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A Cost Benefit Analysis of Work from Home

What is the financial benefit of work from home vs work from office vs hybrid work environments? There are plenty of studies surveying worker satisfaction in different work from home arrangements, but as a fractional CFO, I care less about a squishy metric like “satisfaction” and more about the bottom line. Don’t get me wrong – employee satisfaction definitely affects profits. But using just employee satisfaction to analyze work from home vs work from office fails to grasp the big picture. What about the cost of office rent versus work from home stipends? How does productivity change in the home environment? Are customers more or less satisfied when served by employees working from home?

Knowing the financial impact of work from home vs work from office is critical to setting your company policy moving forward.

My finance team performed a rigorous cost benefit analysis of working from home and hybrid work versus our baseline of 100% working from office. The results were surprising…

Work from Home Costs that Really Matter

The first step of any financial analysis is to brainstorm the universe of costs and gains associated with the policy at question. Some work from office costs are explicit, like rent or utilities. Others are abstract or indirect, like employee dissatisfaction or failure to collaborate efficiently. Some expenses exist in both a work from home and work from office world – for example, we either purchase furniture for the office or we issue a work from home stipend for employees to do the same.

Although we calculated many costs, ultimately only two had a material impact:

Productivity

Productivity is the net of all efficiency gains and losses. It includes things like:

  • Faster delivery due to better focus at home
  • Slower delivery due to difficulty collaborating
  • More working hours due to no commute
  • Fewer working hours due to home distractions
  • Lower performance due to Zoom burnout, etc.

As a service business, productivity is the biggest drivers of our financial performance. Overall productivity went up by $16,000/employee per year during the Covid-19 work from home period.

What’s more interesting is the gains were not evenly distributed throughout the company. The Accounting Team’s productivity increased 21%, whereas The Finance Team’s productivity increased only 5%. Why the difference?

A chart illustrating the productivity gains by department for work from home and hybrid versus work from office. The accounting department had outsized productivity gains in 100% work from home, which disappeared in the hybrid period. On the other hand, the finance department had only modest productivity gains during work from home, but significantly higher gains during the hybrid period.

Bookkeeping and accounting work is easily divided and delegated and requires great focus for multiple hours on-end. “Honestly, I love our co-workers, but the office can be distracting now and then because co-workers might want my immediate attention,” my colleague Venus Huang told me. “When I work at home, I can get much more work done.”

The Finance Team works on highly collaborative projects like strategic business forecasting, pro forma services, and due diligence services. These projects require many meetings, creative brainstorming, and frequent client interaction. Such projects are slowed down by Zoom meetings where it is challenging to hold a fast-paced brainstorming session. “Sometimes it’s just easier to get everyone in a room and whiteboard the idea,” my colleague Cameron Chan told me, “Especially when we are building a complex model.”

In fact, the Finance Team’s productivity increased 10% in a hybrid work environment. That’s right – the finance team was more productive in a hybrid environment than in either 100% work from home or 100% work from office. This is attributable to their ability to schedule their time as either focused work from home or collaborative work from office.

Rent

Rent is often thought of as the biggest expense reduction in a 100% work from home environment. For CFOshare, rent represents almost $6k per employee per year in expenses. This expense goes completely away in a 100% work from home scenario, representing a significant savings.

In the hybrid work setting we still incur rent expense. Could the rent expense be less? That is debatable. We could reduce our footprint and make nothing but “hot desks”, but the employees who use the office the most prefer to have their own desk with a place to store personal items. With a smaller footprint we would be unable to hold all-staff meetings – an important need for CFOshare. In the end we decided that, even in a hybrid work environment, office rent would be comparable to 100% work from office.

Conclusion: Work from Home is 4x More Profitable than Hybrid Working

Combining the data about productivity, rent expense, and other expenses (see below) it is clear that work from home is financially more compelling than either hybrid work or work from office. More importantly, the data shows just how important productivity is compared to all other business expenses. This is useful insight for managers to consider when contemplating whether or not to invest in automation, training, or employee events.

A waterfall chart showing the financial gains and losses of productivity, rent expense reduction, and other factors that make work from home more profitable. A waterfall chart showing the gains of productivity and relatively low expenses related to hybrid working.

Work from Home Costs We Could Not Calculate

How does work from home affect employee turnover? This is an important question for a service business where employees are essential to creating revenue. On the one hand, work from home creates mental and physical stress from sitting at home isolated. On the other hand, work from home eliminates commute time (a notoriously dissatisfying and unhealthy experience for most employees), allows employees to adapt their work environment to comfort (hot, cold, music, etc.), and, perhaps most importantly, live wherever they want. This last point is especially important as it affects an employees’ real pay (relative to cost of living), proximity to friends and family, outdoor environment, etc. Here in Colorado we saw hundreds of professionals leave Denver during Covid-19 and move to small mountain towns that are quieter and less polluted.

I am proud to say CFOshare had zero employee resignations since March 2019, including during Covid-19. This is the product of many polices and processes designed to keep our staff engaged, growing, and satisfied with their work. While a great benefit to our business, it also means we have no empirical evidence to say how churn is affected by work from home, work from office, or hybrid work environments. Therefore we left the impact of churn out of our calculations.

As you read this article, consider how significant employee resignation is in your organization and the expense you pay to manage churn. This factor may change the cost benefit analysis of your work arrangement in significant ways. Contact us if you would like a customized analysis of your business.

Work from Home Expenses that Do Not Matter

Our team thought up a dozen different costs and expenses related to working from home or hybrid work. By calculating the impact of each one, we quickly determined they were insignificant compared to the benefits of increased productivity or rent expense. These other expenses included:

Monthly Team Meetings

In a 100% work from home environment, our team still wants to meet in-person once per month. These days we schedule strategic and collaborative internal team meetings to discuss long-term projects. We also enjoy seeing each other in-person occasionally!

Without an office to go to, we would rent a hotel conference room and have the event fully catered. Although such accommodations are expensive on a daily-rate basis, they are only $1,600/employee per year – quite a bit less than office rent.

Utilities

Unlike rent, utilities remain an expense in work from home as we often pay employees stipends to upgrade their internet connections to support video conferencing. This ends up being quite a bit more expensive since corporate high-speed internet pricing ($150/employee per year) benefits from economies of scale versus dozens of residential internet providers ($600/employee per year.) In the hybrid environment, we end up paying both expenses.

Commuter Benefits

Like many businesses, we offered employees commuter benefits to pay for parking, bus fare, or other commuter expenses. Not every employee used the benefit pre-Covid, but the expense goes away completely in the work from home environment, saving an average of $400/employee per year.

Furniture and Fixtures

As a growing business, we face increasing investments in desks and other office facilities as the work from office team expands. On site furniture expenses were calculated at $300/employee per year; whereas our work from home furniture stipend came in at a more modest $200/employee per year. This savings is due to the number of furnishings not directly attached to an employee’s desk – artwork, conference rooms, and kitchen appliances, for example.

The hybrid environment brings the worst of both worlds by requiring both office furnishings and home furniture stipends.

Snacks

I couldn’t believe how much money we spend on snacks: $240/employee per year! And we do not even have fancy (or healthy) snacks in the office! The expense includes food and beverages, such as our Mor Kombucha on tap or tea and liquor cabinet.

The bottom line of WFH and WFO

When all costs and benefits are added up, the results are clear: work from home was more profitable than work from office. Work from Home wins in every category except collaborative work. Runner-up is hybrid work, where the higher costs of maintaining both an office and home setup are more than offset by worker productivity gains.

Your small business’ results will be different. Here is a guide to help you understand what might sway the economics of your worker setup:

  • If employee churn is high, the benefit of reducing churn will likely outweigh all other costs. Spend time understanding which work arrangement your employees want and test to see if that can reduce churn.
  • If your work is highly collaborative, your quality may go down in excess of productivity gains. This is especially true if your quality standards are very high, or if one quality error is very expensive to correct.
  • Your explicit costs may vary. For example, some of our WFH clients provide employees a $500/mo. co-working stipend. Others will fly-in their employees from around the country for quarterly meetings. These extra expenses need to be considered in your financial analysis.
  • There is more to work than profits. Well-intended flexible work policies can inadvertently bias against women and minorities. Your policy needs to be thoughtfully designed to avoid such bias.

Regardless of whether you change your work arrangement or stick with what is already in place, take the time to analyze the facts so you make an educated decision. If you want help analyzing your business plan, contact us to schedule your free consultation with a CFO.

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