News Brief

Mass Layoff In Tech Companies: Back To Regular Programming As Frenzied Hiring Driven By Access To Easy Money Ends

Swarajya Staff

Jan 31, 2023, 02:44 PM | Updated 02:44 PM IST

The Indian IT workers provide extraordinarily high standards
The Indian IT workers provide extraordinarily high standards
  • Today, tech companies’ core businesses are struggling while investors have changed their tune. For growth, the focus has shifted to profitability as revenue growth slows and external capital becomes scarce. 
  • Popular social media platforms are rife with accounts of mass layoffs by tech companies across the globe. Both large and small companies have begun shedding their workforces, but the number of employees Big Tech companies have laid off is mind-boggling. 

    Amid the controversy, here is another way of looking at tech layoffs and cost cuts at Big Tech companies.

    The Growth-Profitability Conundrum

    Most of the Big Tech names, with the exception of Apple, came into existence in the late 1990s and early 2000s, gaining prominence with the rise of the internet. 

    The easy availability of capital in the late 90s was followed by easy accessibility, especially after the Great Financial Crisis of 2008. Central banks reduced interest rates to zero or lower levels, incentivising investors to invest in riskier assets. 

    For all companies, there is a trade-off between growth and profitability. To be profitable, a company must reduce investments in new areas, keep a tight leash on costs, cut needless flab, and focus on maximising profitability. 

    At the other end of the continuum are companies almost exclusively focused on growing at the cost of profitability. Often, the deciding factor between pursuing growth and pursuing profitability is the availability of capital.

     If an entrepreneur can raise capital easily at a low cost, he can afford to focus on growth as the ever-flowing river of capital would take care of his costs and new investments. But if capital is scarce and costly, he would have no option but to focus on profitability.

    Could Axed Tech Jobs Existed Under “Normal” Circumstances?

    For years, Big Tech had no problem securing capital from investors. Some, like Facebook, Amazon, and Google, even turned their core businesses into cash cows, while others relied on continual external funding. 

    With capital easily available from core businesses or investors, these companies began focusing on setting up projects that would be unviable for years to come. 

    Alphabet had its self-driven cars division, Facebook transitioned into Meta, and Amazon is working on its Alexa division. All three of these “projects” brought in little in terms of revenues but took up tens of billions of dollars in capital. 

    We must remember that the last 15 years have been an aberration in the history of finance. 

    Many observers have termed quantitative easing an “economic experiment” as no precedents of this scale and magnitude exist. Investors, too, were focused on growth and not on profitability. Hence, it is not a stretch to say that many of these “side projects” would never have existed under tighter economic conditions. Consequently, many of these jobs would not have existed under “normal” financial conditions. 

    Many companies became mega venture capital funds that threw money at internal ideas that had a low chance of succeeding. 

    The name of Google’s “Moonshot Factory” itself indicates the culture of betting on moonshots. 

    The employees who had been hired on these side projects were not generating revenues for the company, and the chances of projects failing were high. If anything, it appears that they were aiding tech moguls in their empire-building exercise, maybe even at the cost of the core business. 

    While the layoff numbers are large, one should pause to consider whether many of these jobs would have even existed under normal economic circumstances and whether shareholders should ultimately bear the brunt of a CEO’s pet projects with low chances of generating revenues.

    Tech Companies are Learning to Balance Growth and Profitability

    Today, tech companies’ core businesses are struggling while investors have changed their tune. For growth, the focus has shifted to profitability as revenue growth slows and external capital becomes scarce. 

    After years of operating in a hunky-dory environment, these companies are forced to allocate capital carefully. They are also forced to focus on the core business that brings in revenues and cash rather than running after new vanity projects. Nevertheless, a balance must be maintained between new investments that could help growth while focusing on profitability.

    A Realistic View Of The Situation. Not That Bad?

    The current layoffs should be looked at in conjunction with the rapid rate of hiring that had taken place post-pandemic. 

    The demand for software engineers had grown multi-fold over a short period, and so had their salaries. The demand surge in the market for software engineers was driven by the easy money flow into tech companies and their obsessive love for growth. And inevitably, all markets that witness a boom also see a bust.

    In addition, despite a large number of layoffs, the high hiring over previous years meant that for several companies, the actual employee count is higher than in 2020. 

    Meta, for instance, had 58,604 employees in 2020, 71,970 in 2021, and 87,314 in September 2022. Even after laying off 11,000 workers, it would still have a higher base compared to 2021 and 2020. 

    Google, which fired 12,000 employees - had 187,000 employees in 2022, 156,500 employees in 2021 and 118,899 employees in 2020. Again, the employee count would still be higher even after the current round of layoffs.

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