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Study: Firms equipped for remote work fare better


For Sebastian Steffen, SM '20, PhD '22, who is starting as an assistant professor at Boston College this fall, the pandemic had a relatively minor effect on his life as a PhD student at MIT Sloan. He still conducted research after the world shut down. He still wrote papers. Being in graduate school, it turned out, was well-suited to remote work.

“But I happen to study human capital and the decisions firms make about their employees,” he said. “Naturally, I wanted to understand more about how COVID-19 impacted the lives of people and the firms they work for.”

In a recent working paper, Steffen and his co-authors looked at the work-from-home capabilities of different companies leading up to the spread of the coronavirus. The researchers found a stark divide between companies that had established strong work-from-home capabilities before the pandemic and those that had not. The paper was co-authored by Northeastern University professor John Bai, Stanford University professor Erik Brynjolfsson, PhD ’91, University of Massachusetts Boston professor Chi Wan, and MIT Sloan research scientist Wang Jin.

“The biggest finding was how work-from-home practices can really help firms hedge against operational risk,” Steffen said. “This risk could take the form of a pandemic, or it could be some other kind of shock, like a natural disaster.” Work-from-home practices also afford many advantages outside of crisis, Steffen noted, which makes it likely they will stay in place.

Preparation pays off

Shortly after the pandemic began, researchers at the University of Chicago released a study that ranked how effectively different types of jobs could be done from home. Steffen and his co-authors merged this information with another dataset of roughly 200 million job postings provided by Lightcast (formerly EMSI-Burning Glass), a labor market data company. This created an index of how readily different companies were able to transition to remote work based on the jobs they had been filling pre-pandemic.

Steffen and his co-authors paired this index with data on individual firms’ sales, income, and financial returns. “We were one of the first papers to identify precise estimates of how hard the pandemic hit different firms based on remote hiring,” Steffen said. “We found that some firms suffered a lot less than their less-prepared peers.”

Specifically, companies that were well-equipped to handle work-from-home arrangements prior to the pandemic demonstrated better financial performance between the first quarter of 2019 and the third quarter of 2020 when compared with companies that were more poorly equipped. Net income was roughly 15% higher; sales were 4% higher; and market performance was better, as measured by stock returns and volatility.

Importantly, Steffen and his coauthors separated companies by sector to make comparisons between similar firms. “We weren’t comparing a manufacturing firm to a firm in the financial sector because we know the financial sector is much more adaptable to remote work,” he said. “Instead we compare apples to apples within narrowly defined industries.”

Work-from-home benefits depend on industry

Having strong work-from-home policies in place proved especially beneficial in non-essential and low-tech industries, though for different reasons in each case.

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Companies that were deemed part of an essential industry were permitted to continue working in-person throughout the pandemic, negating the work-from-home issue. The importance of transitioning to work-from-home was heightened in non-essential industries, however, as they were forced to shut down in-person operations.

Companies in low-tech industries, such as retail trade or health care, were affected for a different reason. Prior to the pandemic, most high-tech firms had already integrated work-from-home policies into their infrastructure. “The IT industry and financial sector, for example, were very close to having perfect feasibility for all of their workers to go remote,” Steffen said. When the pandemic arrived, all these companies were more or less equally prepared. In low-tech sectors, though, this became a much more powerful mechanism of differentiation, “and those firms that more easily transitioned to remote work were able to reap the rewards during the pandemic because they could continue operations.”

Finally, the researchers found an interesting secondary result: the pandemic seemed to accelerate market concentration by pushing firms that were already ahead technologically even further ahead. This is a substantial concern, Steffen noted, and one that may require government intervention to correct. Paycheck Protection Program loans were one policy designed to help smaller firms with limited resources weather the pandemic, “but this likely didn’t level the scales enough,” he said.

Work-from-home ability and IT investment

For those firms that remained relatively stable and prosperous during the pandemic, Steffen and his coauthors found that the ability to work from home is tied to more general IT investment.

Right after the pandemic took hold, IT “laggards” were not well equipped when it came to shifting their workforce to remote positions. Those that didn’t have a strong foundation in place had to invest significantly more in hiring IT workers and acquiring the appropriate software and IT infrastructure.

“That the ability to work from home can help buffer against risks like a pandemic is a pretty important insight for firms, and one that was not previously very salient for HR departments,” Steffen said. “It’s smart to invest in IT before unexpected storms have struck so that you don’t have to get in line when everyone else is also standing in line.”

Read next: 4 tools to help managers connect with remote teams

For more info Sara Brown News Writer