Strategy & Operations » UK companies considering “virtual firm” approach

Organisations could decide against renewing current office leases if there are minimal staff working there. In central London, average office rents are from £48.50 to £112.50 per square foot. Depending on the size of the building, the annual rent could easily run into hundreds of thousands of pounds.

While a virtual firm may have a head office, it does not have to accommodate hundreds of people as the majority are working remotely. And the virtual model could be adopted by a wide range of professions due to the simplicity of workers just needing a computer with internet access.

“You haven’t got the costly office space, which is normally a big chunk of overhead. Also, a lot of the IT stuff is cloud-based so you’re saving with things like servers, and the traditional storage facility for IT. People have their laptops at home and that’s kind of all they need,” says Andy Harris, partner at accountancy firm Hazlewoods.

In a virtual firm, workers are often self-employed and may be classified as consultants or freelancers instead of employees. This can result in further savings for companies, provided they’re exempt from IR35 rules.

“From the point of view of the firm, they’re saving 13.8 percent on salaries because they’re not playing employers’ NIC. They’re also not paying the four or five percent pension contribution for them. And they’re not paying for people to go on holiday because these people aren’t employees. So there are quite chunky savings, really,” adds Harris.

“It can work really well. But if you get your balance wrong and you still spend too much money on offices, then it’s not going work.”

The employment picture

The UK’s redundancy rate soared during the coronavirus more quickly than the 2008-09 economic downturn. According to the Office of National Statistics (ONS), the rate jumped from 3.8 employees per 1,000 in January-March 2020 to 14.2 in September-November 2020. The 2020 peak was even higher than the 2008-09 peak of 12.2 but did fall faster.

While the hardest hit sector was admin and support services. Over July-November 2020, this saw a redundancy rate of 35.8 per 1,000 employees.

In comparison, the ONS’s unemployment figures have seen less dramatic movement during the pandemic. In 2020, unemployment averaged 4.5 million. October-December saw a peak of 5.1 million, which dropped to 4.8 million in January-March 2021. In contrast, the average for all of 2019 was around 3.8 million.

And then there is the Government’s furlough scheme, due to end on 30 September 2021 after having been extended several times since March 2020. As of April 14 2021, the scheme has supported an estimated 11.5 million jobs from 1.3 million employers.

Government furlough contributions of 80 percent of wages will decrease to 70 percent from July, then to 60 percent in August with companies covering the rest.

As furlough eases, both the redundancy and unemployment rates may increase. But it could also lead to more virtual firms with businesses choosing to cut back-office costs instead of jobs.

Law

Investment bank Ardern predicts that a third of lawyers in England and Wales could be working in virtual firms within the next five years. Arden also suggests that the virtual model is more effective in recruiting lawyers without carrying the risks and costs associated with mergers and acquisitions.

And in a virtual law firm, consultants can typically hang onto far larger billing percentages than in a traditional practice.

“Before, all the fee would go to the firm and then you get paid your salary. In a virtual model, the lawyer gets to keep most of most of the fee. A typical percentage would be around 70 percent,” says Harris.

“Every £1,000 they bill, they keep £700 and £300 then goes to the firm to cover things like insurances and practicing certificates and other essential items you can’t really get around paying.”

Further savings can be made by outsourcing roles such as secretarial and admin.

Expansion

The pandemic has also seen the expansion of some virtual businesses. Three years ago, Rebecca Newenham set up Get Ahead virtual outsourcing business and marketing agency. It is effectively a franchise business that is growing steadily through regional directors around the UK, matching client needs with the company’s roster of around 50 freelancers.

“Over the last year, I’ve doubled in size in terms of numbers of franchisees that want to be their own boss, have the flexibility, but work on something that’s tried and tested,” Newenham says.

“We’ve certainly grown the team of virtual assistants that want that flexible work. A number of them will have been in employed roles before the pandemic. And now for whatever reason, whether they’re furloughed or made redundant, they see the benefit of being able to work from home flexibly.

Alongside marketing, other services include secretarial duties, virtual PAs, bookkeeping, and HR, as well as management of social media and online events.

“From our clients’ point of view, they are simply paying for the work that’s done. They’re not paying for the tea breaks, any other additional bits like that, it’s so much more efficient. And then from my side, my team are only invoicing me for the work that they’re doing. Which makes a huge difference,” Newenham adds.

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