Al Khan is Co-Founder of CloudDevs, the go-to spot for hiring remote tech talent, and a former financial professional.
Tech layoffs are on the tip of everyone’s tongues lately. They’re troubling—but what’s causing them?
Against a backdrop of growth, the tech industry’s contribution to the economy soared last year, outpacing U.S. GDP nearly twofold, according to Oxford Economics. An analysis from Deloitte suggests the deceleration in global tech spending seen in 2023 is coming to an end, with a decrease in recession risks and forecasts predicting a modest rebound for the tech sector in 2024.
But thus far, the industry has witnessed over 34,000 layoffs, marking a significant shift for an industry synonymous with exponential growth and unparalleled job security. Tech giants, including Google, Microsoft and Meta, have initiated substantial layoffs, with Google preparing for a second round. These layoffs have unfolded against an intriguing fiscal backdrop: Google reported a revenue jump of 13% as they were spending $700 million on severance and other expenses tied to layoffs, and Microsoft let go almost 2000 workers just five days before reporting a 17.6% revenue spike.
These numbers are staggering—and, at first glance, contradictory. But three clear factors are driving this industry trend.
The Ugly Side Of Overhiring
Jason Citron, CEO of Discord, provided insight into one of the driving forces behind these layoffs. He revealed that the platform’s rapid expansion—quintupling its workforce since 2020—had led to diminished efficiency, prompting a 17% reduction in staff. This scenario underscores a broader trend within the industry, where rapid scaling under favorable economic conditions has outpaced sustainable growth strategies across the board.
Overhiring, a byproduct of the sector’s bullish years, has left companies overstaffed and under pressure to streamline operations in the face of economic headwinds. Regardless of healthy profit margins, big tech is self-correcting for a post-Covid hiring boom that’s hindered productivity and left companies bloated.
AI On The Rise
AI’s rise poses both opportunities and challenges, automating processes that once required human intervention but also rendering certain roles redundant.
CEO of GenAI company Aisera Muddu Sudhakar told Axios that he’s seeing “a huge displacement of white-collar workers” across software developer and database administrator roles. And in 2023, over a third of business leaders reported that AI had replaced workers (via CNBC).
At the same time, as many companies shift toward AI, the result has been cuts to other areas. Google spokesperson Courtenay Mencini told Axios that recent layoffs are part of an effort to focus on the company’s biggest priorities, of which AI ranks among the top. Companies like Duolingo and Salesforce have also announced layoffs and hiring freezes as they switch to an AI-first strategy.
The Silicon Valley Identity Crisis
Perhaps most intriguing is the “identity crisis” within tech. A high-profile case receiving a lot of attention at present is the fintech company Brex. Their endeavor to command tech valuations while operating within the financial services sector reveals a strategic misalignment all too common in the sector. The tech industry, particularly SaaS companies, enjoys substantial gross margins, sometimes upwards of 70%, fueled by the scalability of digital products and the low costs of serving additional customers. In contrast, financial services, including those offered by neobanks like Brex, operate under a different economic model, where revenue is closely tied to transaction volumes and interest margins, inherently more constrained than software products and typically operating under single-digit gross margins.
This juxtaposition brings to mind the case of WeWork, a company that, despite its core offering in real estate, sought to portray itself as a tech innovator, thereby attracting tech-level valuations. The unraveling of WeWork served as a poignant reminder of the risks associated with misrepresenting business fundamentals to align with the lucrative valuation models of the tech sector. The allure of tech valuations has led many firms to emphasize their tech-enabled capabilities, often at the expense of reckoning with the core economic realities of their operational domains.
When we think about layoffs, we like to pretend there is one root issue, something that can be repaired. However, the scapegoat model ignores the nuances of the current landscape—and leads to companies following all the wrong strategies to minimize risk.
Navigating The Future
Smarter Hiring
The first step to preventing workforce reductions is to improve hiring. More intelligent hiring keeps teams lean, focused and driven. A tactic being increasingly employed across tech is to minimize—and in some cases completely eradicate—roles of a purely managerial nature.
A pioneer of this method, Brett Adcock of Archer Aviation and humanoid robotics company Figure AI said in a recent interview, “Almost everybody here is an engineer. And our culture is such that everybody does work. Directors, CTO, myself: we’re all either cadding or coding all day.”
Sustainable Growth
Setting realistic expectations for scaling and growth from day one can reduce the need for workforce reductions long term. The tendency for reactionary hiring policies and spending sprees can tie the health of a company too closely to prevailing economic conditions.
Prioritizing sustainable growth over short-term spurts encourages intelligent hiring practices and protects against macroeconomic uncertainty.
Industry Awareness
The importance of aligning business models with sector-specific economic realities cannot be overstated. For fintech and other “crossover” sectors, this may mean tempering growth expectations to reflect the true competitive and regulatory landscapes.
It can also mean actively courting lower valuations, more aligned with realistic expectations of the industry. With startups before 2021 being chronically overvalued, cash flow is stagnating across the board, resulting in a surge of layoffs as initial funding dries up and additional funding proves hard to find. Seeking a lower valuation can prevent overspending—and overhiring—early on, better preparing companies for the reality of a post-tech bubble market.
Layoffs in tech will always trigger alarm bells for employers and employees alike. But rather than giving in to doomsday thinking, there is a unique opportunity here to learn from the experiences of both big tech and the startup scene.
As Warren Buffet says, “It’s good to learn from your mistakes. It’s better to learn from other people’s mistakes.“
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