How will companies adapt to the COVID era?

19 January 2021

By Nicolai Foss

Companies and organisations have had to adapt to working in a pandemic for almost a year and with the virus now mutating into different and more infectious strains this adaptation may become the new normal.

First we saw much on-site work transformed to work mediated by tools like Zoom and other online platforms. Second, this seems to have been accompanied by a higher level of real delegation as companies were compelled to transfer decision competence to local managers, for example Carlsberg transferred more competence to country managers.

Economics-based organisation design theory indicates that these changes are accompanied by changes in reward systems towards more performance-dependent salaries and more reliance on output rather than input measures of efforts. There is also a higher degree of formalisation as companies seek to maintain control under conditions of distance and virtual work, while also looking to reduce the moral hazard of workers taking riskier decisions because of a lack of oversight and a higher level of information asymmetry.

In fact, the latter challenges may lead firms to substitute independent contractors, such as freelancers, for employees. Alternatively, firms may invest more in building employee relations, possibly backed up by giving them more incentives in the form of ownership stakes in the enterprise. Clearly, the implications for rewards and ownership arrangements are different here, and which predictions are confirmed by the data remains to be seen.

Concerning the longer-run consequences of the pandemic, one possibility is that the pandemic will turn out to have been just a temporary disturbance. Thus, the economy, including the organisation of transactions across the global economy will return to its pre-pandemic configuration, as supply chains are restored, international mobility patterns revert back, resources flow back into the experience economy, and so on.

If, on the other hand, the virus doesn’t mutate towards less harmful variants and continues to evolve into more infectious types then constant precautions in the form of continuing social distancing, reduced international labour mobility and business travel, and semi-closed borders will be permanent features of the business landscape. But, this will not be identical to the situation at the onset of the pandemic, as innovations and changed work routines will emerge to compensate. For example, virtual meetings are likely to improve in quality.

However, even if the situation relatively quickly returns to ‘normal’, the pandemic is likely to leave a permanent mark on how companies and other organisations are structured and designed. The reason is that major disruptions imply major changes to the so-called ‘economic fundamentals’, namely technology, scarcities and preferences, which do not revert back to pre-disruption levels. For example, Shingo Watanabe shows that "technology improvements in the recovery were so rapid that, over the whole Great Depression period, technology growth was highest among pre-Second World War decades".

It also well known that major disturbances are associated with changes in preferences as according to research by Lee Ohanian these pertain to labour-leisure trade-offs and politics. It is likely, however, that the COVID-19 pandemic will imply three permanent changes to firms’ organisational designs under any scenario.

 

1 Organisational differentiation and interdependencies

The pandemic is likely to leave permanent traces on the organisation of tasks in terms of specialisation, bundling of tasks and sequencing of tasks.

Because the pandemic makes reciprocal interdependencies – that is where the output of one department is the input of another department  more difficult to organise (as these often involve, direct and potentially lengthy face-to-face interaction), tasks that require two or more departments’ involvement will tend to become pooled. That is, although each department does its own task and none interact with each other, their output is one piece of the overall jigsaw of the task. Or the job may become sequential where departments act like an assembly line, adding their bit to the task before it moves to the next one.

This will see firms invest more in pre-planning task execution as there may be less scope for real time co-ordination. It will also tend to support the breaking down of tasks into smaller subsets of the overall task – known as modularisation – and task sequences so that highly interdependent jobs will become more concentrated in technological and organisational modules (ie small rather than large work teams), which will necessitate a careful rethinking of the interfaces between work activities.

The increased use of automation brought about by the pandemic may reinforce these tendencies as we are seeing with China’s attempts to increase robotics.

It may be that the pandemic has driven a trend towards more plants and plants with fewer employees. Such changes may sacrifice some advantages stemming from the specialisation of tasks and the exploitation of complementarities.

On the other hand, efficiencies may be realised as firms have to rely less on potentially wasteful face-to-face co-ordination and more on automation, pre-planning and the design of standard operating procedures

 

2 The organisation of work

It is unlikely the proportion between on-site and remote work will bounce back to former proportions because of preference changes (many employees have discovered the possibility of remote work and have come to like it), technological change (tools that facilitate remote work will rapidly improve, including the use of hologram-assisted communication and sophisticated means of monitoring employee productivity at a distance), and politics (remote work better supports a green transformation agenda).

The increased use of remote work may imply a decreasing use of team work (which is easier to manage on-site), smaller teams (that are easier to co-ordinate remotely), and an increasing use of management by individual objectives and rewards.

3 Organisational boundaries

Many forces set in motion by the pandemic impact organisational boundaries by impacting employee relations and transactions involving suppliers and capital assets.

On the one hand the use of remote work may decrease organisational loyalties and investments in firm-specific human capital and reduce the need for input monitoring. This will tend to increase the use of freelance, part-time work rather than permanent full employment, thereby shrinking firm boundaries and size. The increased use of automation – which many observers argue will be a permanent legacy of the pandemic – will reinforce this shrinkage.

On the other hand, to the extent that the pandemic leads to a permanent decline in globalisation that implies, for example, fewer suppliers, and it may be a force pulling in the direction of more vertical integration, as international competition is less likely to alleviate the hold-up risks of locking in to one or a few suppliers.

 

The COVID-19 pandemic will have many complex consequences for how organisations operate and are structured, even with a relatively rapid return to pre-pandemic conditions.

Overall, the pandemic is likely to lead to more remote work, more delegation, smaller teams and more widespread use of workers who are more loosely connected to the organisation.

However, it is also likely to lead to more formalisation, more planning, and a heavier use of individual-level rewards. Some of these changes are efficiency-enhancing while others are efficiency-reducing. Whether the net effect is positive or negative remains to be seen.

This is an edited version of a commentary published in the Journal of Management Studies.

 

Nicolai Foss is WBS Distinguished Research Environment Professor and Professor of Strategy at Copenhagen Business School.

Follow Nicolai Foss on Twitter @NicolaiFoss

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