Is Office Space a Thing of the Past?

Is the office obsolete?

The argument has been going on since before the Internet, when its antecedents were limited to connecting university research labs to the Department of Defense. The adoption of new technologies may afford smaller server rooms and fewer filing cabinets, but the location of people dominates everything else when it comes to office space utilization. At least on the margins, the data show we are using less office space for every employee. We cannot assume that reflects the impact of technology, but it’s not an unreasonable hypothesis.

chandan silo for webThe notion of telecommuting can be traced back 40 years, to prophecy of a more decentralized work force driven by new computer technologies and rising transportation costs. Our office buildings have not emptied out, in part because technology remains—at least for the time being—an imperfect substitute for face-to-face collaboration.

If it was at risk of falling into the background, Marissa Mayer’s decree that Yahoo employees present themselves has rekindled the debate about the future of the office. She has been variously applauded for undertaking badly needed reforms and derided for outmoded thinking. As a means to strategic and operating goals, the rationale was not unsound. From an operating perspective, remote employees were underperforming. From a strategic perspective, employees’ lack of motivation could be framed in terms of the company’s loss of momentum.

Ms. Mayer is betting that by bringing her staff together, she can re-energize them. By all accounts, the execution of the policy shift was short on tact and too rigid. Abstracting away from the organizational and market challenges facing Yahoo!, there is a broader conjecture that may hold merit: we generate more and better ideas in groups.

Imagine a world that bears an uncanny resemblance to a stylized economic model. In this very odd and two-dimensional place, there are two types of people. Creative types are highly productive, but even more productive when collocated with others of their type. Less creative types are productive as well, but their productivity is unaffected by their location—as long as they are monitored.

If the available technology means that what I’ll describe as regular types can be equally productive from any location—and if that technology also supports monitoring—we should observe spatial dispersion in this subset of the work force.

For the creative types, who are more productive when they are located together, there may still be a host of reasons why they will want to remain separate. Perhaps most important, at home you can work in your underwear. It can get a little lonely during the day, but you know how to socialize on your own time. Your perspective may change if you learn that your office-bound friends are earning more.

From the firm’s perspective, higher productivity in this simplified world translates into higher profits. If market mechanisms are functioning reasonably well, management will compensate collocated employees more highly to reflect their higher economic value. Responding to that incentive, we should observe spatial convergence among creatives, even if the occasional day from home is part of the routine.

Things are not static, of course. The available technology may change, producing more effective substitutes for collocation. But until then, there is a productivity advantage to the firm that will bring its creative types together.

Sam Chandan, Ph.D., is president and chief economist of Chandan Economics and an adjunct professor at the Wharton School.

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