Today roughly eight million Americans work remotely full-time. And among the most commonly held jobs include many that leverage skills honed on freeCodeCamp. These jobs include web design, software engineering, product management, and writing.
Firms are embracing the shift to hiring and empowering remote staff for many reasons. Some of the reasons frequently referenced include increased workforce productivity and access to new pools of talent.
One reason that is cited less frequently (but is seemingly as important) is that shifting to a remote labor force will significantly reduce a firm’s costs. Ultimately these cost savings will benefit shareholders.
I want to explain the cost structure that firms, and in particular technology companies, must manage. I absorbed these lessons by studying the financial documents and annual reports of companies that perhaps you aspire to work for or whose products you may use and enjoy.
I want to share these lessons with you.
First, some relevant financial context. All firms have essentially three large costs that they must manage: Property Plant and Equipment (PP&E), operating expenses, and Selling, General and Administrative (SG&A) expenses.
When a firm maintains an office (or famous large headquarters in the case of Google, Facebook, and Apple), it obviously must pay for the furniture, land, buildings, and machinery that help power its business. These fixed assets are expected to be used for at least one year and are classified as PP&E on a firm’s balance sheet.
Operating expenses are a second category of cost that firms must manage. These costs include the utilities, insurance, taxes, and payroll that a firm pays to remain open.
Lastly, a company needs to budget for SG&A expenses which are the sum of all direct or indirect selling expenses and general administrative expenses a firm accrues.
With this context in mind, we can view remote work - and the advocacy of remote work by CEOs - through a new financial light.
By placing workers in home offices (or remote co-working spaces) a firm can succeed in achieving two things in a single action: the firm can reduce its fixed and variable costs and move part of its cost structure from its balance sheet to that of its staff.
In short, companies won’t need to invest as much in buildings and equipment (i.e. lower CAPEX), which will lead directly to higher cash flow. This will lead to higher expected growth and higher stock prices over time.
Additionally, companies can decrease salaries and decrease corporate administrative costs, (i.e. lower SG&A), which will lead to higher net income to equity holders.
Facebook provides evidence of this trend.
Recently Facebook Founder and CEO Mark Zuckerberg said that as much as 50% of Facebook’s workforce could be working remotely in the next five to ten years.
What data supports this policy?
Firstly, look at the explosion of Facebook’s SG&A costs in the last three years.
- In 2019 Facebook's annual SG&A increased 80% from 2018.
- In 2018 Facebook's annual SG&A increased 56% from 2017.
- In 2017 Facebook's annual SG&A increased 32% from 2016.
Next, look at Facebook’s increase in operating expenses.
- Facebook's annual operating expenses for 2019 increased 51.05% from 2018.
- Facebook's annual operating expenses for 2018 increased 51.22% from 2017.
- Facebook's annual operating expenses for 2017 increased 34% from 2016.
Lastly, note that even as Facebook’s revenue has increased, the rate of growth is slowing.
- Facebook's annual revenue for 2019 increased by 27% from 2018.
- Facebook's annual revenue for 2018 increased 37% from 2017.
- Facebook's annual revenue for 2017 increased 47% from 2016.
Facebook’s SG&A and operating expenses are increasing faster than Facebook’s rate of revenue.
To increase profitability, Facebook will need to find ways to decrease its costs. It has a few obvious buckets to target and expanding its remote workforce can reduce PP&E, SG&A, and other operating costs in one fell swoop.
Let me explain how.
Remote workers will reduce Facebook’s dependency on furniture, land, and buildings. The decreased utilization of these fixed assets will lower Facebook's PP&E.
Secondly, remote workers will decrease Facebook’s payroll. Why? Because Facebook can pay lower wages to workers outside of dense regions where the majority of their workers are today. Hiring talent outside of metropolitan areas will enable Facebook to pay wages indexed to local costs.
A software engineer in New Hampshire or Montana will cost Facebook less to employ than that same engineer located in New York City or the Bay Area. Zuckerberg explained that Facebook “will adjust salaries to your location...that means if you live in a location where the cost of living is dramatically lower, or the cost of labor is lower, then salaries do tend to be somewhat lower in those places.”
The reduction of costs can be extrapolated to SG&A. Rent, utilities, and office supplies are three examples where Facebook can move costs from its balance sheet to that of its staff who will likely be expected, among other things, to heat and cool their home work environments, make their own coffee and food, or clean their home workspaces - at their own expense.
This shift in cost structure will likely yield disproportionate benefits to shareholders because the earnings of a firm increase when, holding all else constant, costs decrease.
What do these changes mean for you? I have a few ideas.
Remote workers would be wise to ask for and negotiate new benefits packages. Subsidized wifi or utilities seem like reasonable things to ask for if you no longer have an office to work from. Discounted home office products - a chair, desk, light, keyboard, monitor - should be included as non-taxed items when joining in a remote role. Access to virtual mentoring or mental health tools can be requested as core perks to ensure that you are growing and healthy while performing remote work.
As remote work becomes more prevalent - for full time remote workers and employees who blend their time between workplaces - new paradigms of work will arise. With this fundamental shift in the labor markets, firms will have a unique opportunity to reduce costs. How and where their expenses are cut will dictate the rate at which earnings can increase.
It seems to reason that shareholders will benefit from enhanced profitability coming from these changes. But remote engineers, designers, product managers, and sales professionals can benefit too. By asking for new and specific perks that empower remote work, these workers might see more of the upside derived from this shift in the labor market.