Posts tagged business models
Business Models: Coworking
 
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The Future of Work: Aligning work with office space and economics

When coworking leader WeWork announced in April 2018 that it was pursuing enterprise clients, analysts were supportive.

In our office, we said, “What took so long?”

WeWork’s business model of taking on long-term liabilities of office leases in exchange for increased short-term rents from small companies and solopreneurs was a gamble from the start. Fortunately, no economic recession left them stuck with liabilities during a mass exodus of customers. Their success spawned countless imitators and a boom of local coworking offerings.

But in 2015, three years ago, we analyzed the business model of coworking for a large professional services client with 1200 employees and about 37 offices around the world. We looked at the sustainability and the need to focus on enterprise companies, those that would benefit most as knowledge-based organizations if they were to put some of their people into coworking spaces.

SITUATION: To illustrate savings and other benefits to our client, we used PwC as an example. In our example, we showed that PwC could save as much as $379 million annually if they put 30% of their workforce into coworking locations, and they’d also benefit from idea exchange and front-line exposure to new ventures.  

In this analysis, we also examined the coworking business model and determined that it wasn’t sustainable unless they focused on large enterprise clients with offices in multiple metro areas.

2015 Analysis Highlights

Cost Savings

Office real estate evaluated on a per-square foot basis is outdated now that knowledge workers can work off-site and have no need for space when they are not at the office. Thus, dedicated office space is an underutilized asset, which decreases margins.

For example, a manufacturing plant or a warehouse using 24/7 space for equipment or to store products in transit makes financial sense for an operational or supply chain model.

The knowledge supply chain is almost 100% virtual and electronic. Large, fixed-cost dedicated space for a knowledge worker is a mismatch. We evaluated PwC and determined that if they put 30% of their workforce into coworking spaces, they would save $379.5 million per year just in lower rents. This doesn’t include other savings and financial benefits, including lowering the debt ratio by decreasing long-term liabilities, among other benefits.[1]

Some knowledge-based companies had been looking for creative ways to manage how they use office space to address the inefficiency. In 2015, Charles Schwab, Square and Rocket Fuel Inc. vacated parts of their San Francisco offices to streamline operations and lessen a heavy footprint.

Scheduling changes and other tactics, such as subleases for shared business incubators, are models emerging from Microsoft, Trulia, Salesforce, SoftBank and Dreamworks. Real estate analysts expect other companies to pursue similarly creative ways to exit long-term real estate liabilities and to become more agile and nimble.[2]

Coworking spaces could be attractive to thousands of similar companies and get them out of inflexible long-term leases that are a sunk cost on corporate balance sheets.

Shift a fixed cost to a variable cost

By putting employees in a coworking space on month-to-month rents, large organizations can decrease long-term liabilities and fixed costs. Converting some of the expense to flexible or variable, makes the organization nimbler, enabling faster responses to market changes.

Separately, staffing decisions are mirroring this trend as companies balance their headcount of full-time, contract, part-time or project-based hiring.

Other benefits

·       Increase worker productivity

·       Road warrior access

·       Front row seat to innovative new companies and startups that use coworking spaces

Future of coworking

Coworking has started to catch on and is appealing to a workforce that is increasingly made up of freelance and independent workers. In essence, the developer (coworking business entity) takes on long-term liabilities in office structures and subleases at increased rents to small entities and individuals on month-to-month basis. The margins are good, but the developer does risk exposure if a recession were to hit.

The future of coworking is likely a mix of independent workers and enterprise knowledge workers, particularly with an enterprise workforce that is more mobile and has a greater number of freelancers and independents already. Large knowledge-based firms will see the benefits of using coworking spaces, which will create a more stable client base for the developer.

Although our focus was mainly on the client side, we studied the coworking business model in detail and determined that if coworking wanted to survive a recession, it would need to focus more on enterprise clients (e.g. PwC, Deloitte, HP and Microsoft) and put in safety nets to protect against the risk of losing a huge percentage of tenants in a bad economy.

Considering this analysis, WeWork would still be exposed to shocks in the economy with its long-term liabilities, but it could create safety nets in contracts with enterprise clients, including HP or other national accounts, that couldn’t be part of a contract with small operators. This lessens their risk significantly and makes sense for a wide range of services and knowledge-based industries.

OUTCOME: In discussions with this client, we suggested the company move part of its workforce into coworking spaces to reduce long-term liabilities and overhead cost per employee. The CEO thought the gilded appeal of downtown, luxury office spaces was more important to the company brand, even though offices were never more than 30% filled to capacity.

September 2019 Update

As WeWork scrambles to push through its IPO, I’d be concerned about the business model as it seems they could be trying to complete their IPO before any potential recession that might be looming hits. We don’t know how We Co. (WeWork’s parent company) will ride out a recession and that seems to be the big question about their business model. It’s very likely that our earlier analysis underestimated the consequences of a recession, even if they had significant enterprise clients.

Another issue, at least in California, is the passage of a law that will make many contract workers in the gig economy reclassified as employees with rights to typical employee benefits. Could this impact We’s client base, particularly among those enterprise clients that would otherwise put contract workers in WeWork’s office spaces? If other states follow, could the business model be impacted?   

[1] Calculation: Average company savings per employee is $6,487.20 per year to use a coworking space over a full-time office or cubicle (200 sqft). The savings are made up of cost savings across lease, janitorial, office equipment, office supplies, and utilities. It doesn’t include sunk costs from buildout or IT infrastructure, which would increase the savings further. PwC has 195,000 employees. If 30% of their employees used coworking spaces, they would save $379.5 million annually. This doesn’t include financial benefits from a reduction in fixed costs or long-term liabilities.

[2] San Francisco Business Times article, “Charles Schwab, Square, latest companies to unload SF office space,” (May 26, 2015) highlights this trend. The SF Business Times wrote several articles in 2015 recognizing this trend.

Importance of corporate values
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Customers are increasingly discerning about the products and services they buy. They want to purchase products made by companies that share their values and that are invested in the betterment of the world.

Customer values are important to the innovation process. In many ways, innovation is about finding the common ground between corporate and customer values.

We can’t guess what the customer wants. Products and services cannot be created in a vacuum. They need to be created with an enlightened understanding of the customer and, even more, with the customer’s direct participation in their development.

The success and popularity of startup methodologies in corporate environments is based on developing rapid feedback loops with customers to guide the innovation process and kill projects early that don’t engage the customer with a wanted value proposition. Lean practices articulate the importance of the customer.

Disruptive innovations may or may not serve a company’s current customers in the long run, but they should be consistent with the company’s core values. A company may shift and create new products and services for new markets, but its core values will provide consistent guiding principles for innovating.

An innovation project should be easily articulated by anyone on the innovation team in terms of the firm’s strategic vision and core values. These are the guiding principles of the project. An executive should be dubious if any member of the innovation team cannot articulate a project in these terms.

Further, innovation isn’t only about product engineers and customers. It’s also about engaging a team across the organization and soliciting regular input from business developers, marketing managers, supply chain managers, accountants, and finance managers.

The value proposition needs to converge these viewpoints into a product or service, or even a better understanding of what the customer wants. If an engineer develops a product the customer wants, but the business development team can’t sell it or the marketing team can’t market it or the accounting department says the support costs are too prohibitive, the product isn’t an innovation. Innovations need to find support across the entire business model and with all the stakeholders who will play a role in its success.

Innovation is the exploration and discovery of value propositions that customers want.

It’s not just about customer and corporate values. Employee values need to align as well. How can CEO’s engage employees around the firm’s values and strategy as well as develop a talent pipeline? Prospective employees are discerning in where they choose to work, seeking out organizations that share their own values. If CEOs can’t find common ground, they won’t be able to grow an engaged, committed workforce and will struggle perpetually with the disconnect between corporate and employee values.