Layoffs in Tech: Redistribution of Resources Amid a Tech Transformation

Microsoft

By Emil Bjerg, journalist and editor of The European Business Review

For years tech companies have been struggling to find qualified talent, but the tables have turned as the largest tech companies are executing massive layoff rounds. What’s driving the firing spree, and what’s next in tech?

From stock prices to the number of employees to cultural and political influence, the tendency has been unambiguous. For years, the largest tech companies were relentlessly moving in one direction: forward. Now tech stock is dropping, investment is drying up and company after company has gone on a firing spree. In other words, the tech boom is over – as we know it, at least.

According to The Challenger Report, the tech industry saw a 649% rise in layoffs in 2022, the largest number since the dot-com bubble more than decades ago. The trend of layoffs grew towards the end of the year with Microsoft, Twitter, and Meta topping with the highest numbers of layoffs.

The tendency continues in 2023 as both Microsoft, Google, and Amazon – among other tech companies – have had massive firing rounds this January. In their January firing rounds, Microsoft laid off 10.000 employees, Google 12.000, and Amazon 18.000 – the biggest layoff in the online retailer’s history. Paypal, Dell, and Zoom are other major tech companies with large layoff rounds in 2023.

While the corona-years gave birth to the tendency of ‘quiet quitting’, we’ve now entered the period of ‘loud layoffs’; we’ve gone from ‘the great resignation’ to ‘the great layoff’.

So what is driving the layoffs in tech?

Economic drivers of the firing spree

Rather than a single driver behind the layoffs, there are several sources and signals. Unsurprisingly, a significant number of drivers relate to the current volatility.

In the US, layoffs happen in the context of a fluctuating economy. While the American

economy rose by 2.9 percent in the fourth quarter of 2022, the economy was shrinking in the first two quarters of last year. As the economy fluctuates and the threat of a more devastating recession lurks, companies get lean to deal with uncertainty and dwindling profits.

The historic inflation is another driver of the layoffs. As businesses face rising costs, many companies reduce their spending on ads. Many tech companies are especially vulnerable to inflation, having the sale of ads as the primary source of income. In looking to balance things out, letting go of hundreds and thousands of employees is an effective means.

If 2022 was about inflation, 2021 and 2020 were about corona. We’re not done talking about either in understanding the current moment in tech. Online activity was peaking during corona as we went online to shop, teach and meet and spend our increased free time on online streaming. In a post-COVID world, physical activity is back to dramatically cutting online activities, reducing demand and income.

With – at least bits of – the online hyperactivity gone, many tech companies have an abundance of workers. Zoom, a service most of us got very familiar with during the pandemic, is illustrative here. The company just let go of 1300 employees.

In this volatile climate, venture capitalists are hesitant to invest, meaning that many tech companies are unable or unsure if they’ll be able to secure new rounds of funding. That combined with the inflation-preventive interest hikes, money has gotten expensive and difficult to come across.

With a recession expected to hit in 2023, it seems the perfect economic storm has hit tech. But other dynamics weigh in and enforce the layoffs.

Layoffs amid a tech transformation

This perfect storm happens against the backdrop of a generally disruptive atmosphere in tech.

As Tony Uphoff recently noted, “we are witnessing the transformation towards the next computing platform”. In his view, the layoffs are about allocating resources to future platforms rather than existing ones. As he says, talking from the perspective of a tech CEO: “a lot of the infrastructure that I built that was a part of the past may not help me own the future in the way that I owned the past”.

In other words, we’re currently between the heightened demand of the COVID-crisis brought and the potentials of Web3 and generative AI. Just like the way we’re consuming and producing tech is in the midst of a massive restructuring, so is the way tech companies prioritise their resources to stay relevant. That perspective can help explain how Microsoft can fire 10.000 employees and invest 10 billion USD in OpenAI in the same month.

While a range of economic and technological dynamics are the main drivers of the firing sprees, social dynamics could also have an impact. Jeffrey Pfeffer, professor of organisational behaviour at Stanford, believes that the reason so many tech companies are having layoffs in such massive numbers is due to copycat behaviour. According to Pfeffer, the firing rounds work as a “social contagion”, where businesses mimic other businesses.

Layoffs in Europe

As we’ve seen, there’s a clear tendency for massive layoffs in Big Tech, but what about European tech companies?

The tendency is the same in Europe, as investments in European tech dropped in 2022 compared to 2021. According to the State of European Tech, in 2021, a record high of 103 billion USD was invested in European tech, while the investments amounted to 85 billion USD in 2022. What’s more concerning is that most of those investments were made in the first half of 2022 as the investments generally dried up with a shifting economic perception in the last two quarters of last year.

As a result of a more hostile economic climate, there are massive layoffs in European tech as well. A notable example is Dutch device maker Phillips, which fired 10.000 employees – nearly 13 percent of its workforce. Among other European tech companies to have firing rounds are the fintechs Klarna and Pleo, mobility company Voi and the grocery delivery startup Gorillas.

On top of that, many European tech workers have been impacted by the global layoff rounds in American tech companies.

After the gold rush: what’s ahead for tech and tech workers

To look at what’s next for tech, let’s look at the context in which the layoffs have happened.

Some of the best stocks you could invest in in the 00s were what would later come to be Big Tech. If you bought stock in Apple in early 2004 and sold it at its peak in 2021, you’d get a return on investment of 463 times. Had you invested in Google in August 2004, that’d be worth 55 times more on its prime in 2021.

For a long time, the early successes of companies like Google, Facebook, and Apple have drawn investors towards next-generation tech companies such as Uber, Airbnb, and Spotify trying to ensure being part of the next big thing in tech. Companies that – in contrast to companies like Google, Facebook, and Amazon – have struggled to find a profitable business model.

The magic connected to something simply being tech seems to be over, and investors will likely remain more cautious in the future. Now as well as in the years to come, competent people creating something techie won’t be a draw in itself – a much more substantial proof of concept and business model is likely to become the new norm.

The increased competition for investment happens simultaneously with a seemingly intensified competition to become a dominant actor on the new computing platforms.

As the CEO of Microsoft, Satya Nadella recently noted in connection to their layoff round: tech is an unforgiving industry to companies that fail to see and adapt to what’s next. The current AI race between Google and Microsoft symbolises the current moment in the tech behind the scenes: the companies that will powerfully and profitably establish themselves on Web3 and regenerative AI will most likely be able to create new semi-monopolies.

Remember search engines AltaVista or Lycos? Most likely not, because Google’s innovation in search algorithms made those companies obsolete. The current competition in regenerative AI and Web3 might deem major tech companies obsolete too.

As for tech workers, many of the fired tech workers can benefit from the fact that there are “other industries that are desperate to hire them”. Others will find work as contractors, as the use of freelancers is on the rise in tech. Many even in the companies that fired them.

Re-skilling to adapt to a present and future increasingly influenced and produced by regenerative AI will be relevant for the fired tech workers – just like it is for all knowledge workers in general.

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