Patrick McKendry

The run of layoffs throughout the tech sector continued this week. On Friday morning via an automated email, Google announced that it was laying off 12,000 employees. This was on the heels of Microsoft laying off 10,000 employees only 2 days prior. They are not the only companies whose new year’s resolutions cost people their jobs. Salesforce started the new year with a layoff round of 8,000 people on January 4th. So did Amazon, as a follow up to their 10,000 person layoff in November, bringing their total cuts to 18,000. Of course, you cannot talk about big tech without covering Meta who laid off 11,000 in November of last year as well. Smaller companies also laid off a significant percentage of their staff even though the absolute number of people impacted was smaller. Booking.com cut 25% of its team for a total of 4,375 people let go. Twitter “let go” of 50% of its staff and, arguably, drove out even more.

In late Q1 of 2022, rounds of layoffs started to roil the industry as early warning signs of at least a US recession began the shift towards more conservative business outlooks. Groupon cut 44% of employees in April, Better.com cut 33% of its staff in March, Toast cut 50% of its team in April, and ZipRecruiter cut 39% of its group in March just to name a few of the larger changes. We also had the run of jobs cut at crypto companies as the economy started to sour and questions of the functional value of digital coins increased. Crypto.com cut 2,000 people, a total of 30% of its workforce, and Coinbase laid off 1,100 people in June 2022 with another 950 people cut this month. Data source for all of the above is layoffs.fyi.¹

It is hard to not become numb as wave after wave crashes. Above, I listed only a few. But, in the last 13 months there have been at least 1,201 layoffs. That count only includes those listed in the user-reported layoffs.fyi dataset. This has led to the termination of 214,814 people. Again, this only includes those in the reported dataset.

We can put it into some additional perspective. If all of these people moved to the same place, they would form the 107th largest city in the United States with a population greater than Des Moines, Salt Lake City, Knoxville, or Rochester.² Those laid off could easily fill Michigan Stadium twice.³ Comparably, Redmond, Washington - home of Microsoft - has a population of around 75,000 per the 2020 census.⁴ Mountainview, California - home to Google - has a population of only around 82,000.⁵

Yes, I know that each of these layoffs have their own nuanced factors specific to each company. And yes, I know that strategic shifts will change the resource priorities and needs of these organizations. And yes, I know that Google and Microsoft will employ more people even after these layoffs than they did a few years ago. And yes, I know that these companies employ people at will and that terminating staff is well within their rights. Here, I will not go in and analyze the rationale and health of all 1,201 layoffs. I do not have that time.

I think it is worth the time to highlight that all of the above can be true. And yet, it can also be true that each is very likely a failure of leadership with preventable causes. These are opinions and you do not have to agree. In any case, I think it can be fairly stated that these organizational shifts have brought significant and immediate strain to the lives of literally hundreds of thousands of people. That warrants review.

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"I take full responsibility for the decisions that led us here”⁶

Nearly every layoff round has been paired with the above statement from the associated CEO. By now, the trite remark has become the definition of a cliche. Responsibility includes accountability and in many cases we see the cost of these decisions not being carried by leadership. Responsibility requires impact.

In a world where executive compensation is predominantly tied to company value, stock price could be a proxy for impact. Alphabet stock closed 5% up on Friday after their layoff announcement. Microsoft’s stock price dropped 3.5% in the two days following its layoff memo, but recovered the next day to within 0.05% of its prior price. These changes register as little more than variance. Granted, over a longer time window the value of these companies has been sliding. Google is down 34% from its 2021 peak and Microsoft has dropped around 30% from its height. Yet over an even longer window, they are up significantly - Google up 65% and Microsoft up 155% over the past 5 years.⁷ Further, the value of each company showed steady growth prior to the COVID-19 pandemic, at which point their values accelerated. Google, in particular, benefitted from a favorable macroeconomic environment as analysts forecasted a massive and permanent shift towards greater digital engagement. Now we see that trend reversing as the pandemic starts to ease. The juxtaposition of these two inputs begs a few questions.

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1. Was the layoff round actually a good move?

For an easy example, I’ll reference Google here. Layoffs have a direct impact on operating costs. Payscale suggests that the average salary of a Google employee is $123,618 per year.⁸ Across 12,000 salaries, that would free up an estimated $1.4 billion in cash flow, which can be invested in other activities. But this is only about a 5% gain in operating cash flow over Google’s 2019 levels.⁹ The market’s reaction was largely equivalent - Alphabet stock rose 5% after the news.

However, the big questions have not changed.

Will Google be able to stop its revenue slide given its tremendous reliance on advertising?
Will they be able to effectively execute their planned shifts towards greater AI integration?

To me, there are now new questions to ask.

How does cutting talent accelerte growth in new areas if cash flow is already healthy and margin is still positive?
What will be the downstream effects to the employees who remain after seeing a swath of loyal, and in some cases, senior Googlers cut from the organization?
Will downsizing instill confidence amongst those who remain or create more alarm as these layoffs seem to confirm what had previously been only suspicions of hard times ahead?¹⁰

Reports from Google’s internal question platform highlight this theme with one top-rated question asking “How were the layoffs decided? Some high performers were let go from our teams. This negatively impacts the remaining Googlers who see someone with high recognition, positive reviews, promo but still getting laid off.”¹¹

It remains to be seen whether these layoffs will meaningfully support the health and growth of these companies as we move forward. For Google - who already had cash flow in the range of tens of billions and did not see outsized market rewards in response to getting lean - I think the change is, at best, a wash.

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2. Was the macroeconomic influence actually inevitable?

Most CEO memos about recent layoffs have called out the pressure of shifting macroeconomic forces. Many leaders note that they forecasted the trends incorrectly and were surprised to see the rapid acceleration towards digital across industries begin to reverse. Others highlight the financial pressures of inflation and rising interest rates as an unexpected force that could not have been predicted. These statements essentially contradict those leaders who in the same breath are claiming to take “full responsibility.”

I contest the idea that these trends were totally unpredictable. Everyone knew interest rates could not stay so low forever. At some point interest rates would start to increase, prices would inflate, and the economy would slow to at least some degree. It is fair to claim that no one knew exactly when or just how quickly that would all happen. Still, nearly two years should have been ample time to plan contingencies for various futures.

In some cases, companies seem to have stepped knowingly into the momentary growth opportunity. Per Amazon retail chief Doug Herrington’s memo to employees as Amazon began layoffs of 18,000 people, “Although other companies might have balked at the short-term economics, we prioritized investing for customer and employees during these unprecedented times.”¹² The move certainly created business value for Amazon, but the eventual slowdown sounds far from being a surprise.

The Amazon example also highlights that the “inevitable” resizing of these corporations did not start with the layoffs in 2022. It started years prior when leaders started to chase opportunities, grew too quickly, and got out over their skis. Apple serves as a stark contrast at this moment to other tech players because they have not yet pushed any layoffs through. For their part, Apple grew more judiciously during the pandemic, adding only 6.5% to their workforce year-over-year in 2022 and even fewer people in 2020 and 2021.¹³ Despite their slower people ramp, Apple also saw the same booming growth during the pandemic and are encountering similar depressive forces on their business today. Their stock price is down 23% versus its 2022 peak, but is still up 221% on a five year window. Their headcount is also stable.

I understand that Apple is less subject to the recessionary forces that are plaguing Google, Meta, and others who rely heavily on advertising revenue. But it is equally incomplete to say that those forces were totally unpredictable, inevitable, and insurmountable if met with properly disciplined leadership.

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3. How can we better disentangle the evaluation of leadership from business value creation?

Google’s layoffs have been cold and have lacked empathy. Many of those who were let go had put years into advancing the company vision. They were not informed directly by their manager, face-to-face. Rather, an automated email went out to the entire company with the news. Some were informed when they were unable to access company systems had been cut without notice.¹¹ I understand the value of this approach for information security. Regardless, this execution is terrible.

At the senior executive level, success as a leader is primarily tied to a company’s valuation. Sometimes, it is exclusively tied to that. Is that good enough as a measure to properly and robustly evaluate leadership? When a mid-level manager makes a communication mistake it follows them to their review cycle and frequently diminishes promotion and base pay potential, even if the performance outcomes of their team were stellar. We should hold the CEO to an even higher standard.

Sundar Pichai had a base pay of $2 million in 2019 with awarded stock options of $240 million.¹⁴ The board added comment on the financial package, noting that “the vesting of a significant portion of the award would depend on Alphabet's total shareholder return relative to other S&P 100 companies.”¹⁵ Pichai is an example, but this is a common compensation structure at the executive level. And I give credit to Pichai who previously turned down an additional stock package in 2018 because he believed he was already paid sufficiently well.¹⁴

Pichai has been awarded these stock options for strong business performance, but that does not tell the entire story of his performance as a leader. In recent years, the relationship between employees and employer at Google have become increasingly antagonistic. The company has been accused of firing employees as retaliation against labor organizing activities.¹⁶ 20,000 employees held a walkout over the handling of sexual harassment allegations against top executives.¹⁷ The angst building around the layoffs is yet another troubling sign. These are problems of leadership and their impacts appear to be underrepresented in board room evaluations.

The incentive structures seem broken here as leaders are perversely rewarded for coldly disrupting the lives of employees with stock market returns on their reworked cost structure. Granted, I think it is reasonable to argue that leaders who cannot build healthy cultures are doomed to fail at some point, which will eventually appear in their stock value. It is a fair enough counter, but do we need to enable the scandals and misdeeds of Uber¹⁸ or Enron¹⁹ in order to force the conversation on effective people leadership? There must be a better way to incentivize proper focus here.

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One underlying cause

In analyzing the recent performance of companies across the digital space, it is clear that there are a number of nuanced reasons that layoffs were pushed to try and drive business health. Some companies needed to resize after intentionally pursuing aggressive hiring strategies. Other companies failed to predict the pace at which macroeconomic forces would disrupt their business. The reasons for these decisions are endless. However, almost universally there is one underlying cause - bad leadership.

I am a firm believer that credit should roll down the organization and fault should roll up. The tremendous growth in performance and innovation that many companies experienced in recent years is a testament to all of the great people who built and executed strategies at every level.

As that performance turns there is, afterall, one thing on which I do agree with these CEOs. As leaders of their organizations, I agree that they are fully responsible for the declining results of their companies. There is a lot more to dissect here to more fully understand which changes could have been better forecasted, what alternative growth plans or offboarding strategies could have been leveraged, and how difficult conversations could have been handled with a more human approach. I hope that we all, as leaders, have the humility and openness to learn as much as we can from the cost that we placed onto others.

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References

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Mass Layoffs and Bad Leadership