Changes in where we work and how we are forced to work during COVID-19 led to an increase in the number and importance of virtual companies. Virtual companies and remote work, however, are not new. Before the pandemic, 4.7 million people were already working remotely from home. According to the US Census Bureau and the Bureau of Labor Statistics, these 4.7 million people comprised about 3.4 percent of the US workforce.
A survey by Gartner, Inc. revealed that post-pandemic, 88 percent of business organizations worldwide mandated or encouraged all their employees to work from home. Thanks to the fourth generation of the industrial revolution powered by the high-speed internet and online communication, businesses could survive in the problematic pandemic times.
However, despite news media declarations, most middle-market executives do not intend their employees to remain virtual. Forty-one percent (41%) of middle-market companies have brought their workforces back in total, and 28% are well into a phased return.
Virtual companies operate with lower costs and greater agility, proving significant advantages over traditional brick and mortar companies. The high standards of feasibility and flexibility they offer contribute to their value.
What Is a Virtual Company?
A virtual company conducts all or most of its business online. It may or may not have physical locations customers can visit. With online retailing, a form of virtual interaction, companies can sell their products for a fraction of the cost of a physical retail store.
Businesses, where most work depends on computers, can easily transition to virtual operation. For instance, IT companies have embraced many aspects of virtual business structure, such as developers working from home. Customer service centers have shifted to virtual business by allowing their representatives to answer calls and emails from home.
An extreme example of virtual business is when all employees work from home, and the CEO’s residence serves the company’s headquarters. A less extreme example of virtual enterprise is when the company has physical offices or a warehouse.
Virtual businesses trim unnecessary costs by going online. Cost-cutting efforts include outsourcing business functions such as product development, sales, shipping, etc.
Advantages of Virtual Companies
Virtual Companies Are Easily Established,
Creating a virtual company cuts real estate, office space, utilities, equipment, etc. Establishing a virtual company requires:
- Registration, starting a business plan.
- Overseeing and listing all possible costs such as computers, internet service, communication devices, marketing expenses, employee salaries, benefits, etc.
- Describe how you plan to run your virtual business, including the number of staff, the role of management in overseeing projects remotely, and the ways to measure employee productivity.
- Creating an organizational chart, finding out the costs for communicating with virtual employees.
- Creating a secure intranet for employees to meet, share ideas, and discuss work-related issues virtually.
- Hiring employees and commencing business operations.
Efficiently Financed and Quickly Scaled,
Virtual companies have no head offices, no leases for real estate, minimal fixed assets, and low overhead costs. They hire globally, and employees can work from anywhere. They have a minimal investment in equipment, are more profitable than traditional companies of the same size, and are easier to bootstrap.
They enjoy extended work hours across multiple time zones. Constant online communication leads to faster decisions. Virtual companies can scale quickly and disrupt industries: for example, the digital revolution in the banking sector is disrupting the old commercial banking system.
Break Geographic Boundaries,
Virtual companies attract the best employees who are most suited to the corporate culture and interest worldwide. Good employees want to work with good companies around the world, and they find each other online.
Improve Work-Life Balance,
Employees prefer to work virtually to avoid soul-sucking commutes, enjoy flexible working hours, enhance work/life balance, and significantly lower work-related expenses. No commute means reduced fuel costs and time saved for hobbies or family. Virtual companies also integrate women, who bear the bulk of responsibility for housework and child care, better to the workforce with improved work-life balance.
Nimbly exploit new opportunities,
The third generation of industries focused on raising capital and dwelled in the “he who had the funds makes the rules” philosophy. Fourth-generation companies require a lot less money: capital is becoming less important. In contrast, human capital is becoming a lot more critical. Virtual companies need to engage the best employees worldwide and utilize their knowledge, motivation, and skills to create value.
Create Leaner Corporate Structures, and
Traditional organizations followed vertically oriented corporate hierarchies of authority. Just a few individuals at the top held all the power. On the other hand, virtual organizations create alliances between individuals and groups from different businesses. Each organization within the alliance possesses the highest competencies to build a customized product or deliver service quickly.
The virtual corporation brings diverse innovations together and is more permeable than traditional organizations. Traditional functions begin to fade as interfaces between the company, supplier, and customers change constantly. A virtual company may not have a centralized physical office or even an organizational chart. In a virtual organization, different sets of people such as customers, competitors, and suppliers may work alongside one another.
Save on Taxes & Fees.
Virtual companies can save a lot on some of the regulatory burdens imposed upon traditional companies. Trade barriers, threats of shutting borders, anti-trust or competition bureaus, tech companies getting caught up in international trade sanctions, and other problems such as security and IP disclosure requirements make transacting international business more difficult. Traditional companies trying to conduct M&A transactions are affected by these problems. However, virtual companies registered in unaffected jurisdictions can avoid such issues when going for M&A transactions.
Disadvantages of Virtual Companies
Virtual companies aren’t perfect and impractical for many business niches.
- It’s challenging to build and sustain a corporate culture when employees aren’t physically present with each other for long periods. Distance inhibits camaraderie among remote employees who rarely get opportunities for impromptu conversations and learning.
- Social isolation can lead to challenges in retaining talent who feel disconnected from their employers.
- Some work simply cannot be done this way (retail, service businesses, etc.)
- Distance impedes the interaction necessary for collaboration, innovation, and performance of creative work.
- Humans are social creatures. Not all workers can or want to work in virtual environments—the decision to stay virtual needs to be weighed against employees’ mental health.
The Net Effect: Are Virtual Companies More Valuable?
The short answer is: It depends. Companies that have “dialed in” could be more valuable than their physically-based peers because:
- They might enjoy both lower-cost structures and access to a broader range of talent/human capital.
- They might enjoy a larger total addressable market, given they can serve clients anywhere.
On the other hand, virtual companies that fail on the above items would undoubtedly be viewed as more fragile than their brick-and-mortar counterparts.
- A company that cannot retain staff is a red flag. Evidence of this includes
- Employees who require constant training and retraining and
- High talent acquisition costs.
- They cannot maintain pricing. If the company has a lower cost structure but competes on price, they are racing to the bottom.
- Their pricing pressure on topline revenues impacts net margins, which would weigh heavily on valuation.
Flexibility and agility help virtual companies build value and compete against traditional companies. All things being equal, if a virtual firm has solved the challenges presented naturally in the virtual business model, it very well could have an advantage over its traditional peers.
