Silicon Valley's Boom-Bust: Were Tech Layoffs Preventable?
Tech layoffs loomed large last year, but 2023 is already giving 2022 a run for its money.
An average of 2,080 employees have gotten the axe every single day of 2023, according to layoff tracker website Layoffs.fyi, following more than 154,000 tech sector layoffs in 2022.
Making the list of New Year's cuts is:
- Salesforce and Amazon, both of which laid off 8,000 workers.
- Microsoft laid off 10,000 workers at the same time as rumors swirled around its potential $10 billion investment in OpenAI.
- Google just today announced it was cutting 12,000 jobs.
- Meta, which cut 13% of staff in 2022, confirmed they revoked full-time job offers.
- Other notable layoffs include Twitter, Vimeo, Parler, Coinbase and Qualtrics.
“The tech industry has always had this boom-bust," said Rachel Happe, founder and digital workplace community strategist at Engaged Organizations. "I’ve been laid off three times in the tech industry, and it’s horrible, given that we don’t have a social safety net. It’s terrifying.”
Finding the Root of Tech Layoffs
These job cuts are happening at some of the most innovative companies in the world, Hyoun Park, CEO and principal analyst at Amalgam Insights, wrote on LinkedIn.
However, "after all the tech, diversity, equality, inclusion, efficiency and problem-solving capabilities we've figured out over the past 30 years, none of that has gone into making layoffs better and less painful."
Happe had her own take on these companies, with business leaders that are often very wealthy. “Money kind of makes you dumb. There’s a lot of dumb money in Silicon Valley, making people think they’re smarter than they are.”
Rising Interest Rates
One thing companies did — and still do — to make the current layoff situation inevitable is use debt to scale, said Happe.
“A lot of the finance of any company is wrapped up in financial markets and financial wrangling," she explained. "It has nothing to do with a product or the revenue. It has to do with their financial structures. And if you're heavily reliant on debt, and the interest rate goes up, all of a sudden, it doesn't seem like such a great strategy anymore, and you have to get rid of costs really fast.”
And how do you cut costs? “You take it out on your employees, even if revenues haven't softened up,” she said.
The chart below shows the federal funds target rate from Jan. 1, 2019 to Jan. 18, 2023. This rate acts as a reference for interest rates at commercial banks.
Companies don't see employees as assets, said Happe, only liabilities. And their knowledge and skillsets never come into play.
“They don’t see the contribution to effectiveness, to efficiency, to relationships, to innovation, any of that. It’s why you often see, when companies have layoffs, they have layoffs of higher-cost employees or older employees," she said, regardless of their skills or experience.
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If you look at the valuations companies had from a stock market perspective this time last year, said Park, they didn't make any sense.
“You looked at the numbers that companies were putting up from a revenue and profit perspective, and it was impossible to figure out how that related to the stock price."
Stock price is basically the market capitalization of the company, Park explained. "Market capitalization is how much money a company is expected to make throughout its lifetime. That's theoretically what a stock price means. And when you can't figure out how that number is aligned to either your profit or your revenue, that's a problem.”
Companies started running into this problem in the middle of 2022, when they realized the good times were not going to roll forever. Instead, said Park, companies needed to have more realistic expectations of how much money they were making and what it would take to break even.
“It seems like the reactions that all these tech companies are having is to pull out the same tired playbook that we all learned in business school that you need to cut operational costs, cut operational expenses, starting with x percentage of people," he said. "And what I find ironic about this is that even the numbers being used by these innovative tech companies are straight out of MBA 101. There's no real reason that 10% is some sort of magic number either from a finance perspective or from a technological perspective.”
Along with unrealistic valuations, these publicly traded companies — worth billions and mostly owned by institutional investors such as Fidelity and Merrill Lynch — make decisions to support the stock price.
Once you've publicly traded in your stock, things like debt-to-equity ratio or debt-to-revenue ratio start to matter, Park explained. Cash flows based on all the possible ways you can bring cash in (e.g., from borrowing money, issuing bonds) start to come into play and run the company more than thinking of basic costs and sales.
"It feels like a lot of these tech companies over the past decade got carried away with the fundamentals of managing the stock price rather than the fundamentals of managing the business," he said. "To the extent that they've forgotten how to manage their businesses correctly to handle both of these goals."
Now that these tech companies have to manage the business again, they're going back to basic and not very productive strategies, he added.
“There's so much that is being held up by the stock prices that represent trillions of dollars in value that make it a challenge to figure out exactly what the right thing to do is in these situations," said Park. "But it does seem that layoffs are a lazy way to simply try to answer the problem.”
The main issue with these job cuts was over-hiring based on predicted growth, said Park.
“Companies thought they would keep growing 20% a year forever simply by hiring more sales people, more marketing people, more developers," he explained. "And then last year, that stopped happening and everybody panicked.”
The economy is in a complex state, where things don’t have normal patterns anymore. “When there’s a bump in demand, you've got to wait a while to see if it’s a trend or just a bump, right? So why are you hiring people without knowing?,” Happe said.
Despite this over-hiring, Park claimed companies could have weathered the storm. “It’s hard to argue why a company with say $50 billion or $100 billion in cash on hand wouldn’t be able to weather six or 12 months or 18 months downturn for the employee count they have."
The money was there. In fact, tech companies are buying stock back from Wall Street based with the immense amounts of money they’re making, said Park. So that’s not really the issue.
“It's more about trying to position the stock because executives are also selling stock and want to make sure that they’re selling it for as much as they can.”
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Budget Freezes Amid Recession Talk
Happe said in the first quarter of 2022, she started hearing about companies that had frozen their budgets in anticipation of an economic downturn. And chatter about this potential recession and slowing growth ramped up into quarter two.
But these tech companies created a self-fulfilling prophecy, she said. “Economic strength is all confidence, right?”
And what happens when some companies freeze budgets because they don't know what the future holds? "Other companies really do take a hit to their revenue, because they're not getting new contracts," Happe explained.
This is something she says she's experienced herself. One client, a tech company, clamped down on its budget and contracted fewer hours in an effort to cut costs.
Were Tech Layoffs Preventable?
"Tech companies are run by tech people — engineers — who like to believe everything is an engineered thing, so they can put the pieces of the puzzle together," said Happe. "It creates the sum of the parts."
As such, customer experience and employee experience in the tech sector tend to be software for work. "Meaning it's a technology project, not a leadership project," she said.
But technology can't solve every problem in Silicon Valley. With a more human-oriented approach, tech firms could have prevented (or at least lessened) the impact of job cuts.
Rethinking Debt and Employees as Assets
“You shouldn’t make yourself so vulnerable to interest rates,” said Happe. To support a company, instead of relying on debt servicing, you could grow slower.
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“A lot of private companies are a lot better at managing this because they're not trying to grow as fast as they can," she said. "And we've got a real obsession about that, especially in the tech market.”
But is that the healthiest thing for the company, the employees or the customers? “Not really," she said, "because people aren’t integrated and learning. It just takes time to coalesce around new things.”
Instead, she believes there should be a process to place value on knowledge. "Software amortization is on the asset side of the balance sheet,” she said, adding that there are a lot of things that accountants find ways to make gross estimates out of, and they could do the same for knowledge. “But they don’t.”
Establishing Talent Networks and Job Sharing
Instead of hiring permanent employees during increased demand, Happe said tech companies should have turned to talent networks. A group of people who are trained, ready to contribute, don’t want to work 100% of the time or potentially work for other clients. She describes it as a marketplace where people self-select jobs.
“I was part of one where you get kind of approved by a company to be a contractor for them,” she said. Because the network wasn’t kept up to speed on the company’s operations, however, it wasn’t possible to jump on tasks immediately. “That's where I think it would need to get to.”
Another path that Happe said looked promising is job sharing, also called work sharing, where two part-time employees jointly share the work — and pay — of one full-time job.
This setup, she said, makes sense for a lot of people, like those who are caregivers, at the end of their careers or want more interesting work. Job sharing is also ideal for those who don’t want to work long hours — something the tech sector is notorious for.
Looking at Other Cost Reduction Initiatives
If job cuts came down to cost savings, other options were available. Park pointed to the significant operating expenses around cloud computing, something Amalgam Insights tracked from 2019 to 2022 and which he says "have been escalating almost 30% a year for the past several years without much oversight."
In 2022 alone, global spending on cloud computing, which includes infrastructure and software costs, reached more than $350 billion. And as much as 30% of those investments could be wasted due to service duplication and unmanaged growth of production and sandbox resources.
Another way tech companies could reduce costs is by tapping into the global workforce. Happe pointed to Silicon Valley's high average salary — data from the Bureau of Labor Statistics shows the average hourly wage in Silicon Valley was 71% above the national average in 2021. But preventing that is tech's unwillingness to hire remote workers.
Yet, using a talent acquisition team to tap into the global workforce could open up a lot of opportunities, including lower average salaries, a bigger pool of talent, increased diversity and more.
The Consequences of Tech's Boom-Bust Cycle
There are a lot of creative solutions to the tech layoff problem. However, because the economy has been so good — even now, with job losses — many of these companies are not willing to take big risks, Happe said.
“Or make investments in new ways of doing things because, again, there’s no financial motivation to do it at the moment. But it’s short-sighted."
Loss of Innovation, Competition
Despite these layoffs, Happe said it's funny to see that many companies still wonder why employees have no loyalty. The answer is so simple and right in front of our eyes: Companies give no loyalty back. Instead, they treat employment as a transaction.
“And that’s a bad situation if you are a company that hires knowledge workers because that transaction situation doesn’t get you to innovation and collaboration and all the things that propel the business forward,” Happe said.
While these companies are (theoretically) too big to fail from a core product perspective, said Park, by losing these workers, it will be harder for them to focus on the next product that’s meaningful.
“I think that’s going to be a challenge for these companies that are laying off people who understand both the current products and what might be coming next and being able to put that all together.”
He pointed to ChatGPT, the potential “Google Killer,” as an example. “It’s going to be hard for companies that have just laid off people to quickly respond to that. They’re dealing with their own internal challenges of moving the work to the 90% of employees who are left rather than being able to react to external threats.”
Loss of Productivity
A big issue with these layoffs from a pure business value perspective, said Park, is that it takes time to onboard employees.
“You can't simply hire someone and have them be fully productive the next day because there are all the aspects of learning how to work with your manager, understanding who your stakeholders are, understanding how the company works, being able to align your work habits to the company's preferred outputs, all of these little things that come into play every time you join a job."
It can take six to 12 months just to get up to speed, said Park. A report from Gallup shows that while the average onboarding program lasts 90 days, it typically takes new employees 12 months to reach their full potential performance-wise.
Hiring and onboarding a new employee also comes with costs. Another Gallup report revealed that the cost to replace a worker can range from one-half to two times the employee's annual salary.
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Loss of Industry Talent
Historically, this boom-bust has been a tech industry trend. “You can look at my own story. I was laid off three times until eventually, I leave the market,” said Happe.
You never get ahead of the curve, she said. At a certain point, you’re capped out of being able to reach a leadership position or no longer have the motivation to reboot your carer. And you might reach a point where you decide to leave the industry altogether.
“It gets you a very bimodal group of employees in tech,” said Happe. “It gets you the executives and then all the young ones.”
But the young ones lack experience and the well-paid executives tend to be naive, she said. If companies had that perspective from middle-tier tech workers, they might be able to solve the boom-bust problem.
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