Are tech layoffs warranted?

By Alex Owiti

The recent tech layoffs have taken the world by a surprise. Over 150,000 employees have been terminated from their jobs in an unanticipated manner within the tech industry, in spite of their global size and astronomical revenues.

Facebook, Google, Pinterest, Amazon, Salesforce, NetApp, Twitter, Spotify, and Microsoft are some of the big tech firms that have recently streamlined their human resource capacity because of jittery about the looming global recession. What could be the issue? Are the layoffs warranted? 

Even though the effects of the Covid-19 pandemic, the Ukraine-Russia War, Climate change, inflation, and other macroeconomic elements are being felt now, these important tech giants cannot just coil, and die. They have a serious buffer zone of cash and assets, and could have waited for 12 months based on the economic predictions before deciding on whether to lay off or not. 

The IMF has predicted that global growth will fall to 2.9% in 2023, and rise to 3.1% in 2024. The 2023 forecast is 0.2 percentage points higher than predicted in the October 2022 World Economic Outlook, but falls below the historical average of 3.8%.

Is this an alarm to warrant layoffs? I guess the Covid 19 pandemic was the worst global catastrophe ever seen after the 2008 global recession and most companies apart from tech companies saw their worst performance in revenues and layoffs. 

According to The Guardian, in 2020, at the height of Covid 19 pandemic, Amazon, Apple, Facebook, and Google released their financial results showing how the pandemic was a boost to the tech sector. The Guardian reported that despite the US announcing that economic growth overall had collapsed by a record 32.9%, Amazon reported a profit of $5.2bn for the quarter and sales of $88.9bn, 40% higher than the same period last year. 

Amazon Web Services, the company’s cloud computing division, reported revenues of $10.8bn for the quarter. The Guardian also reported that Facebook withstood an advertising boycott because of hate speech in July 2020 – analysts predicted that the social media company’s revenue would dip. Ad sales, which comprise nearly all of Facebook’s revenue, rose 10% to $18.3bn in the second quarter. 

In 2021, BBC reported that tech giants experienced increased profits as consumers upgraded their devices and sought cloud storage during lockdowns. Apple’s profits nearly doubled to $21.7bn (£15.6bn) in the three months to 30 June 2021 as customers bought pricier 5G iPhones.

Microsoft saw a $16.5bn profit at the same time – up 47% year-on-year, due to demand for cloud services and games.

Google’s parent company, Alphabet, also reported growth in quarterly sales and profits with its video platform YouTube, for example, posting an advertising revenue jump of $7bn in the three months ending 30 June 2022, in comparison with $3.81bn the year before.

Even though in 2022, most tech companies started to experience a massive revenue drop, some of them invested big time in technologies that were not bearing immediate return on investment. For instance, the Daily Mail reported that Meta had pumped more than $36 billion into its Metaverse venture since 2019. 

However, the effort had since resulted in a $30.7 billion operating loss over that same span.

Therefore, some not strategic decisions have become bad investments leading to the employees bearing the axe of layoffs.

At the same time, companies such as Twitter blamed its layoffs on serious revenue and cost challenges. This is after Elon Musk bought the company for $44 billion. Furthermore, The New York Times reported that Google’s parent company, Alphabet posted a fourth consecutive drop in quarterly profit, weeks after reducing its workforce by 6% to cut costs.

The New York Times also reported that the company posted its fourth consecutive decline in profit as it grapples with a slowdown in digital advertising. Net income plummeted 34 percent to $13.6 billion, falling short of Wall Street expectations of $15.3 billion, according to data compiled by FactSet.

The internet giant also generated $76 billion in sales in the last three months of 2022, down 1% from a year earlier and in line with analysts’ estimates. Google is said to have experienced years of soaring growth as consumers spent more time and money online during the coronavirus pandemic, lifting the advertising market upon which the company depends. Those advantages began waning last year, when rising interest rates and inflation prompted advertisers to rein in their spending. 

Most layoffs are because of the drop in revenues, inflation, post-Covid 19 pandemic impacts on businesses, and poor performance of macroeconomics.

A professor at the Stanford Graduate School of Business, Jeffrey Pfeffer believes that tech layoffs are a copycat behavior. In a recent interview with Stanford News, he termed the layoffs as “social contagion”, defining it as a behavior that spreads through a network as companies almost mindlessly copy what others are doing.

He further adds that the tech industry layoffs are basically an instance of social contagion, in which companies imitate what others are doing. One of the reasons why a company would dismiss its staff is because “everybody else is doing it”. 

“I’ve had people say to me that they know layoffs are harmful to company well-being, let alone the well-being of employees, and don’t accomplish much, but everybody is doing layoffs and their board is asking why they aren’t doing layoffs also,”Pfeffer explains.

Professor Pfeffer notes that layoffs are inspired by imitative behavior and are not evidence-based. Actually, he says, layoffs don’t work to improve company performance. 

“Academic studies have shown that workplace reductions don’t do much for paring costs. Severance packages cost money, layoffs increase unemployment insurance rates, and cuts reduce workplace morale and productivity as remaining employees are left wondering, could I be fired too?” Professor Pfeffer poses. 

Layoffs often do not cut costs, as there are many instances of laid-off employees being hired back as contractors, with companies paying the contracting firm. Layoffs often do not increase stock prices, in part because layoffs can signal that a company is having difficulty.

Layoffs do not increase productivity. Layoffs do not solve what is often the underlying problem, which is often an ineffective strategy, a loss of market share, or meager revenue. 

Also, some layoffs are as a result of a bad decision. Companies sometimes lay off people they have just recruited – they will go back to the market and compete with the same companies to hire talent. They are basically buying labor at a high price and selling low. Layoffs also have negative health effects on employees. Layoffs kill people, literally, according to Pfeffer.

“They kill people in a number of ways. Layoffs increase the odds of suicide by two and a half times. This is also true outside of the United States, even in countries with better social safety nets than the U.S., like New Zealand,” he says. 

It is therefore important for companies to not only think about their astronomical profits but put in mind the welfare of their employees first before anything. Layoffs destroy the basic elements of human rights as well as promote negative mental health problems. Companies should think of rationalization of its human resource capacity as the last resort even though we reckon the effects of the looming recession and global economic slowdown are a reality. 

Writer is the founder and CEO of Alexander PR and Communication Network 

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