There’s an eerie similarity to the statements tech companies have made about their recent layoffs. Mainly, if the press releases are to be believed, the C-suite of every Big Tech company on Earth — well, with the notable exception of Apple, which has not announced layoffs — figured no one would ever go outside or spend money offline again after the pandemic and their various online businesses would stay just as big as they were during the heights of covid.
I do love a heavily lawyered statement that was clearly written by the public relations department! In fact, these are all so similar that they might as well have come from the same PR person. It kind of seems like tech firms are laying off workers because… other tech firms are laying off workers.
Let’s be real, none of these companies are teetering on the edge of bankruptcy — in fact, they were recently minting money. That money did not evaporate. And as any person who’s been through job cuts can tell you, it’s generally not about performance, either! Essentially, someone went through a budget and zeroed out a bunch of line items that happened to be, you know, people’s jobs. The question, then, is why a company might make job cuts that don’t seem especially necessary.
The answer is that investors have changed how they’re evaluating companies, says Michael Cusumano, the deputy dean at the MIT Sloan School of Management. Generally, when companies are growing really fast — like when revenue is shooting up 20 percent or 30 percent a year — nobody cares about profits, Cusumano says. But we’re not in a growth period right now, so investors are being more cautious.
Tech companies have “tens of billions, often hundreds of billions of dollars, collectively, in reserves,” Cusumano says. “But they don’t really use that to support operations.” When an investor is reading an earnings statement, those reserves aren’t what they’re thinking about, either. One measure people use for measuring tech companies’ investment value is revenue per employee — and having hired all this staff during the pandemic, that means revenue per employee has gone down.
Software companies like Microsoft should have $500,000 in revenue per employee, or at least a minimum of $300,000, Cusumano says. “It could be higher than that, but when it starts to get below that, you start to worry that they’ve got too much headcount. So that’s something people look at on a yearly or even quarterly basis.”
The theory behind layoffs is that they save the company money, even though there’s an initial expenditure of millions or billions of dollars in severance. The idea is, with fewer salaries, the company’s costs are lower on an ongoing basis. I asked Cusumano if that was empirically true. He said he wasn’t sure.
So I called up someone who’s been studying this kind of thing for a long time: Jeffrey Pfeffer, a professor at the Stanford Graduate School of Business. When I asked him about the similarities in the company statements, his answer was succinct: the tech companies are copying each other. “I think Peter Drucker [who is widely known as a father of management thinking] was quoted as saying something to the effect of ... thinking is hard work, which is why most managers don’t do it,” Pfeffer told me.
Layoffs probably don’t cut costs, Pfeffer says. 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 employees will not increase your revenue. It will probably decrease it.”
The literature on whether layoffs actually work to boost stock price is mixed: in one study, companies that closed plants and did layoffs had better returns than companies that only did layoffs. During the 2020 coronavirus pandemic, layoffs had no effect on stock prices at all.
Layoffs do have one concrete impact. Pfeffer’s research has found that layoffs literally kill people — by increasing the risk that someone will die by suicide and by levering up stress, both among people laid off and among those who remain. Layoffs may also reduce productivity among those who remain employed.
So why do layoffs at all if they don’t actually work? “People do all kinds of stupid things all the time,” Pfeffer says. “I don’t know why you’d expect managers to be any different.”
Correction 3:46PM ET: Confirmed with Michael Cusumano that he misspoke, and meant $500k, not $500 million.