A key reason we started following coworking back in 2007 was it provided a flexible alternative to the traditional long term commercial office lease.
Coworking turned a fixed cost (long term lease) into a variable cost (month to month membership).
We've long considered the shift to variable costs to be a key megatrend of the new economy. As we pointed out in the 2008 Intuit report The New Artisan Economy:
… by the beginning of the 21st century, ownership of large-scale infrastructures no longer determined business success in a growing number of industries. Brick and mortar and heavy iron gave way to speed, flexibility and innovation. New technologies, collaborative supply chains and outsourced manufacturing created lightweight infrastructures – smaller, cheaper and more agile.
With the greater need for business flexibility and agility not only are variable cost business models more attractive, in many cases fixed cost models are a liability.
Because of this, a recent article by the CEO of the coworking chain Industrious grabbed our attention.
The Tension that Defines us: Some Thoughts on the Future of Work covers a recent funding round by Industrious.
It also covers two key trends they see driving change in commercial real estate. One of them is "businesses’ rapidly growing need for flexibility". Key quote from the article:
American businesses are finding it increasingly difficult to sign 10-year leases. As the pace of change increases in business, with every passing year the ability to project headcount in a city 10–15 years in the future is becoming more and more difficult, not just for small businesses and startups, but for the Fortune 500.
The article goes on to describe what corporate customers want from coworking spaces:
... I’ve never heard a customer say “I want coworking.” What they say is, “I want my employees to love coming to work, but I can’t commit to a 10 year lease and create this all myself. Can you help?”
The article closes with a description of the move from fixed cost business models to variable cost ones:
This is starting to look a lot like other outsourcing trajectories, whether it’s manufacturing, customer service, or IT. Businesses are moving a cost line from a fixed obligation they deliver themselves, to a flexible service they consume from a partner: think for example of the transition from companies managing their own servers to using Amazon Web Services.
The shift to variable costs continues to be a megatrend.
It's a driver in the growth of sharing and gig economy firms like Airbnb and Uber, it's a major reason businesses large and small are increasing their use of contingent labor, it's one reason there are more online only businesses, including restaurants and it's the main driver behind the rise of platforms, ecosystems and cloud computing.
Despite its importance, the shift to variable cost business models get little attention. We think this is because it's a fairly wonky topic. Also, few people get excited about accounting concepts.
But it's driving a lot of change, and not just business change.
Consumers are also avoiding fixed costs. They're delaying or not opting for marriage and kids, they're renting instead of buying homes and they're reducing or delaying large purchases of all kinds and they're even choosing pets over children.
We cover the business aspects of this topic in more detail in our Business Models section and the consumer aspects in our Economic Uncertainty section.
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