The tech sector has long been one of explosive growth and capitalizing on the latest trends. So, when it outperformed during the work-from-home revolution, few were surprised. With that increased business came massive hiring campaigns; at their peak, major firms like Amazon and Meta doubled their head counts in a matter of months.
Now, following a rough 2022, Big Tech is bleeding workers left and right. Drained stock values, smaller growth and high inflation have weighed heavily on executives’ minds. But given that many tech companies continue to perform, we’re asking: why are tech companies laying off so many workers?
The answer, as is often true in economics, is more complex than its surface-level answer. Fortunately, Q.ai is here to help you navigate these complexities with a range of targeted, AI-backed Investment Kits.
Meta was the first Big Tech firm to announce substantial layoffs in November 2022. The company’s narrative goes something like this:
In 2020 and 2021, sales and product demand spiked for the company in the new work-from-home world order. Worker demand escalated as companies competed to onboard the best and brightest talent.
But when the pandemic eased off, inflation spiked and the Fed hiked interest rates, they faced a new problem. Amidst a cooling economy and potential recession, their payrolls remained enormously bloated. At the same time, some investors applied pressure to scale back their expenses to protect profit margins.
Thus, Meta laid off 11,000 workers in a month – a small portion of its payroll, but not an insubstantial number.
If that narrative sounds familiar, it should. After Meta broke the ice, more major tech companies followed suit. Layoffs piled up, with executives decrying overzealous hiring practices, inflation and lower consumer spend for their decisions. Many, including Meta CEO Mark Zuckerberg, posted emotional blogs about their decisions.
“Not only has online commerce returned to prior trends, but the macroeconomic downturn, increased competition and ads signal loss have [led to lower-than-expected revenue],” he wrote. “I got this wrong, and I take responsibility for that.”
Here are a few of the other major players who’ve made significant layoff decisions since then.
Amazon initiated its first round of layoffs in November when it announced that 10,000 jobs could be on the chopping block. At the time, Amazon blamed an “unusual and uncertain macroeconomic environment” for the decision.
But that wasn’t the last for the e-commerce giant. In early January, CEO Andy Jassy wrote that 18,000 more corporate employees could see the axe. “This year’s review has been more difficult given the uncertain economy and [rapid hiring in 2022],” Jassy wrote. “Today, I wanted to share the outcome of these further reviews…we plan to eliminate just over 18,000 roles.”
On January 10, Coinbase acknowledged that it, too, would make massive cuts – around 950 employees, or 20% of its workforce. The crypto company had previously laid off about 10% of its workforce in June 2020 due to a “crypto winter.”
But January’s decision stems from a slightly more unexpected source: the shockwave stemming from FTX’s impressive collapse. Coinbase CEO Brian Armstrong acknowledged this reality, calling the fallout a “contagion [that] has created a black eye for the industry.”
Google parent Alphabet announced this week that it’s reducing headcount by 12,000 positions. In a memo, CEO Sundar Pichai informed employees that this decision was the result of unrealized growth expectations.
Wrote Pichai, “Over the past two years we’ve seen periods of dramatic growth. To match and fuel that growth, we hired for a different economic reality than the one we face today.”
This week, IBM announced that it would reduce its global workforce by 1.5%, which amounts to some 3,900 positions. But IBM is an outlier in the job cuts mantra. Unlike many of its Big Tech counterparts, the company expects “full-year revenue growth consistent with our mid-single digit current model.”
So, why the layoffs?
According to an IBM spokesperson, the decision is related to the company reorganizing two of its business units. The decision was “not an action based on 2022 performance or 2023 expectations,” they reported.
On January 18, Microsoft announced that it, too, is laying off workers in the five-digit realm – around 10,000, all told. That amounts to about 4.5% of Microsoft’s entire corporate workforce after it slashed jobs in October.
Wrote Microsoft CEO Satya Nadella in a statement, “As we saw customers accelerating their digital spend during the pandemic, we’re now seeing them optimize their digital spend to do more with less.” He also nodded to recession expectations as a reason for positioning the company cautiously and strategically.
On January 4, Salesforce CEO Marc Benioff acknowledged that the company plans to slash 8,000 jobs, or 10% of its workforce. At the same time, Salesforce intends to reduce office space to cut costs elsewhere. Benioff blamed a “challenging” economic environment and “more measured” purchasing decisions by consumers.
Spotify’s recent announcement that 600 positions would be cut comes right out of Meta’s playbook. Wrote CEO Daniel Ek in a Monday blog post that “efficiency takes on greater importance” in challenging environments. He also admitted that he “was too ambitious in investing ahead of our revenue growth.”
Each Big Tech company has given viable – if remarkably similar – reasons for laying off workers. Most press releases blame the post-Covid slump, overhiring and high inflation and interest rates for their decisions.
And yet, it’s unusual that some of the largest, most successful companies in the world would expect 2021’s unprecedented growth to last forever. At the same time, none of them are remotely near bankruptcy, and there’s no indication of a crisis of underqualified personnel.
So, why are tech companies laying off workers en masse?
Some experts believe that other, largely unspoken factors could be contributing to the rising tide of layoffs.
Here are a few.
Silicon Valley has always oriented itself around high-flying innovations, unicorn startups and massive growth. Even during major economic downturns (think the Great Recession or Covid pandemic), the industry has remained unusually resilient. When it’s down, it’s never down for long.
But when a potential recession threatens its profit margins, that doesn’t mean the industry just takes it. One way to keep pace with a history of massive growth is to sell more products or raise prices. Another is to slash its workforce and reduce expenses. With a downturn on the horizon, many companies are opting for the latter.
Alongside its massive growth, tech is renowned for quick-paced innovation and industry disruption.
But the constant shift in tech and strategies means that, inevitably, some teams do get left behind. Sometimes, even high-flying companies have to make cuts in some areas to ensure others receive essential R&D funding.
For firms facing cuts, channeling resources into new strategies could prove beneficial long-term. Unfortunately, that means tech layoffs are an unavoidable reality.
Jeffrey Pfeffer, a professor at the Stanford Graduate School of Business, has another theory. When asked about tech companies’ similar responses, Pfeffer’s answer was simple: tech companies are copying each other.
“Oftentimes, companies don’t have a cost problem. They have a revenue problem. And cutting employees will not increase your revenue. It will probably decrease it,” he told The Verge.
There’s some evidence to support the position that layoffs can hurt profitability, rather than help it. Similarly, layoffs don’t always result in positive impacts on stock prices.
So, why are tech companies laying off workers?
“People do all kinds of stupid things all the time,” Pfeffer says. “I don’t know why you’d expect managers to be any different.”
Michael Cusumano, deputy dean at MIT’s Sloan School of Management, has another theory. According to him, these massive tech layoffs have more to do with investors than companies’ bottom lines.
Often, when companies see 20-30% growth annually, actual profits take a backburner to future success, he said. But with growth fading in the rearview mirror as payroll expenses remain high, many investors are evaluating tech companies more harshly.
Cusumano added that many investors don’t consider that these companies are sitting on “tens of billions, of hundreds of billions of dollars…in reserve.” But since they don’t use those funds to support operations, investors rarely consider them.
Instead, investors are more likely to focus on revenue per employee. And with so many pandemic hires, that metric has declined dramatically for major tech firms.
However, firms can counter this by signaling to shareholders that they’re willing to claw back fiscal responsibility via belt-tightening and refocusing on long-term growth.
Historically, such mass layoffs may have been cause for concern among investors. But in this case, such a widespread, proactive approach may be designed to show investors that the industry can make tough decisions to ensure long-term success.
As an investor, that means your tech holdings may see some decline short-term, particularly if a recession does bear fruit. Long-term, however, these companies are preparing for success the best way they know how: through continued innovation and (at least) the appearance of fiscal responsibility.
The current macroeconomic environment makes determining winning and losing investments difficult at the best of times. But when you’re considering volatile tech stocks, the math is even more challenging.
Fortunately, we here at Q.ai have an easier option: letting artificial intelligence monitor the markets for you. If you’re interested in disruptive innovation, our Emerging Tech Kit has you covered. Or if going green tops your bucket list for 2023, our Clean Tech Kit is working hard to bring about a cleaner, greener future.
With Q.ai at your back, you can rest easy knowing our AI will monitor and respond to changing market conditions on your behalf. The ultimate goal: to keep your portfolio and risk tolerance evenly matched – and help you build long-term wealth.
Download Q.ai today for access to AI-powered investment strategies.
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