Tech companies are some of the biggest companies in the world. They have the most recognizable names with products that have managed to make their way into everyone’s daily life. Meta, Amazon, Microsoft, and Alphabet are just a few of the massive tech giants. They’re also part of the many tech companies that announced layoffs over the last year. And they don’t seem to be the last.
According to Crunchbase, roughly 200,000 workers have been laid off since the beginning of 2022 in tech. That number doesn’t account for others who have been affected in other ways by these cuts either. There is definitely something going on that’s caused all of these companies to pull the trigger on mass layoffs.
That’s especially true because the tech sector has historically been more resistant to macroeconomic factors such as recessions and economic downturns. For example, Apple, Microsoft and other tech firms posted record profits on the back of the Covid 19 Pandemic. That’s not to say that they’re immune, as they definitely aren’t. But they have characteristics in their company profiles that inspire investor confidence consistently.
All of this begets the question, why are tech companies laying off employees right now?
Well, if you look at some of the statements that have been put out by the CEOs or executives at companies who’ve done the layoffs, you’ll see some common threads.
Overextension
The statements that have been released from many of the CEO’s of the largest tech companies have pretty much all said the same thing. That every company over hired and overextended themselves during the boom times thanks to the pandemic. Which, to be fair, many of these companies increased their headcount by 20%, 30% even close to 50% in some examples.
Tech companies have gotten a good reputation as good places to work. They give their employees high salaries and good flexibility when it comes to work/life balance and remote working policies. That means they can attract some of the best talent on the market. So when times are good, these companies go all out in order to secure the best employees they can. Which can help explain the massive increase in employees and why they were optimistic for future growth.
What doesn’t really add up is that there has been a bull market for 10 years, surely, they should’ve known it wouldn’t last forever. And as such, should’ve been prepared for that reality.
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Slower Growth
Tech as a sector has always been focused on hyper growth. Companies are founded, take off like a rocketship and then go public with an IPO that shatters records. Sustaining such insane levels of growth is difficult, and becomes harder to do the bigger a company grows. As they grow, their growth becomes marginal rather than exponential. The law of diminishing returns in action.
Tech giants are not broke and are sitting on large sums of cash. They’re still profitable. That’s not the issue here. The issue is that tech companies need to show growth, as that’s how they are measured and valued. And they’ve got to maintain that growth, which is of course harder to do in a bear market.
The same ratios and metrics are used to measure tech companies as well as other companies, but some are more prevalent than others. One such measure of valuing a tech company is to use the revenue per employee metric. This measures how much revenue is generated by each employee inside of the company.
Now as mentioned above, tech companies overhired and overextended during the pandemic. So because their headcount had increased by a lot, the amount of revenue per employee had gone down. Meaning their company is bloated, or in an investors eyes, it’s less valuable since it’s not operating efficiently. So in theory, laying off employees will make their companies more valuable, but of course there are lots of other external factors and other measures that should be taken into consideration.
However, it is possible that a companies stock price will go up after announcing layoffs as it sends positive signals to investors.
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Inflation and higher interest rates
This is the same thing that every tech executive has been saying in their layoff announcement statements. Is it true? Kind of. Yes, with inflation the same goods and services being more expensive is going to have an impact on their bottom line. Higher interest rates are also going to impact them. So, tech companies and their leaders are saying that due to these reasons, they need to find other ways of reducing their costs. In this case, that means employees are getting the axe.
With inflation and higher interest rates, as well as the prospect of a recession looming over consumers heads, discretionary spending will go down. And it’s reasonable to assume that as consumers spend less, tech companies that rely on high consumer spending will feel those effects. As such, the leaders at these companies feel that reducing their headcount can act as a counterbalance to these changes in consumer spending habits. And hopefully stem the tide of any further macroeconomic effects such as a recession.
Tech is full of copy cats
Successful companies are always going to have copy cats and others who want to repeat their success. However, sometimes the copying of each others moves in tech can go to far. It’s as if every tech firm is playing Simon Says. Where either Amazon, Apple, or Alphabet do something, then every other company does the same thing, just because? It’s easy to follow along with the latest trends in tech.
What’s hard, is to take a stand and put your own money where your mouth is. Literally. In this case, it’s Tim Cook from Apple reducing his own salary to a measly $40 million. Obviously, that’s still a ridiculous amount of money to make, but it’s a 40% cut in his take home pay. And he hasn’t announced any layoffs at Apple (yet). So bravo to him for leading by example and not copying what literally every other tech company is doing at this moment in time.
These tech layoffs are contagious. As the “if everyone else is doing it, why shouldn’t we?” pack mentality comes into play. However, there are times when going against the grain now pays off later down the road.
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Do layoffs actually work as a cost saving measure?
The efficacy of layoffs as a cost saving measure are disputed. Stanford Graduate School of Business Professor Jeffrey Pfeiffer says that most times they’re ineffective at actually saving costs. One reason of that is because layoffs have a large upfront cost that can be in the millions to billions of dollars in severance packages. On top of that, it can seriously demotivate your employees if they lose close colleagues, and start to wonder if they’re next on the chopping block.
There’s evidence that those who invest when their competitors are divesting end up with an advantage when the economic downturn is over. As Pfeiffer mentions a famous quote from a well known businessman, “A.G. Lafley, who was the former CEO of Procter and Gamble, said the best time to gain ground on your competition is when they are in retreat – when they are cutting their services, when they are cutting their product innovation because they have laid people off.”
This again begs the question, why are tech companies doing layoffs if they don’t really have much of an impact?
According to Pfeiffer, “People do all kinds of stupid things all the time,” he says. “I don’t know why you’d expect managers to be any different.”
