The Incorporeal Economy

The Incorporeal Economy

In October 2006, Netflix launched a contest. They offered a $1 million prize to any team that could improve their movie-recommendation software engine by 10%. Netflix’s global hackathon eventually engaged 30,000 engineers loosely organized and endlessly re-organized into hundreds of self-selected teams attempting to optimize their competitive profile. The winners took almost three years to get to that elusive 10%.

Many of the teams were built on virtual connections. They were had never met each other. They were creating a product response to Netflix’s demand in what we might term an incorporeal economy – one where a physical presence is not required.

As we have seen over the past months of economic chaos being able to operate without physical interactions is a distinct advantage. “Digitized” sectors have been only lightly touched by the government lockdown policy.

In the Bay Area, business models that are less dependent on in-person human interactions lost only 74,000 jobs, or 6.4% of the total, as of May according to the Bureau of Labor Statistics. These included business services, finance and information technology. The one sector that is not digitized but is also surviving well is, of course, government, which still has 95.4% of staff on payroll.

In contrast, the leisure and hospitality sector, where your customer must be physically present to enjoy the product or service, lost 180,000 jobs, a massive decline of 47.2%. In order to increase the virtuality of their businesses, these corporeal sectors are now struggling to stay at least visible with customers. A group travel company suggests, “Experience our new virtual adventure holiday – click here.” Runner’s World has published a “2020 Virtual Race Calendar”.

One thing is clear from this data.  We are not, “all in this together”. In terms of the personal economic circumstances, some people are hardly “in it” at all.

Employees in all-digital companies have no essential need to go to an office. They can see and visit with their colleagues on Zoom calls. They can create and share product development on-line almost as seamlessly as in person. We have heard a lot of complaints about “Zoom fatigue”, however, and the need to intentionally schedule even the smallest interaction rather than just dropping by Jane or Joe’s desk for an update on the way to lunch.

Remote work can also rupture the team cohesion of sharing a physical space. Informal interactions in the kitchen, the elevator, the hallways or out for lunch or drinks after work can help build trust in a way that is impossible by video call.

This new incorporeal work style brings other challenges. Leaders who relied on their charisma may find it difficult to capture the same motivational impact over a video connection. In fact, when people tell the tribal stories that paint the picture of their corporate cultures, it is always about personal face-to-face interactions. Years ago, when I was at Silicon Valley Bank, everyone that had been around awhile had a personal Ken Wilcox story. Without social proximity these stories will not exist in the same way, there will be fewer of them and they will be communicated less frequently. And the culture will suffer.

Two years ago a Gallup poll found that 70 percent of employees worked remote at least one day a week. In April, a similar survey found that 60 percent would want to work from home, “as much as possible”. Jack Dorsey says Twitter and Square employees can work remote – forever.

The lockdowns have shown that every company has many functions that can be done remotely. Anything in the back office, staff related or line support can be done without face-to-face contact. Soon all sectors will seek to capture the cost advantage of virtualization because the market has certainly recognized this value. The equities of Facebook, Zoom and Netflix, recently hit all time highs.

In characteristic fashion Apple is resisting this trend. They seem willing to skip the cost benefits from smaller office spaces and employees based in lower income locals in exchange for more creativity, collaboration and cultural cohesion. Apple’s products have always been known for their aesthetic appeal. That means developers must perfect the look and feel of how a human might relate to the product design. It is impossible to pursue this objective that without being physically present.

What are the possible long-term effects of this emerging trend if it persists? First, companies now can recruit the best talent anywhere. For example, the high cost and eroding quality of life in San Francisco will no longer be a barrier to recruiting the best talent. Second, the need for office space will decline along with commercial rents in urban centers. The same could be said of residential real estate. Finally, leadership will need to adapt their style as they work in a world where they will never communicate in person with most of their employees.

In 1351, the Bubonic plague was in retreat after killing 30 to 50 percent of the population in Europe. The disease significantly reordered the structure of European society marking the end of feudalism and the emergence of the Renaissance. The balance of value between capital and labor was shifted for the next hundred years.

Today, it is hard to predict the ultimate behavioral effect of COVID-19 on business, but it does seem that the value of physical presence may decline in a meaningful way.