In light of the recent layoffs by tech companies, there is an unusual similarity in their statements. With the notable exception of Apple, which has not announced layoffs, according to press releases, the C-suite of all Big Tech companies figured after the pandemic that no one would ever step outside or spend money offline again, and that their various online businesses would continue to thrive as they had been before.
I do love a heavily lawyered statement that was clearly written by the public relations department! In fact, these are all so similar that they might as well have come from the same PR person. It kind of seems like tech firms are laying off workers because… other tech firms are laying off workers.
There’s no way these companies are teetering on bankruptcy – they’re recently minting cash. That money did not evaporate. And as any person who’s been through job cuts can tell you, it’s generally not about performance, either! Essentially, someone went through a budget and zeroed out a bunch of line items that happened to be, you know, people’s jobs. A company might make job cuts that don’t seem particularly necessary, so you may wonder why they do so.
The answer is that investors have changed how they evaluate companies, says Michael Cusumano, the deputy dean at the MIT Sloan School of Management. Generally, when companies are growing really fast — like when revenue is shooting up 20 percent or 30 percent a year — nobody cares about profits, Cusumano says. But we’re not in a growth period right now, so investors are being more cautious.
Here are some of the quote unquotes from the among the admins of these companies
“At the start of Covid, the world rapidly moved online and the surge of e-commerce led to outsized revenue growth. Many people predicted this would be a permanent acceleration that would continue even after the pandemic ended. I did too, so I made the decision to significantly increase our investments. Unfortunately, this did not play out the way I expected.”
“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.”
“As we saw customers accelerate their digital spend during the pandemic, we’re now seeing them optimize their digital spend to do more with less.”
“As our revenue accelerated through the pandemic, we hired too many people leading into this economic downturn we’re now facing, and I take responsibility for that.”
“As you know, we continue to face an unusual and uncertain macroeconomic environment. In light of this, we’ve been working over the last few months to further prioritize what matters most to our customers and the business. After a deep set of reviews, we recently decided to consolidate some teams and programs.”
“This year’s review has been more difficult given the uncertain economy and that we’ve hired rapidly over the last several years … Today, I wanted to share the outcome of these further reviews, which is the difficult decision to eliminate additional roles. Between the reductions we made in November and the ones we’re sharing today, we plan to eliminate just over 18,000 roles.”
“Like many other leaders, I hoped to sustain the strong tailwinds from the pandemic and believed that our broad global business and lower risk to the impact of a slowdown in ads would insulate us. In hindsight, I was too ambitious in investing ahead of our revenue growth. And for this reason, today, we are reducing our employee base by about 6% across the company.”
“At the outset of the pandemic in 2020, the world rotated overnight towards e-commerce. We witnessed significantly higher growth rates over the course of 2020 and 2021 compared to what we had seen previously. As an organization, we transitioned into a new operating mode and both our revenue and payment volume have since grown more than
Tech companies have “tens of billions, often hundreds of billions of dollars, collectively, in reserves,” Cusumano says. “But they don’t really use that to support operations.” When an investor is reading an earnings statement, those reserves aren’t what they’re thinking about, either. One measure people use for measuring tech companies’ investment value is revenue per employee — and having hired all this staff during the pandemic, that means revenue per employee has gone down.
Software companies like Microsoft should have $500,000 in revenue per employee, or at least a minimum of $300,000, Cusumano says. “It could be higher than that, but when it starts to get below that, you start to worry that they’ve got too many employees. So that’s something people look at on a yearly or even quarterly basis.”
Is technology replacing humans at this rampant rate now? Its a question to be considered at the era we live in today.
Layoffs probably don’t cut costs, Pfeffer says. In fact, there is only limited empirical evidence that layoffs help improve profitability, and some evidence they actually hurt profitability, he says. “Oftentimes, companies don’t have a cost problem,” Pfeffer says. “They have a revenue problem. And cutting employees will not increase your revenue. It will probably decrease it.”
The literature on whether layoffs actually work to boost stock price is mixed: in one study, companies that closed plants and did layoffs had better returns than companies that only did layoffs. During the 2020 corona virus pandemic, layoffs had no effect on stock prices at all.
As far as layoffs are concerned, there is one tangible impact. According to Pfeffer’s research, layoffs literally kill people – both by increasing the suicide risk and by raising stress levels, both among the laid-off and among those who remain. Layoffs may also reduce productivity among those who remain employed.
So why do layoffs at all if they don’t actually work? “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.”