universal Laws of Life and Death in Organisms, Cities and Companies. Similar to the fundamental scaling laws around metabolic efficiencies of organisms (a blue whale, for instance, weighs about 100 million times more than a shrew, yet its heart rate is only about a hundred times slower), the larger the city, the greater the efficiency, including innovation. Doubling the size of a city, for example, results in about a 15 per cent increase in patents per capita.⁹

The structure of a city’s network of relationships, according to West, could be compared to the behaviour of the networks within the body of an organism. In a city, these networks contain more people, more diversity and therefore more different perspectives from which to draw new ideas, leading to higher economic growth.¹⁰

This supports Bloom’s research, which indicates new ideas already require an ever-increasing amount of resources. In a 2020 paper,¹¹ he argued an increasing level of research is required to generate a constant level of growth over time. This is true of both the economy as a whole and more narrow categories within it (see Figure 3).

“This analysis can be applied across different firms, goods, or industries,” he wrote. “Research productivity is falling sharply everywhere we look. Taking the US aggregate number as representative, research productivity falls in half every 13 years: ideas are getting harder and harder to find.” That figure may fall even further in a pandemic if in-person collaboration is severely limited.

Figure 3: Aggregate growth versus research efforts

Without the advantages of scale that in-person collaboration in urban offices offer, the problem is likely to worsen. In a 2011 Ted Talk, West neatly summed up the challenge: “You have to innovate faster and faster and faster. So, the image is that we’re not only on a treadmill that’s going faster, but we have to change the treadmill faster and faster.”¹²

COVID-19 has disrupted every corner of the labour market. But it has also provided a glimpse into new possibilities to change West’s ‘treadmill’.

Giles Parkinson, global equity portfolio manager at Aviva Investors, foresees a hybrid model that combines more efficient use of technology alongside deliberate and thoughtful in-person collaboration.

At least within the sectors in which people can work from home, teams may decide to meet in the office for two or three days a week rather than the conventional practice of commuting into the office five days a week. If that is not possible, they may decide to come together for a week every quarter or a few weeks every year depending on team preferences and the requirements of individual projects. The point is: individuals, teams and companies would have more autonomy over the way they choose to work.

“Online may work better in certain cases for certain tasks, but it’s exceptionally difficult to operate exclusively in a virtual world,” says Parkinson. “We’re flesh and blood people, after all, and it’s part of our DNA to socialise, to collaborate, to build a culture.”

Louise Piffaut, ESG analyst at Aviva Investors, adds a company’s culture is the glue that holds it together, keeping staff focused and motivated. A strong culture is more important as more full-time employees telework, and companies become increasingly dependent on a contingent workforce. Culture can provide a sense of corporate purpose.

“We have been used to having everyone come into work at the same time and sharing the same office space. Now that we are working from home, it is very different,” she says. “There is a risk that some employees may feel isolated unless there is good team communication.”

Online meetings can be stilted. When combined with what de Bruin described as a bifurcated environment in which some team members are in the office while others are working from home, communication can become even more challenging.

“The last thing we want is a ten-member team in which seven of those people are feeling as if they are not part of the conversation,” he says. “That could be a tilting factor encouraging everyone on the team to get back to the office, whether or not it’s the most efficient thing to do.”

According to a Gallup estimate, disengaged employees already cost the US economy between $483 billion to $605 billion each year in lost productivity prior to COVID-19.¹³ A lack of what Hällgren of Umea University calls “in-between” activities, such as casual coffees, after-work drinks and other non-work events may cause employee disengagement to rise even further.

“If we are working from home, we tend to focus on the work we have to do. We forget that we still need to develop relationships with our colleagues,” says Hällgren, who has also researched the organisational dynamics of Mount Everest expeditions. “These connections are extremely important to understand each other and to get along. When they break down, it is likely to create conflict, causing employees to disengage.”

Remote working may also take its toll on trust. The use of software such as Time Doctor, ActivTrak, Teramind and StaffCop to monitor employees has been rising globally since the coronavirus outbreak. Although these platforms vary, monitoring software tends to rely on tools such as screenshots, always-on video services and login times to gauge employee productivity.¹⁴

Some of these practices, which were already happening before the pandemic, are now being scrutinised under privacy rights laws. In October 2020, for example, Hamburg’s data protection commissioner fined clothing retailer H&M €35 million for illegally spying on its employees in Germany between 2014 and 2019.¹⁵ Amazon has also been criticised by UK and European trade unions for collecting sensitive information about its workforce during the pandemic.¹⁶

“It all comes back to trust,” Piffaut says. “I don’t think companies will be able to control everyone. And, viewed from a different perspective, companies may find that remote working can allow for more tangible results.”

Hällgren puts it this way: “We can’t see what people are doing – and we shouldn’t if they are working from home – but this creates a need for leaders to increase command or control. Yet this is not necessarily the most efficient thing to do during a crisis.”

In his analysis of how the Swedish police operated during COVID-19, Hällgren found frontline officers used to a hierarchical culture initially turned to their leaders for all decisions. But little by little, decision-making became decentralised – more fast-paced, adaptive to situations and, ultimately, more effective. Teams became more motivated and the level of trust increased. Trust is one of the key ingredients behind a decentralised leadership model in “high reliability organisations”, where responsibility is clearly defined but decisions are delegated down the chain of command to create engagement at lower levels, he explains.

“With COVID, there is this great opportunity to reconsider the corporate structure,” he says. “A bureaucratic, top-down approach is effective for incremental changes, but not for radical innovation.”

Borhaug says rather than thinking about the future of the workplace as an ‘either/or’ question on whether to work from home or in the office, companies should aim to be fully flexible, giving people the technological tools, resources and empowerment to be in charge of how they can work most efficiently. “If they do that, companies might be surprised that productivity may improve,” she adds.

The role of machines in the workforce doesn’t stop at spyware: they are encroaching into every aspect of employment. Businesses are likely to accelerate the pace of job automation and augmentation during the health crisis – at a time when between 80 and 90 million individuals, or roughly 15 per cent of the workforce across 35 countries, may be falling into poverty as a result of losing their livelihoods, according to International Monetary Fund estimates.¹⁷

As companies automate at greater speed, many of these jobs will not return. People in the lowest social strata with fewer educational opportunities have traditionally been disproportionately affected, further widening the inequality gap. However, automation and augmentation are also reaching higher into the corporate hierarchy.

Companies are increasingly laying the foundations for algorithmic management –the use of smart algorithms largely based on artificial intelligence, data analysis and machine learning to perform managerial tasks. Once the purview of the gig economy, algorithmic management is growing in almost all sectors, including banking, healthcare and legal services.

Diana Wu David, author of Future Proof: Reinventing Work in an Age of Acceleration, expects algorithmic management will increasingly be used to measure productivity, screen potential job candidates and make strategic decisions on where to deploy human capital.

“AI can provide a lot more information about who and what is available within and outside your firm to do a particular project, and do so in perhaps a more objective way,” she says. “I expect management decisions that are at least partly based on AI to become more prevalent in future.”

By 2025, the quantum of work hours performed by machines will match those by human beings, the WEF report estimates. However, humans are likely to retain their comparative advantage versus machines in roles including advice, communications and management (see Figure 4).

Figure 4: Share of tasks performed by humans versus machines, 2020 and 2025 (expected)

The digitisation of the workforce has implications for career paths, which may no longer fit neatly into traditional norms, says David, who is also adjunct professor at Columbia Business School EMBA Global Asia.

“Historically, there has been a linear progression of going to school, getting a job and progressing through the hierarchy of the corporate ladder, getting more and more pay and responsibilities as you go. And then you retire,” she says. “This old paradigm – and so much of this is a legacy of industrial production – is no longer feasible for people, nor is it feasible for companies or governments, which now have huge pension deficits.”

Workers will need to adopt a lifelong learning approach, supported by both governments and employers. “Learning is the new company loyalty programme,” David says. Companies that are better at helping people identify their skills and filling in the gaps based on the companies’ and employees’ needs will have comparative advantages.

Shipley points to corporate universities at the likes of Apple, Pixar and Airbnb, creating an internal learning environment because companies recognise the need to constantly reskill. Google is taking this a step further: it not only provides its own staff with further education; it is also working with US community colleges to provide certificates in essential tech skills.¹⁸

“We’ve been given an incredible gift to rethink everything,” Shipley says. For a start, she believes companies should stop treating workers like a balance sheet expense item and more like assets within an investment portfolio. Only when human capital can be viewed in those terms will employers and employees begin to work together to futureproof that portfolio.

Companies that can reimagine the way teams can work together more efficiently are going to be more likely to outperform their peers in future, Parkinson believes. Fundamentally, they’ll come out of this crisis as stronger businesses in a more competitive position, because they have adapted to the circumstances to become more resilient.

“What we’re seeing in public markets – both in listed properties but also within multi-asset strategies, is that those companies enabling new ways for businesses to adapt their working practices are trading at significant premiums,” adds de Bruin.

Perhaps benefitting the most from this trend are technology-related stocks helping to digitise the workforce, and they may continue to outperform for longer, adds Paul Parascandalo, multi-asset fund manager at Aviva Investors. While Zoom has been the poster child among software companies that connect employees remotely, others such as Microsoft have also shone. The company’s CEO Nadella, for example, announced in an October earnings call that usage on its Teams platform increased by more than 50 percent in the prior six months, totalling 115 million daily active users.¹⁹

Those that can innovate faster to progress augmented and virtual reality platforms may also benefit. Mixed-reality headsets, for example, are being trialled by London-based traders at UBS to create a virtual trading floor.²⁰ Other tools can recreate a virtual office, enabling shared backgrounds so that colleagues feel as if they’re in the same room, restoring the focus on facial expressions, body language and other nonverbal cues. Artificial intelligence is being deployed to help employees do everything from eliminate background noise during conference calls to manage their stress levels while working online.

According to Deloitte, at least 100 digital remote collaboration products were released in the first eight months of 2020.²¹ Such tech collaboration tools have implications beyond the office, for sectors such as medicine, education and even entertainment.

“There’s a clear reason why these companies have been beneficiaries during the pandemic,” Parascandalo says. “Preferences are evolving, shifting more online, and that means many of these tech companies will continue to experience tailwinds.”

Compare that with the central bank easing and government fiscal support globally that will likely suppress bond yields for longer. “It’s not surprising investors may be willing to continue buying US tech stocks, even if they are looking more and more expensive,” he adds.

Depending on how vaccine rollouts progress, there may also be opportunities to spot undervalued companies punished in the initial days of the COVID-19 crisis.

Businesses supporting travel, such as airlines and hotels, and leisure activities including entertainment, bars and restaurants, are among those that may outperform if an effective vaccine becomes widely available. However, these stocks could prove more volatile, at least in the near term, so investors should proceed with caution, focusing on companies with attractive valuations, strong balance sheets and effective managerial teams.

“Over the long term, people will want to interact to drive and develop businesses together,” says Parkinson. “It is these relationships that really make a company valuable; it is these connections that lead to those differentiated insights that ultimately distinguish companies.”

Where governments choose to funnel fiscal support will also have a big impact on jobs – and investments. In the US, President Joe Biden has said he wants to spend $2 trillion on green infrastructure as part of a broader economic recovery plan.²² In Europe and in the UK, campaigns targeting net zero emissions by 2050 are also likely to create jobs in clean energy.

The UK’s ten-point plan for a green industrial revolution, for example, includes a £160 million investment that will eventually support “up to 60,000 jobs directly and indirectly by 2030 in ports, factories and the supply chains, manufacturing the next generation of offshore wind turbines and delivering clean energy to the UK”.²³

Such commitments should help pave the way for a more ‘just transition’ from fossil fuels. Overall, post-COVID stimulus programmes globally could create as many as 5.5 million more renewable energy jobs in the next three years, according to estimates by the International Renewable Energy Agency (IRENA).²⁴ For investors, green infrastructure may provide a predictable source of income, diversification and portfolio resilience, while also helping to lower their own portfolio’s carbon footprint.

The need to chart a different course for the global workforce goes well beyond the energy sector, however, and perhaps nowhere is the effect more intensely felt than in commercial real estate, particularly offices. Here too, the decisions made by governments, businesses and workers will have significant long-term implications.

If workforce trends are shifting online, office space must also evolve. Research and advisory firm Green Street reckons the move towards remote working may reduce office demand in the long run, giving tenants more negotiating power.

Preferences are also changing. To spur innovation, office design should encourage spontaneous interactions, Pickering says. Future offices may have a less rigid layout with more capacity for spontaneous exchanges. Remote workers may have to be accommodated with facilities for meetings at satellite locations around a main hub. The working environment should also strive to facilitate the retention of employees, who will expect a range of on-site services.

The ‘hotelisation’ of the workplace will require an increasing amount of capital expenditure to provide similar amenities, flexibility and design flair as a full-service hotel, adds Pickering. Service provision will increasingly become a key element in building design at an early stage of the development process; outputs from this may include wellness centres, concierge services, catering and differentiated technology.

According to Green Street, age and building quality will become a more important indicator of future return expectations.²⁵ A portfolio with more ultra-modern offices, for example, may attract higher demand while requiring less additional cap-ex.

“This does not mark the end of the office. Experience has shown there is no substitute for the stimulus to new ideas that comes from team working and the added value originating in informal exchanges in the workplace,” adds Pickering. “However, employers and developers will have to think differently to accommodate the changing needs of office workers. The offices of the future must be capable of meeting changing circumstances.”

City-centre commercial buildings also matter for entirely different reasons. They support the local economy – restaurants, bars, retail shops and other businesses, so much so that many governments (including the UK’s) began nudging people back into the office in 2020 before a resurgence in coronavirus cases halted their efforts.²⁶

“The office dilemma isn’t just an office dilemma, it’s also a city dilemma,” de Bruin says. “The two go hand in hand.”

The City of London Corporation, which governs the Square Mile, recently outlined plans to inject more vibrancy into an area traditionally dominated by offices, which lacks the range of amenities available elsewhere to draw visitors. “Amenities-rich locations are much more desirable to office occupiers, and the City lags in that regard when compared to the West End, for example,” Bayfield says.

In response, City officials are targeting a more diverse range of tenants, aiming for a fifth to be new to the Square Mile by 2025. They also want to increase visitor numbers during evening hours and weekends by 50 per cent. Green infrastructure that includes dedicated innovation spaces will also be expanded, according to the City’s plans published in collaboration with consultants Oliver Wyman and Arup.²⁷

These efforts highlight the need for policymakers and companies to collaborate in reinventing work in the wake of the pandemic. History tells us societies that adapt to new conditions and support their populations through periods of turmoil can emerge stronger and more resilient. This was true of medieval Europe during the plague, and it is proving to be the case in 2021 as the world starts to picture life beyond COVID-19. The more things change, the more they stay the same.