Why Layoffs Happen and How to Navigate Them

The pressures to be efficient

Big Tech has laid off tens of thousands of people after a decade or so of continuous growth.

Layoffs have been more common at companies below the exalted group of Big Tech companies (FANG/MANGA).

I’ve had to ask people who reported to me to leave, 3 times in the 13 years I spent at my previous company. In all such cases, neither I or even my boss decided who would leave. This was usually decided at VP level or above and the frontline bosses were just the messengers.

The criteria seemed a mix of shutdown projects, location of employees, salary levels and performance.

While layoffs mostly suck for employees it makes sense to try and understand this dispassionately. Why do they happen? What kind of strategies should you use to survive and come out.

I feel many smart and experienced people don’t understand this well and their social media posts betray this lack of understanding.

Photo by Ron Lach

Why do layoffs happen?

This is a common question floating around now. Google, Microsoft etc. are all still immensely profitable. They are not under any threat of going under. But they are still laying off people.

One way to study this is to use the efficiency frame.

The modern world is a marvel of efficiency. You don’t need to climb stairs. You don’t need to own or ride a horse to travel. You don’t walk to the nearest stream to wash your clothes or carry buckets of water to your house to drink.

Efficiency is a noble goal because it gives us back time that would otherwise be spent on mundane repetitive tasks. This time can be redeployed in much more productive ways.

For example, a young woman is going to be more productive in University as a scientist than cooking 3 fresh meals a day with firewood and no refridgerator while bringing water from far away.

The modern world is a byproduct of decades of increases in productivity due to efficiency gains. We humans have largely figured out how to setup the right conditions for efficiency to be prioritized and this has lifted many more people from poverty than any other set of policies in history.

A company is just a vehicle to do something more efficiently than how it used to be done. It does a few things better than anyone else by bringing together the right amounts of money, material and people and combining them in intelligent ways.

If it cannot do this, there is no reason for it to exist!

So it cannot survive in the long run if it is not efficient with its resources. Other more hungry upstarts will eventually take over.

But a company can be inefficient for certain periods of time.

The strange thing about efficiency is that it goes against some of our core human behaviours like accumulating material wealth and power. So managers can tend to build larger and larger teams for good reasons (like finding another problem to solve) or bad (I want to manage a lot of people so I build a new tool instead of using a similar one).

There need to be forces that exert counter-pressures to deliver efficiency. Senior management should normally exert pressures to keep things efficient.

They are incentivized to do so because the bottomline (and hence stock prices) dictate their variable pay. Most sectors haven’t escaped this even in the 2010s. Hospitals, airlines, restaurants, small businesses, industrial powerhouses have all gone through restructurings even through the 2010s.

In fact, a lot of the efficiencies that most sectors have delivered over the last couple of decades have come from using software to automate tasks.

But this management pressure to be efficient seem to be switched off in Big Tech for over a decade. Why?

Big Tech grew revenue very fast through the 2010s as software infrastructure migrated to the cloud and the shift of human attention to smartphones, monetized through digital ads, continued to accelerate.

On top of this, interest rates were at zero. This meant even pension funds had to pour larger sums of money into Big Tech to meet their target returns.

So capital was cheap. Big Tech could just keep issuing stock to pay staff (stock-based compensation).

High revenue growth rates and low interest rates meant management didn’t need to do much to keep investors happy. The normal counter-pressures that drive efficiency were just not applied.

The pandemic with its attendant remote work and lack of non-digital pleasures just poured more fuel into this and Big Tech continued to hire like crazy.

This demand spurt is cooling as pandemic life retreats. Simultaneously, high inflation has forced a change to the interest cycle and the treasury now offers short term rates of 4-5%. Many investors don’t need to invest as much in stocks. And those who do are looking for higher returns.

So capital has become become more expensive. The value of future cashflows is now discounted to much lower values.

Share prices of Big Tech companies have cooled as a result and selling stock at levels similar to the past doesn’t look possible.

So investors are now demanding more. The normal pressures to be efficient are back.

It is in this context that Twitter went through its own restructuring. There were predictions about how Twitter would just crash due to the sudden massive layoffs. It’s been 2 months and it is running fine.

So how much bloat is Big Tech really carrying? Investors who have looked at Twitter are calling for a much larger cut to headcount.

If the good times return, Big Tech will largely get back to its old behaviours. But if growth slows further and interest rates remain high, Big Tech will need to cut even more headcount as the pressure to be efficient grows.

For startups, funding dried up due to rate hikes and higher cost of capital. The outlook for them depends on how long rates stay elevated.

What can you do?

The noble, moral force of efficiency can feel ruthless when you are at the receiving end. Many never recovered from layoffs in manufacturing in developed countries.

In places like India, it feels like efficiency has arrived too early. We don’t create nearly enough well-paying jobs for the young people coming through the system every year.

There are many factors here that you, as an individual, cannot control. So we focus on the few things one can do.

For those in startups and Big Tech it is clear that the pressure to be efficient in the 2020s will be much stronger.

Most people in Tech will still find jobs pretty quickly as the revenue growth story due to cloud migrations and digital transformation isn’t over yet. Software is still eating the world.

As a manager, it will be better to run an efficient team and be able to tell a story around how much value you and your team bring to the company. Your bosses will also be more pleased with an efficiency focus than before.

There are also many people stuck doing things that feel like they could be automated. It might happen in 1 year or 5 years or 10 years! Who knows?

But it would be better for you to either be the one who automates these tasks or move to another area. Both of these could mean learning new skills. In fact the ability to learn new skills is literally the only insurance you have against the rising tide of efficiency.

When faced with these challenges it is easy to call for curbing the power of companies to fire people. But that is not helpful.

More regulation means companies will shift business to where it is easier. Additionally this will depress wages. If a company cannot fire people easily, they will hire fewer workers and pay them less.

You can see this play out in the income differences between the US and the countries in Europe where the labour regulation is stronger. Anecdotally, the differences are even more amplified in tech salaries.

In India, some techies are calling for job protections after layoffs. They forget that most of their own work involved improving efficiency in other sectors (implying layoffs or reduced hiring in those sectors).

If a company is not allowed to right-size its workforce to the revenues and its cost of capital, it will eventually die. Even if it is a slow death, the employees won’t be rewarded like before.

Therefore, a focus on efficiency is essential for companies. And for an individual, the best option is to keep moving up the value chain of skills.