It’s been a wild three years, with the COVID-19 pandemic turning the world upside down, severe weather events increasing, the war on Ukraine and the global financial crisis leading to recession and heavy inflation. Businesses are struggling to respond appropriately to help keep their financial position intact, while at the same time trying to protect their staff, brand, and customer loyalty—it’s a tight line to walk.
The tech industry in particular seems to have resorted to the most common way to protect their EBITDA (earnings before interest, taxes, depreciation and amortization—a rule of thumb is that an EBITDA of ~10% or more is good), which is to layoff staff. It’s effective as the severance payments of these layoffs can be counted as “non-operating expenses” in the balance sheet, meaning that the pay-offs don’t impact the net income under US GAAP (generally accepted accounting principles).
The plan behind layoffs is to reduce operating costs as much as possible, therefore producing a stronger bottom line (cost savings). On the surface, this is straight-forward, simple strategy to quickly reduce costs, but the real question is… what is the longer term impact of these decisions?
An Overview of 2022 Tech Layoffs
If you haven’t heard of the website https://layoffs.fyi before, bookmark it now. It’s a fascinating insight into tech layoffs since COVID-19 began. From their snapshot of data showing the biggest tech layoffs in 2022 so far, the first thing that jumps out to me is the 10,000 Amazon layoffs, which only equate to 3% of their global workforce. It’s stats like this which help showcase that this data can be skewed in various ways to paint multiple stories. Let’s dive into the overall trends of layoffs during the year and by how many businesses.
After a slow start to the year, with the world slowly coming back to normal after the COVID-19 pandemic lockdowns, you can see the sharp spike in layoffs being announced and employees being laid off. This is largely down to Russia’s war on Ukraine, which drove up the global cost of field and food, creating record inflation, and sending stock markets into a panic. The trickle effect of this is that as inflation increases, consumer spending drops, which in turn hurts the share price of businesses.
Given that this is a global inflation problem, no industry is 100% safe from the fallout, however Travel and Construction tech businesses have fared the best in 2022. Retail tech businesses top the list, largely due to over 50% of the employees being laid off coming from Amazon (10,000 laid off in mid-November 2022).
What Are the Ongoing Impacts of Layoffs?
At the most extreme, it can spell the end for some businesses. For example, Finnish telecommunications company Nokia laid off 2,300 employees in 2008, despite celebrating a 67% increase in profits. This was brought about by the rise in low-cost Asian competitors which drove Nokia’s prices down by 35%. The fallout from the layoffs resulted in 15,000 people protesting at Nokia’s plant in Bochum, Germany, with unions also calling for a boycott of Nokia products. The bad press, large severance payouts and loss in sales resulted in an estimated €900m of losses from 2008-2010.
This led to a further 18,000 employees laid off in 2011 and essentially spelled the end of Nokia as a powerhouse in the telecommunications market. Various other factors played a major part in the failure of Nokia, such as Microsoft’s acquisition of the brand and subsequent attempt to release the Windows Mobile OS, but the layoffs certainly played a big part.
This is of course an extreme example, but the more common impacts of staff layoffs are:
- Low employee morale
- Reduction in productivity
- Reduced customer satisfaction
- Increase in voluntary turnover
- Lower product/service quality
- Reduced research and development
- Reduction in safety measures
- Overall reduction in brand perception
Whether these impacts are wholly factored into the decision to lay off staff is debatable. Anyone who has been in front of a board of directors and witnessed the pressure placed on the business’ senior executives will attest to swift and decisive action being made largely without complete consideration of the impacts.
Put yourself into the shoes of a CEO in front of a board of directors, who is told that, without an immediate improvement in the bottom line, their position at the company will likely be gone. You can imagine decisions will be made quicker than they should be.
Potential Alternatives to Layoffs
In 2013, AT&T’s leaders recognised that 100,000 of their 250,000 employees didn’t have the necessary skills required at the company and would likely be in jobs that didn’t exist in the following decade. Instead of firing those workers, AT&T took a $1 billion gambit to retain and retrain all 100,000 workers by 2020. This way the company could retain the IP those employees had gathered over the years, while also allowing them to keep trust in senior management.
Since this decision was made, product development cycle time decreased by 40% and revenue had increased by 27%. In 2017 AT&T made Fortune Magazine’s 100 Best Companies to Work For list for the first time.
Other potential solutions are:
- Reduce number of products & services sold and re-skill employees in the high profit areas of the business
- Restructure the business & processes to be more streamlined and efficient
- Temporarily reduce or remove high-cost employee perks (with emphasis on the word temporarily)
- Reduce workspace costs by adapting to more work-from-home policies
- Increase communication – let the employees know that times are tough, but the business is sticking by their people and together will ride the wave
It’s a tricky market to navigate to say the least, and making the right call for the business is the hardest decision for any business leader to make. In the future, I’m sure we will be reading and studying numerous reviews of how the best leaders in today’s market navigated this turbulent time. Only time will tell who the great leaders of today will be.