When people began working from home, many executives feared that productivity would be lost. Instead, the reverse has proved true: for many employees, it has increased, thanks in part to the accelerated pace of digitization. As companies move to the next normal, they are looking for ways to maintain those gains through new hybrid working models enabled by digital technologies. There are decisions to be made about real-estate footprints and arrangements, shared service centers, organizational structures, and investments in digitization.
In this episode of McKinsey Talks Operations, host Daphne Luchtenberg is joined by Naomi Hudson and Martin Rosendahl, partners in McKinsey’s Operations Practice, and Phil Kirschner, a senior expert and associate partner at the intersection of McKinsey’s People and Organizational Performance Practice and Real Estate Practice. Their conversation has been edited for clarity.
Daphne Luchtenberg: Your company’s future success demands agile, flexible, and resilient operations. I’m your host, Daphne Luchtenberg, and you’re listening to McKinsey Talks Operations, a podcast where the world’s C-suite leaders and McKinsey experts cut through the noise and uncover how to create a new operational reality.
When people began working from home—back in 2020, at the start of the COVID-19 pandemic—there were fears that productivity would be lost. Instead, many executives were surprised to discover how quickly their organizations could adapt to a fully virtual environment. Many employees believed and reported that their personal productivity increased.
Embedding new ways of working comes with a new set of challenges: decisions to be made about real-estate footprints, shared service centers’ organizational structure, leadership behavior, and the investment in digitization. I’m joined today by three McKinsey colleagues who will help us understand the challenges and the opportunities arising from them. Naomi Hudson and Martin Rosendahl are partners in the Operations Practice, and Phil Kirschner is a senior expert at the intersection of McKinsey’s People and Organizational Performance Practice and Real Estate Practice. Welcome to you all.
Naomi and Martin, I’d like to ask you both to open up our discussion today. When people began working from home, companies were concerned about a loss in productivity. In fact, many companies were surprised that business didn’t stall altogether. Yet the debate on whether or not companies have become more productive continues. To help us get to the bottom of it, can you set the context and tell us what’s behind the question of productivity in today’s landscape? Martin, you first.
Martin Rosendahl: Thank you, Daphne. This is really a great question and one of intense debate in the executive suite. When we survey organizations and employees about their level of productivity, the response is very clear. By and large, people feel they have been more productive during the last couple of years, during the pandemic. Clearly, things get taken out—things like travel time and those types of activities. People do feel they are more productive.
Now, the interesting part is that when you ask executives, and specifically behind closed doors, they have a more nuanced picture. They are happy with their organization’s ability to be resilient during the pandemic. But they also challenge the long-term productivity of the current situation. I’ve even been in the room with a few executives who, behind closed doors, mentioned that they are very keen to get their employees back to the office. They don’t feel at all comfortable with the current situation and believe that there will clearly be a lack of productivity—but maybe also, more importantly, a challenge over time to the culture and collaboration, specifically cross-collaboration between different functions.
Daphne Luchtenberg: I’m just going to say that this is becoming even more acute. It’s not just about going back to the same thing as before. It’s against the challenging backdrop of inflation, labor shortages, an impending potential recession. C-suite leaders must think about how they get to the next way of driving productivity.
Martin Rosendahl: Yes, that’s absolutely correct. This problem has really accelerated over the last six months. Most organizations we work with right now are clearly feeling a perfect storm. One, of course, is inflation. Second, potential recession. Third, geopolitical consequences for the operating model and the markets. And fourth, the significant attrition and the talent shortages that many organizations are facing today. All of those things really come together in a big push for additional productivity. Executives want to think beyond the traditional levers of productivity and build an organization that is faster, better, and simpler. This means cutting time on core processes through digital automation technology, improving the employee experience, and, of course, driving productivity.
Daphne Luchtenberg: Naomi, what are we seeing in our survey responses?
Naomi Hudson: In COVID-19, we saw that executives were surprised that businesses didn’t slow down. In some cases, they thrived, depending on which sectors you are in. Our latest survey showed that there was a pivot [from survival] to growth; suddenly, you’re out of COVID-19 and focused on growth. I think the trends that you’re talking about—a shortage of labor, inflation, Ukraine—have now pivoted back [to survival]. I suspect what we’re going to see, in the next survey, is a pivot on how to push growth while maintaining this tight control on productivity and costs. How do executives juggle both levers at the same time?
Daphne Luchtenberg: Yes, fascinating. Phil, I’m going to bring you in here as our people-in-place expert and ask you more about the challenges of sustaining this kind of remote or flexible working model that we’ve all come to love a little bit. We’ve seen high-profile examples of new collaboration tools, mandates for days in the office, and day-to-day recommendations to improve the corporate culture and employee well-being. Are we seeing these things working? What other tactics would you recommend that companies start to consider?
Phil Kirschner: Yes, thank you. I really appreciate being here to add this perspective. I don’t often get a chance to talk about operations in general performance improvements, such as Martin and Naomi have been thinking about. As we’ve all seen, obviously, the day-to-day tactics—although it’s been two years now—are working. As Martin said, companies, by and large, have not substantially suffered from the sudden shift to remote and flexible working models. But the hard work is ahead, to capitalize on what we believe is a once-in-a-generation opportunity to rethink the future of work, the workplace, and the workforce for our clients. On the productivity point, Martin hit the nail on the head: we removed a lot of friction from our days by shifting to remote—we don’t have to commute, we don’t have to move from meeting room A to meeting room B, and that leads to the kinds of answers that we see in surveys.
When you ask someone if their current workplace—which happens to be your home for many of us—enables them to work productively, the answer is resoundingly yes. That point is really important. I find myself doing a lot of history lessons with clients: that we feel more productive at home not just because of the removal of barriers but also because many of our offices weren’t performing that well before. They were not really accounting for the increasingly diverse work patterns and styles. Similarly, I’m getting asked more and more about how to measure productivity in this current state, when we’re remote, by managers who when pressed couldn’t have done this before. They assumed that people were productive because they saw them but did not necessarily appreciate the amount of time that they didn’t see them.
When you ask someone if their current workplace—which happens to be your home for many of us—enables them to work productively, the answer is resoundingly yes.Phil Kirschner
From the limited data we have now on truly measurable productivity outcomes before and after the pandemic, what’s clear is that it is the coordination costs that are making things difficult. That is, we moved very quickly into the remote context and are largely still trying to operate as if we are all together. That contributes to the fatigue from having calls all the time because you can no longer just tap someone on the shoulder. Let’s take a cue from the companies that have been the most successful at running fully virtual environments since long before the pandemic. The three behavioral changes that need to be made are truly shifting to visualization of work process, taking the need to be somewhere or with someone out of the equation, and knowing how things are happening at a team level, not just the organizational level.
Second is increased adoption of asynchronous communications. We should take a hard look at the volume of meetings that we have, which are both contributing to burnout and well-being issues but also physically prohibiting us from moving between two places in this world, from our home to the office or from our home to some other kind of workplace. Finally, we must embrace a documentarian culture. It is counterintuitive, historically, but you have to write everything down. It has to be easy to understand how the organization works at the simplest level, in a self-service manner, as you are being onboarded remotely or have staff coming and going more frequently due to contract and freelance models.
Those are the three points that I’d most commonly offer to sustain the productivity point and on employee connection, because we know there is some weakness the longer we are apart. We should encourage leaders to focus on the moments that matter and the purpose of the office. Leaders should avoid the very easy desire to mandate that people be in a particular place at a particular time, which we’re finding runs a little afoul of what people would like to hear from their employers, especially because they weren’t being told to be in the office before.
Daphne Luchtenberg: That’s right. It’s so interesting, isn’t it? And I’d like to dig into that a little bit more, Martin. It’s clear that it’s about place of work, but it’s really about people, isn’t it? And companies are having to think about how to do the same things, if not more, with fewer people. That’s really important as part of the dialogue on SG&A [selling, general, and administrative] functions, isn’t it? What would you have to say about that?
Martin Rosendahl: Yes, that’s exactly right. One of the organizations I work with right now, their CEO framed it more in the spirit of growth enablement. So it’s “do even more with the same.” His view was that they will need all of their employees to be doing slightly different things or significantly different things. But right now, the fact that this hasn’t happened is stopping them from growing. Organizations are doing five things to drive this change. One, they are taking much more of an end-to-end process view; they’re trying to shift from traditional functional silos to look much more across their core end-to-end processes and even thinking about “what are my ten most important enterprise processes, and where do I have the biggest pain points, and where do I see the biggest value?”
Secondly, they try to automate everything that is possible. In the last five to ten years, we saw the promise of automation but struggled to capture it. I think now we have kept up, and we’re much more able to drive the full impact of automation. Thirdly, we’re trying to be more intelligent. This means taking advantage of all the data we have to drive more intelligence, insight generation, and advice.
Fourth, we’re looking across at our partners—and this is really a big shift. The concept of outsourcing has been there for a long time, but the next level is to work much more in an ecosystem of partners. Maybe I can’t hire even some very strategic skills. Maybe as an organization, I need to accept that my absolute best data scientists are very happy to sit on the beach in Bali and work on core algorithms for me. I just need to have a way for the organization to drive that. And the fifth area is about implementing some more agile operating models—again, to support working more on the important, core business issues and in a much more collaborative, cross-functional manner.
As an organization, I need to accept that my absolute best data scientists are very happy to sit on the beach in Bali and work on core algorithms for me. I just need to have a way for the organization to drive that.Martin Rosendahl
Daphne Luchtenberg: Thanks, Martin, that’s great. Phil, coming back to you. If there are these changes in the way we work and how we access the skills we need, what does that mean for our real-estate footprint?
Phil Kirschner: Short version is that it is getting smaller. Over time, we believe, this is a good thing, as real estate actually is responsible for about 40 percent of global greenhouse-gas emissions. But, again, back to the history lesson, most traditional offices prior to COVID-19 had somewhere between 10 percent and 20 percent vacancies—desks without names on them. And maybe 20 percent or more of the desks with names on them were empty on any given day because of staff who were out for a variety of reasons, such as being with clients, being sick, on vacation, on maternity leave, you name it. Employees were never in the office 100 percent of the time before.
That led to some companies to explore large-scale desk-sharing programs in the office—tens of thousands of people, with companies taking advantage of that 20, 30, 40 percent capacity increase from remote and hybrid work. I think these companies now have a little bit of a leg up on companies that hadn’t thought about different ways of occupying the office and are now having to deal with that reality, as well as the increased demand for working remotely.
We do see that it is common to have a 20 or 30 percent portfolio reduction plan. The most progressive client that I’m working with at the moment has deeply integrated its future real estate and future ways of working and collaborating under the same executive program. It is going seamlessly from “how should we redesign our meeting rooms?” to “what kind of cameras and collaboration tools should we incorporate?” to a full review of how their sellers sell, as a business process independent of space. When a company is able to integrate all three of those streams holistically under the employee and client experience, it’s on track to achieve a 60, almost 70, percent portfolio reduction within the next two to three years.
As a final point, the SG&A survey that was mentioned earlier, in the most recent iteration, was on the questions around remote and flexible work. One of the results that jumped off the page to me is that when asked what kind of benefits companies are providing to employees to enable flexible work, the number-one answer was actually access to flexible workspaces, such as coworking sites—something that is neither the home nor the office. I believe this supports the idea that there has been an absolute explosion of the so-called third places since the pandemic. Just because someone doesn’t want to make the traditional commute all the way to the office doesn’t mean that they want to be stuck at home alone. I think we will see that as central business districts, over time, contract and as employers need less space for traditional offices, we will exhale closer to where we live.
Daphne Luchtenberg: Yes, love that. So as we go back, we’re really going to see different ways of working each day. We might be in a different place, with a different team, from day to day, and the footprints have to adapt to that.
I wanted to talk a little bit more about the tools that we’ll be using to become more productive. Naomi, if I could come back to you. We’ve talked a lot about accelerated digitization that enables new ways of working both for SG&A functions and others. But it seems that many companies are still not capturing the full value of the investment they have made. Can productivity come from tech enablement alone?
Naomi Hudson: If I look at it from a CFO point of view, there’s always a bit of “how hard does your money work?” and then “how well does your money work?” If I look at how hard does your money work, we talked about SG&A as a percentage of revenue and saw big changes over COVID-19. We’re seeing a lot of those reverse, and we’re seeing how you fund that doubling of tech investment over the next two, three, or four years from some of the other areas. That has to come from some of the different ways of working that we’ve all talked about. It’s got to come from standardization and simplification. We’ve all got to embrace that. It’s no coincidence that the companies in quartile one—the very best companies, across sectors—tend to have homogeneous processes: one simple way of doing things, whether that’s on a national basis, a regional basis, or a global basis.
Similarly, we have to embrace different operating models. The swing toward shared service centers in COVID-19 doesn’t look to be abating. How can you do more of your functions, more of your processes, in a different operating model, whether it’s a hybrid, a captive, or an outsourced shared service center? The top 30 percent of companies have seven or more different functions in shared service centers. So let’s look about how we can do things differently, not just the people element. Then you layer on the tech elements. We are all extremely used to doing our banking online. I can’t remember the last time I went into a branch; we self-serve. How do employees self-serve? How do I add my personnel data? How do I update my benefits selections? How do I get my learning and development? Similarly, how do customers do that? And how do suppliers do that?
The past two years have accelerated a whole different mindset change—“it can be done”—and forced the pace. That’s the “how hard” bit. “How well” is the tricky bit, I think. How do companies measure satisfaction? How pleased am I that I can self-serve? Is that easy for me to do? Do I get a confirmation that I’ve changed my benefits selections, et cetera? So the softer, qualitative side comes in. There’s both hard and soft levers that need to be taken into account and managed by C-suite leaders as they manage their business effectively.
Daphne Luchtenberg: Naomi, do you think that the implementation of self-serve tools has been done well or not so well?
Naomi Hudson: The last survey, in November 2021, showed that only about 40 percent of companies thought that they had implemented their tech investments effectively. That’s a stark reminder of the leakage of business value. I think the three biggest things they found, or the three biggest differentiators, were understanding the direct sources of where the value was, what’s driving the business value, and putting your digital investments behind that, so that you can directly draw lines between them. The second variable was constantly maintaining the IT alignment of the business, visibility on investments, stopping all those pet projects, making the costs and benefits visible effectively, and then having a vision—that robust road map over a one- to three-year journey. But one to three years, given what we’ve just been through, seems a long time. How do you keep the organization constantly refreshed, maintain it, and keep it relevant for today when we see sentiment changing? In a matter of months, how do you keep up with a rapidly changing, volatile environment?
Daphne Luchtenberg: Yes, that’s interesting, Naomi. Martin, I wanted to bring you back in. We talk about digitization and what technologies to use and, as Naomi mentioned, look first to where the core value is and then look at what technologies can really help you optimize your processes. What advice do you have for organizations that are identifying and then rolling out technologies and, presumably, need to keep a finger on the pulse of the latest developments in technology to ensure that they are still at the leading edge?
Martin Rosendahl: There are still so many organizations that want to solve and close this opportunity by further tech investment. Over the last couple of years, I don’t think any of my clients have had a lack of technologies, tools, cloud platforms, analytics platforms, data initiatives. They’re typically there. What I try to look at are, basically, three questions. Number one, do we know where the value sits? Back to Naomi’s point, are we really clear what are the big sources of value, where are they, how do we prioritize? Second, do we have the right talent? Again, this can be internal or external, very likely a mix, but do we have the right talent? Do we know what talent we need to drive impact through technology? And then, thirdly, is the foundation in place? The foundation comes in a few different ways—it comes from data, it comes from cyber, it comes from processes. So is that foundation in place, and can I make sure there are no blockers to capturing the value?
Daphne Luchtenberg: Got it. Quite complicated for companies to get right, wouldn’t you say, Martin?
Martin Rosendahl: You could look at it from many angles. Looking at the statistics that Naomi was mentioning, yes, it can feel a little bit sobering. That said, these are not unreasonable claims. If you would have a new manufacturing plant or if you would enter a new market, you would ask those questions. What is the value? Do I have the right talent? Are the basic foundations in place? It’s almost applying sound business judgment to drive improvements through tech, as successful businesses have done for so many years in other portfolio decisions.
Phil Kirschner: This is all so fascinating. I just want to comment on “do we know where the value is?” This is very much aligned with the idea of understanding the purpose of the places that we ask our employees to come into. Can we really articulate this through testing and learning, if we weren’t doing so before? What creates an opportunity in measurable value when we are doing something at the same time together? And Naomi’s earlier point on consumer behavior—I’m so inspired by that because we might switch banks in our personal lives if we think someone’s self-service or digital portal is better than the competition’s and the friction to switch is rather low.
We didn’t previously have the luxury of making a call or decision about the place where we worked. We largely didn’t have a choice. We went there because we had to. The friction—the tension that we’re feeling and employees not necessarily wanting to be in a place where someone is telling them to be—is simply that employees have a better experience somewhere else and are voting with their feet. We have to apply the same scrutiny to our employee experience and feedback and learning as we would for customers, taking all that energy and pointing it internally.
Daphne Luchtenberg: Thanks, Phil. Martin?
Martin Rosendahl: I couldn’t agree more, Phil. And to build upon your point, an executive I was speaking to last month thinks one of his absolute signature moves is to radically improve the experience of his employees. He feels that the current way of working, it’s too hard. It’s too complex. He shared a number of quite stark examples. I think this is not a one-off. This is something that is very clear now. Having had the experience, over the last two years, of ordering food to our homes and fixing everything while we were locked into our houses, employees will not accept a poor working experience.
Daphne Luchtenberg: Yes, fascinating. I have to bring this conversation to a close, although I’m sure all of us could spend another hour or so just debating some of the things that need to change and will change. Before we finish, I wanted to put a quick-fire question to each of you. If you had to give one piece of advice, Martin, Naomi, Phil, to a leader who’s thinking about SG&A spend and thinking about the priorities moving forward, what would that be? Phil, let me start with you.
Phil Kirschner: Generally, my advice is that the future of work is very much virtual first, by intent, but not placeless. As for SG&A in particular, I mentioned earlier that the large scale of sharing and mobility programs is meant to address an increasingly diverse number of workplace patterns and preferences. Honestly, most of them were being applied to SG&A functions first, as opposed to core industrial or trading or business functions. There is a significant opportunity, if you listen to your employees about what they want, to really transform the way work happens.
Daphne Luchtenberg: Thanks, Phil. Naomi?
Naomi Hudson: I think I’ll take a different slant from Phil. Just ground yourself in the numbers. How do you understand your SG&A at that kind of forensic level? What are you spending on? Where are you spending it? How much are you spending? What are you buying, who’s buying, et cetera? I walk into so many CFOs’ offices where they can’t answer the simple question of what are they spending, let alone is it good value. Rip up the rulebook, I think, because you probably need to reassess where you’re spending. Once you’ve got your arms around your cost base, then do that forensic analysis—do you think it’s the right spend, good value, coupled with the employee experience, et cetera. “Start from a clean base” would be my bit, Daphne, because we ripped up the rulebook. We really did.
I walk into so many CFOs’ offices where they can’t answer the simple question of what are they spending, let alone is it good value. Rip up the rulebook, I think, because you probably need to reassess where you’re spending.Naomi Hudson
Daphne Luchtenberg: Ripping up the rulebook and taking a forensic look at spending sounds very much like an opportunity to use some zero-based productivity principles—an area I’d love to dive deeper into in a further episode. Martin, what would you add?
Martin Rosendahl: I think we need to think about the holistic impact here. When we talk about SG&A, we need to think about the financials. No one is saying no to that. But equally important is what does this mean for my people? What does my footprint mean for society? How do I make sure now, in a talent shortage, that I take a societal view as well and think about how I upskill, cross-skill, my people? When we think about SG&A, for so many years it’s been all about the cost levels. This is an opportunity to think more holistically about the impact.
Daphne Luchtenberg: Point taken, Martin, and very well said. Phil, Naomi, Martin, thank you so much for joining me today. It’s been just a great discussion, and this is such a fascinating time. I might invite you all back in six or eight months’ time to see what really happened and how the future of work is going to take shape.
You’ve been listening to McKinsey Talks Operations with me, Daphne Luchtenberg. If you like what you’ve heard, subscribe to our show on Apple Podcasts, Spotify, or wherever you listen. We’ll be back with a brand-new episode in a couple of weeks.