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Why are so many tech companies laying off people right now?

Why are so many tech companies laying off people right now?

There is an eerie similarity in the statements tech companies have made about their recent layoffs. Mainly, if press releases are to be believed, the C-suite of every big tech company on Earth — well, with the notable exception of Apple, which hasn't announced layoffs — felt like no one ever was not out Will go offline or not spend money. His various online businesses post the pandemic will remain as big as they were during the peak of Covid.

I love a heavy-handed lawyerly statement clearly written by the public relations department! In fact, they're all so similar that they must have come from the same PR person. It seems that tech companies are laying off because... other tech companies are laying off.

Let's be real, none of these companies are on the verge of bankruptcy -- in fact, they were minting money until recently. That money didn't evaporate. And as anyone who's been through a job cut can tell you, it's usually not even about performance! Essentially, someone went through the budget and zeroed out a bunch of line items that happened to be, you know, people's jobs. The question is why a company might make job cuts that don't seem particularly necessary.

The answer, says Michael Cusumano, deputy dean of the MIT Sloan School of Management, is that the way investors value companies has changed. Typically, when companies are growing really fast -- such as when revenue is growing 20 percent or 30 percent annually -- nobody cares about profits, Cusumano says. But we are not in the growth period yet, so investors are becoming more cautious.

Tech companies have "tens of billions, often hundreds of billions of dollars, collectively in reserves," says Cusumano. "But they don't really use it to support operations." Those stocks aren't what they're thinking of when an investor is reading the earnings statement. One measure people use to measure the investment value of tech companies is revenue per employee — and hiring all this staff during the pandemic means that revenue per employee has gone down.

Cusumano says that software companies like Microsoft should have $500,000 in revenue per employee, or at least $300,000. “It can be higher than that, but when it starts to go down, you start to worry that they have too much headcount. So it's something that people look at on an annual or quarterly basis.

The theory behind layoffs is that they save the company money, even if the initial outlay in layoffs is in the millions or even billions of dollars. The idea is that with lower wages, the company costs less on an ongoing basis. I asked Cusumano whether this is empirically true. He said he was not sure.

So I called on someone who's been studying these kinds of things for a long time: Jeffrey Pfeffer, a professor at the Stanford Graduate School of Business. When I asked him about the similarity in company statements, his answer was succinct: Tech companies are copying each other. "I think Peter Drucker [widely regarded as the father of management thinking] was quoted as saying something to the effect ... Thinking is hard work, which is why most managers don't do it." We do." Don't," Pfeifer told me.

Layoffs probably don't cut costs, says Pfeffer. In fact, there is little empirical evidence that layoffs help improve profitability, and some evidence they actually hurt profitability, he says. "Oftentimes, companies don't have a cost problem," Pfeffer says. “They have a revenue problem. And cutting staff won't increase your revenue. This would probably reduce it.

The literature is mixed on whether layoffs actually work to boost the stock price: In one study, companies that closed plants and had layoffs had better returns than companies that did not. There was only retrenchment. During the 2020 coronavirus pandemic, the layoffs had no effect on stock prices.

Layoffs have a tangible effect. Pfeiffer's research shows that layoffs actually kill people—by increasing the risk that someone will die by suicide and by taking advantage of the tension, both among people who are laid off and those who are left. Layoffs can also reduce productivity among those who remain employed.

If there is no work then why lay off? "People do all kinds of stupid things all the time," Pfeffer says. "I don't know why you would expect managers to do anything different."

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