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Reasons for Layoffs and Why the Current Scenario is Not Very Surprising for Everyone

Mark Zuckerberg, Meta CEO, is concerned about his company's organizational structure. As per him, managers are managing managers. Besides hinting at more rounds of layoffs at Meta, it shows how aggressively tech companies have hired in the last few years.

The companies hailed as the best companies to work for, and the CEOs who emphasized that people are their most important assets are suddenly in layoffs mode. Every CEO is busy drafting an email for the fresh round of layoffs – the email content mostly concerns how they feel bad about laying off employees and accepting the responsibility.

The layoffs in 2022 that continued in 2023 have sparked a hot debate around the reasons for layoffs. Real time layoff trackers are buzzing with the latest updates and numbers on a fresh round of job cuts. Every company laying off employees cites excessive hiring during the pandemic period when almost every company, tech or non-tech, startup or established, experienced a never-before-like business expansion. The biggest gainers were tech companies that expanded their recruitment teams to meet the tech talent shortage.

Big pay packages for employees, successful IPOs, net worths of entrepreneurs reaching new levels, rounds of massive funding for startups and acquisitions of highly-valued startups by bigger brands – it was all happening impressively well.

But tragically, it did not last long. The worst hit were the startups and the employees working for them and also the big tech companies. Soon, companies outside the tech sector also joined the layoffs. And LinkedIn and Twitter were suddenly the most used apps where employees ranted about unfair layoffs, looked for help in finding new jobs, or simply motivated others to accept the bitter reality and move on. It's now settling down as more and more employees accept that layoffs are real and can happen even in the safest and highest-paying companies that are also known as the best companies to work for.

So what are the main reasons for the current massive layoffs across the tech sector, which has spread to other industries as well? And how valid are these reasons for massive layoffs?

Excessive hiring during the pandemic led to layoffs

This is the number one reason the companies are citing. Other than this, they are hesitant to talk about several other factors except some talking about recession forecasts. No doubt, the hiring was aggressive during the pandemic, and recruiters were busy hunting employees from everywhere – campuses, poaching from other companies, from related domains.

The recruiters had to make it work. The companies had to fill in numbers, so they were ready for some exceptions. Whether candidates were meeting the precise hiring criteria or not, the sudden business growth and future expansion plans buoyed by the growth at that time led to massive hiring.

Massive layoffs are a natural progression for massive hirings based on current demand instead of a future requirement. Anything done on such a large scale, without adequate measures and relevancy, had to come down at some point. It is happening now. Some reports show that most employees being fired are either in the experience range of 0 to 3 years or highly experienced from the experience range of 20 years onwards. There are clear reasons behind these layoffs – lack of experience does not add value to a company for a few years, and too much experience costs companies more than they want to bear.

The first round of layoffs in 2022 impacted these ranges the most, and the next round of layoffs will probably focus more on the performance of the employees rather than just the cost. Somehow, this is how companies function, so layoffs were always on the cards. And this has not come out as a big surprise to most business experts.

Startup funding drying off – Leading to businesses winding up and laying off employees

Just like excessive hiring, investors poured too much money into startups. Investment funds had a lot of easy money for years (cheap interest rates being the main factor), and they were ready to invest in the most promising companies.

This is why tech startups were a natural choice for them. Companies like Zoom, Caravana, Slack, DoorDash, Peloton, OnlyFans (the list is literally endless) saw rounds of funding that put other established companies in other sectors to shame, much like highly-paid tech jobs overwhelmed every other job in every other industry.

Once economic conditions started getting gloomy and interest rates on that easily available money spiked, financing dried up. Funding is now at a standstill, and many startups had to wind up because of a lack of funding, leading them to plan layoffs. The tech employees preferred joining startups instead of Big 4 or other big brands because the premium the startups paid to hire talent was huge.

The premium made the already big fat pay packages so lucrative that tech employees were rarely able to say no to the offers made by the startups hiring teams. This is one of the big reasons that tech startups have suffered the most. Freeze on funding has meant layoffs to the extent of 80-90% in some once-hot tech startups, and employees have borne the brunt of it.

Since startup companies cannot run without funding, they have no option but to wind up and fire employees. So, this answers what led to the downfall of startups and why are so many companies laying off.

The shift in business strategy due to changes in market conditions

Amazon expanded far beyond its core online retail business. It opened up brick-and-mortar book shops numbering around 400, ventured into online education, invested heavily in Blue Origin, talked about delivering internet through satellites (pitting it directly against SpaceX), invested massively in other online business areas like Amazon Distribution, food delivery, delivery through drones, etc.

With these numerous plans, from which many were or are in operation, the scale of business can be imagined. Money flowed in from the core business and was redirected into other ventures, which were all major plans and needed heavy investments. The way the tech sector was growing, it was natural for the world’s richest person at that time, Jeff Bezos, to be ambitious and go ahead with everything that showed the potential for business expansion.

This is just one example. Salesforce acquired Slack for $28 billion, which investors termed as an expensive acquisition riding on overconfidence. There are reports of cultural rifts between Slack and Salesforce employees. Gossips are doing the rounds that Marc Benioff, CEO and co-founder of Salesforce, might sell or spinoff Slack and it won’t get him even half of what he paid to acquire it. That’s the perfect case of acquisition gone wrong.

Meta has been investing billions in developing metaverse with no revenue generation possible for almost a decade. Elon Musk moved his focus for some time from Tesla and acquired Twitter which led to a period of downfall in Tesla stock value. Other than this, the economic forecast has been highly tilting toward a recession. Reports like PC sales slowing down or Apple phone demand not showing growth as per expectations are signals that investors pay a lot of attention to and start working on layoff plans.

Intel, Salesforce, Cisco, Adobe, Nvidia, Netflix, Amazon, Meta, Microsoft, Apple and every other major tech company have seen a sharp decline in their stock value compared to their peak value in 2022. This loss of value has led every company racing to declare their financial results as perfectly as they can.

And when it’s about financial results, cost cutting is the first thing they look forward to, which in turn always leads to employee layoffs. It’s a tradition that companies have followed in the past. Although there is strong evidence that cost-cutting through layoffs does no good to a company’s financial performance in the long run.

Here are some of the main consequences of layoffs for companies and their employees:

1. Decreased motivation level in the existing workforce directly impacts productivity leads. The question 'am I getting fired in the next round of layoffs' makes employees paranoid, lowers their morale and disconnects them with the 'we are all part of a family' idea.

2. Tarnishes the brand images – Companies that promote ‘employees as their strongest assets’ laying off do not go well with their vision and mission. The layoffs do not work in favor of companies that always send out a strong message on how their brand is dedicated to the welfare of employees and how they are their growth partners in the long term.

3. Layoffs kill people - Stanford business Professor Jeffrey Pfeffer mentions how layoffs impact the mental health of employees who have been fired. The odds of suicide in case of a laid off employee increase 2.5 times. There are also health and attitudinal consequences that existing manpower and HR managers doing the layoff job face.

Automation of jobs (led by AI) leading to manpower downsizing

Bernard Marr, in his article on Forbes, talks about layoff reasons. He mentions how automation, particularly AI-led, has led to the firing of HR employees. Among the big layoff numbers, more than a quarter of job cuts have been reported to be of recruiters. Undoubtedly, tech hiring was a major work domain during the last decade.

Hiring employees for different work modes (on-site for global locations, remote and hybrid employees, regular in-office employees for local offices), meeting the numbers, and ensuring the final joining (from offer to appointment), tech recruiters were busy kept busy by the HR heads who had clear instructions from the top management that said ‘hire at any cost.’ A downward business spiral was not something they were prepared for. Layoffs are the first indication of the halt in business growth.

Coming back to the worker shortage, something was building up in the background. The tech leaders are known for their dynamism and far-sightedness, so they were able to analyze the challenges presented by the shortage in the labor market. The shortage of tech talent was hurting their growth plans.

Every business meeting had a tension-filled atmosphere as expansion plans were being halted regularly by the high low availability of workers, high attrition rate, increasing pay-related costs, sudden resignations from key position holders, etc. The tech business leaders continuously sought a solution to overcome these challenges. And the solution was well within their reach, and it was something they had their minds focused on for a long time – AI.

Hundreds of functions can be automated easily, thereby reducing the high dependency on employees. The list is long – customer service, marketing and advertising, software development and testing, accounting and finance, data analytics, business intelligence, etc. Analyze it with the help of HR functions that can be automated – resume screening, interviewing, onboarding, payroll management, performance management (Amazon has been using it for many years), offboarding, and so much more.

Companies are working aggressively on combining Artificial Intelligence (AI) and automation to develop Intelligent Automation (IA), which will be a game-changer for them. Of course, it will lead to more layoffs in the future. While the debate about AI replacing humans rages on, AI is already showing its capabilities which is evident with the massive layoffs.

The manufacturing sector has been completely transformed by automation. The manufacturing industry, from auto to pharma, faced similar workers-related shortages and the challenges that come because of it, but automation has changed the landscape completely. It completely ended the frequent process disruptions the industry faced, which is why we do not hear about worker shortages in the manufacturing industry anymore.

The same is happening in the tech industry, and the recent large-scale layoffs, although companies are not openly admitting it, have to do with AI. As AI evolves, it will change the tech industry’s heavy reliance on knowledge workers, and tech worker shortage will be a thing of the past. Take the case of ChatGPT by Open AI - within the first few days of its launch, its being termed as a business threat to Google. Over a million people subscribed for ChatGPT and it is proving to be a disruptive force in the world of internet.

Supply chain disruptions during the pandemic served as a wake-up call for the companies, and they wasted no time in turning to technology to meet future challenges. Tech leaders have been wise in predicting the future in this aspect, and for them, AI is the only solution to streamline processes. They see it as a way to focus on business growth by implementing what they have been working on for years – AI. Layoffs are not a concern for them because the job is being done nicely with simple emails saying, ‘I take the responsibility,’ which is nothing more than a hollow platitude. But, it’s business and layoffs are a part of it.

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