When Does Location Matter? An Exploration of Organizational Theory and Location Independence

Anyone who has spent time in a corporate setting is likely to understand the idea of “face time” — being seen working hard in the office by the boss and coworkers, I was no exception. In one of my first corporate experiences I vividly recall a boss that disallowed myself and two coworkers from taking a short afternoon break and walking in the neighborhood. My coworkers were salary employees who put in well over 40 hours a week and rarely had quick turnaround projects, there was not real concern about them completing tasks on time and yet our boss was uncomfortable with the idea that his employees may be seen spending time away from their desk, not working. For the few weeks this break occurred (prior to being witnessed) it allowed friendships to build, social ties to be established, as well as knowledge to transfer about what each person was working on and struggling with in an informal way. The restrictions that were a result of accidental observations lead the elimination of the exact type of activity which demonstrates the benefits of co-locations. In this typical example both advantages and disadvantages of co-location are revealed, and I got my first experience of how an arbitrarily rigid work environment can be. This planted a seed for a life of exploration into organizational design and the structure of work.

This post draws on both classic and more recent academic research looking at organizational design and the role of location. Particularly exploring what aspects of management have benefited from co-location and asking if those same arguments still apply. This post is not about how to resolve issues of physical manufacturing or in-person customer service. It assumes that a business, or a section of it, has the potential to be remote, and is pondering concerns about topics like productivity and effective learning. Additionally, it is important to remember this is a general discussion, the design of practices that works for an individual organization is going to be unique to them, as is the choice to physically co-location. What I hope to show here is first that this is a decision worth pondering, and then to present some of the factors for consideration in that choice.

Organizations have been the subject of study for well over a century. Through most of that time the fact that a company was located at a physical space was taken for granted. Yet today we see these long held assumptions being violated, successfully. That raises the question of why does location matter? And for what? Traditionally, organizational scholars have shown that physical proximity provides advantages in monitoring subordinates[1], improves the coordination of interdependent activities[2], including aiding in the transfer of tacit and social knowledge[3], and in creating clusters[4], which among other benefits supply a pool of relevant talent. The remainder of this article will explore each motivation.

Monitoring Activities

Companies aim to control the behavior of their employees so they set up incentive structures (i.e. performance bonuses) and monitoring. This monitoring is a key responsibility of management, no matter how the organization is designed. Monitoring is commonly studied in the context of public boards assessing the actions of CEOs; however, the same concepts extend to how executive evaluate managers, and how managers measure the output of their workers[5]. This is traditionally done by in-person observation, creating the norm that one must be “seen” working by physical presence in the office. There is a prevalent notion that if you are present for a set amount of time you are giving the required effort. Location independent companies still rely on the principles of incentive structures and monitoring to track the performance of their workforces. Incentives, especially monetary ones, are easily transferrable, but how monitoring is done, when the ability to walk over and observe employees is no longer an option, look different.

Remote companies generally take one of two approaches to this issue. The first is using technical solutions to remotely monitor digital work, (i.e. time doctor) the other is to only track the output, this is generally coupled with a strong trust building mechanism. Much of this decision depends on the type of work that is done. When employees are doing creative work or are hired for their unique expertise it may not make sense to record their digital activity as a means of evaluation. Instead, something like project or piecewise incentives may make more sense. These types of arrangements are often based on a high level of trust either from prior experience of that individual, performance in the hiring process, or trust that has built up over time. In contrast, if workers are doing smaller repeated tasks, such as responding to customer service tickets, where count and time spent are meaningful measures then digital tracking may make sense. In today’s digital world monitoring may be completely decoupled from co-location. In fact co-location may rely on a type of monitoring that is detrimental to overall productivity, as in the opening example. As organizations grew in the early 1900s in-person observation was a reliable way of tracking activities, but as work become less and less observable to someone walking by and more easily recorded digitally, it may no longer be necessary to rely on co-location to monitor their workforce.

Coordinating Interdependence

There are generally three types of interdependence between functions of an organization[6]. The first is pooled, this can be managed through standard rules, basically this is the idea that each operator needs to follow the same rules for the organization to operate properly. Think of the individual stores for a global brand (i.e. Starbucks), it is clear that each store operated with common rules, stores do not depend on each other but they do all depend on the same source of information. The second is sequential interdependence, this is the idea that the output of A serves as the input for B. This is fairly common, one example is brewing, where beer must first be made and then it is bottled. The bottlers depend on the brewers but the brewers are not dependent on the bottlers. The third type of interdependence is reciprocal, meaning A depends on the output of B and B depends on the output of A. In this situation, real time feedback is often required and continuous updating throughout the process. This is typified by hospitals where multiple units are involved in the diagnosis and care of a patient.

When thinking about the impact of location, both pooled and sequential interdependences are readily adaptable to digital management. They are fairly easily managed mostly because as there is no need for real-time feedback. Each unit does their work independently and either the task is complete or is sent to the next unit for continuation. If there is some limited feedback it is often resolved in a single conversation. Furthermore, the relatively simple type of information that needs to be transferred can be done with low fidelity communication such as text conversations. In contract reciprocal interdependence is more complex and while co-location does still have real benefits, especially for coordination that is reciprocal and requires individuals depend on the work of each other and are frequently providing feedback, there are still options for remote companies. This will depend on the specific team members work styles and what is being developed regular team check-ins may provide value, this could range from weekly google hangouts to daily meetings and specified hours of overlap. Additionally, when thinking about coordination structures recognize that what is needed will often change with time, so plan ahead, know when milestones are coming which require high levels of communication, perhaps even planning in-person sprint meet ups if needed. There is no one size fits all coordination mechanism, this is true for both co-located and location independent organizations. However, those who choose to be location independent have put themselves in a potentially less forgiving environment, where walking to a colleague’s desk is not an option, and the creation and building of a communication culture takes time and effort. Yet, if it is done well, I believe location independence allows for a remarkable balance of freedom, flexibility, and structure.

Transfer of Social Knowledge

The learning, or information transfer, that occurs within a physical office often gives more depth of information than an online chat. There are two main reasons for this. The first is the higher fidelity of in-person communication, meaning that when you are standing in front of someone in addition to their words and their tone you can read body language, observe the surroundings, and generally pick up on social cues that may not be available in video chat, on the phone, and via text conversations. The second issue is the general social conversation that occurs in person that can be difficult to replicate digitally. This social connection is often cited as a common missing for remote workers. However, it is not just the feel good comradery that is missing it is also a lot of meta information about the organization and the internal knowledge distribution. Meaning when you chat with coworkers, for example while waiting for a kettle to boil, the small talk often tells you “irrelevant” information that may later let you point someone else to a source of information (this is what was happening during the afternoon walks in the opening example).

While location independent organizations are at a disadvantage, it is not impossible to have social knowledge transfer remotely. The first step is to create norms within the company so that the tools also promote the social side of communication. Management in organizations must allow and encourage it without seeing this as inefficient, it is important to recognize that this is an important part of learning for employees[7]. In fact one recent study found that, “employees who had used the [internal social communication] tool became 31% more likely to find likely to find coworkers with expertise relevant to meeting job goals. Those employees also became 88% more likely to accurately identify who could put them in contact with the right experts” [7]. Additionally, allowing the right set of tools to emerge for each individual and team, giving each person the flexibility in what tools people want to use[8], while educating them on the recommended style tools for the various types communication (i.e. is this a text, phone, or video chat conversation?). Finally, prioritizing the annual (or more frequent) company gathers will be critical, not for setting tasks but to build trust, for people to connect on a social level.[9] It will likely take an ongoing effort to encourage remote employees to socialize with co-workers, but it is possible, and it is worth it.

Clusters and the Supply of Talent

One of the most prominent ideas related to location is that of industry specific clusters — think Silicon Valley, Hollywood, or Wall Street — these areas provided a consolidated space for a variety of players related to the market to come together. Scholars call this agglomeration, and find that the effect of these areas are positive at the industry level, but do not benefit individual organizations[10]. One study of the garment industry in New York City demonstrated how the existence of the cluster was critical to the industry, but there was no clear pattern for individual companies, the designers accessed the space as needed benefiting from the presence of consolidated market yet were not constrained by its boundaries[11]. This dynamic highlights two aspects of cluster constraints on organizational location. For the designers, this cluster was a supporting environment that allowed further creativity unconnected to the physical space; but for the suppliers this space is a constraint, in order to serve their customers, they are expected to be physically present next to their complementors and competitors as a participant in the ecosystem.

One historic reason for the development of clusters is the focus on resources, this includes both natural or physical resources (i.e. a timber supply) as well as human labor. With respect to human labor, clusters allowed for the development of expertise. Consider the automobile industry in Detroit in the early 1900s, a strong local expertise in manufacturing practices developed, people were trained and companies were able to fill their positions with qualified workers. A feedback cycle was created, and over time increased expertise and specialization developed. All of this reinforcing the local dominance of a specific industry and make it more compelling for new organizations in that industry to locate nearby to tap into these resources. This was compounded even further but the limited (and slow) access to information, people were not readily able to share complex information over distance, and therefore to be a top participant in an industry with a cluster, a hopeful upstart needed to physically be within the cluster.

Today companies feel the tension of two trends, on one side is the cluster effect, and on the other is the popularity of globalization and outsourcing. In the labor market today people have an increased general mobility, access to online tools which allow them to learn new skills or how to transfer existing skills into a new industry, and with increasing quality of global communication, and the rising cost of living in some areas the draw to searching globally for labor is strong. A major factor organization should consider when balancing this is their industry as well as their position in it. When considering the possibility of designing a new or existing company to be location independent examining the dynamics of the industry is crucial. There may be benefits of being an outsider and breaking the mold, but it is a decision that ought to be made intentionally. If an organization does opt to reside outside their industry cluster, they need to find a way to participate. This could be in driving the activity online or by prioritizing specific events or simply making sure to be present with some frequency. This is not an impossible task, but it is also not trivial. For organizations considering location independence, the identification of their industry cluster along with a strategy for participation and visibility is critical.

The choice of location based versus location independent is one for each organization to consider. It is a non-trivial commitment to establish new structures and behaviors that support remote work. Yet, for most organizations there is little (apart from habit) to justify ignoring this trend. Monitoring is not more effective in person, perhaps even the opposite; and coordination while benefiting in some ways from co-location hardly requires it with the communication tools available today (both chat and project management), even the industry clusters that once tied resources to a specific geography are accessible without committing to full time presence. Regardless of outcome, organizations today ought to be open to considering a location independent design. Furthermore, as ecosystems continue to develop and support remote workers and individual preference shift this trend will grow. Expect to see organizations dropping traditional headquarters and increasing remote work support, as well as creating flexible spaces, perhaps distributed in location, which hold a fraction of their workforce. Finally, the design set of structures and behaviors that work for an organization is going to be unique to them, and many do not require physical location.

As more and more organizations are transitioning to remote work, a community is developing. This year, for the first time, the leaders in this movement are gathering to share their experiences, learn from each other, and welcome those curious about remote organizations. Learn more and register to join at: www.runningremote.com

[1] https://hbr.org/1973/03/what-kind-of-management-control-do-you-need

[2] March, James G., and Herbert Simon. Organizations. (1958).

[3] Nelson, Richard R., and Sidney Winter. An evolutionary theory of economic change. (1982).

[4] https://hbr.org/product/location-choice-for-new-ventures-cities/811106-PDF-ENG

[5] https://hbr.org/product/hbr-guide-to-performance-management/10119-PBK-ENG

[6] Thompson, James D. Organizations in action: Social science bases of administrative theory. (1967).

[7] https://hbr.org/2017/11/what-managers-need-to-know-about-social-tools

[8] Berkun, Scott. The year without pants: WordPress. com and the future of work. (2013).

[9] https://hbr.org/1995/05/trust-and-the-virtual-organization

[10] https://hbr.org/1998/11/clusters-and-the-new-economics-of-competition

[11] https://hbr.org/2014/02/new-yorks-fashion-industry-reveals-a-new-truth-about-economic-clusters