If you’ve been following the news or regularly visit a few social media platforms, you have likely heard of the large-scale layoffs in a few well-known Silicon Valley companies. An estimated 200,000 tech workers—so far—have been let go. And with the year just barely starting, there are many more questions and uncertainties about the effects these will have on the rest of the country. How will this affect the economy? What does this mean for the current local labor market in the US? And most importantly for us: what are its impact on the offshoring industry and the global economy as a whole? Are these more signals for the coming recession?
The Reason Behind These Mass Layoffs
The wave of layoffs we are seeing now can, for the most part, be traced back to the start of the pandemic and the Great Resignation when everyone was stuck at home with very few options. Many companies, primarily e-commerce, food delivery, and streaming services, saw a massive spike in their online demands as people turned to them for their basic needs and entertainment during the long lockdowns.
The executives and experts at these firms saw this surge and predicted continued growth even after the pandemic. Consequently, to accommodate this sudden rise in demand and support their projected growth, many of these companies rapidly increased their workforce to nearly double their previous size.
Unfortunately, the predictions made by these tech titans were wrong. With skyrocketing inflation, interest rate hikes from the Feds, a war in Ukraine, and consumers going back to spending on other necessities and wants after the pandemic, growth has halted for some and fallen for others with the reopening of our economies. Multiple disasters caused by the domino effect of the pandemic especially in the volatile yet essential tech sector have hit these tech companies much harder than they had initially anticipated.
A Tech Bubble Burst?
“The whole tech industry of the last 15 years was built by cheap money,” said Sam Abuelsamid, principal analyst with Guidehouse Insights. “Now they’re getting hit by a new reality, and they will pay the price.”
For over a decade now, these silicon valley tech companies have enjoyed phenomenal growth in their industry without worrying about profitability. However, with banks raising interest rates to control inflation, capitalists holding off on investing due to the anticipation of a recession, and advertising funding being reduced from lower consumer demands, the easy supply of money has run dry. Tech companies that depended on borrowed money, venture capitalist investments, and ad funding are now struggling to balance their sheets and will most likely have to cease some future projects.
The mass layoffs we see on the news today are the efforts of these companies to cut back on spending, “correct” their ill-advised hiring sprees during the pandemic, and generate returns for their investors.
Oddly enough, Apple is missing from this list as they’ve avoided the tech layoffs. Throughout the pandemic and the two years that followed, Apple has been the only massive tech corporation that stayed conservative towards its workforce growth.
A Simpler Answer to the Mass Tech Layoffs
Professor Jeffrey Pfeffer, from the Stanford Graduate School of Business, posits a simpler explanation: copycat behavior. Pfeffer states that the mass layoffs occurring at these tech companies are merely a result of a “social contagion,” with the behavior spreading through a network of companies mindlessly copying what other companies are doing.
The problem, Pfeffer continues, is that these mass layoffs actually do nothing to improve company performance or cut costs. According to him, “there is a growing body of academic research suggesting that firms incur big costs when they cut workers. Some of these costs are obvious, such as the direct costs of severance and outplacement, and some are intuitive, such as the toll on morale and productivity as anxiety (‘Will I be next?’) infects remaining workers.”
Should the Labor Market Be Worried?
According to Jerome Powell, the Federal Reserve Chairman, there’s good reason to believe that these tech layoffs are not a great representation of the general job market. On the contrary, the data shows that the unemployment rate is still low at under four percent.
The US Department of Labor and Statistics says that this disconnect may be due to data lag, as these new reports of layoffs have not yet been counted. However, the labor market is also at an unusual point where there’s a historic gap between the number of workers looking for employment and the number of available jobs. Employment participation is at an all-time low, and a huge swathe of the labor force retired during the pandemic, which may be significant factors in this odd market. More people retired early during the pandemic than in the previous eight years.
Malcolm Harris, a journalist and the author of “Palo Alto: A History of California, Capitalism and the World,” offers another bleaker view. The layoffs have nothing to do with long-term or short-term business strategies and are instead a way of resetting and disrupting the skyrocketing salaries and the growing effort to organize tech workers.
What Can SMEs Learn from These Mass Layoffs?
Employees and employers are at a critical point in history. With the growing body of technology revolving around AIs and the fierce global competition for skilled labor, an upheaval of how we organize and think about work looms on the horizon.
Research and history have shown that bad layoffs and layoffs done for the wrong reason, often hurt companies more than they help. From lower morale to a negative effect on stock prices and employee performance, poorly executed layoffs create more problems than they solve. Senior leaders may dismiss these claims citing that companies that do layoffs do so because they’re already performing poorly. However, the numbers don’t lie. The company and the employees who are left to carry the workload of their laid-off peers are worse off even a year or two later. The declines in job satisfaction and organizational commitment have long-term effects on productivity and quality.
So, what can SMEs that are looking to expand and grow take away from all of this?
Practice discipline in your hiring plans and commit to rigorous performance metrics to build a workforce that will see your company through, even in uncertain times. The mistake committed by many of the previously mentioned tech firms was the assumption of wild growth during the pandemic, which led to profligate hiring. Coupled with unsustainable and fiercely competitive salaries, it was a recipe for disaster.
Focus on employee retention and development. This means initiating genuine communication strategies with employees to see where employees stand in the organization. In an economic downturn, offering bonuses and monetary incentives to employees may not make a lot of sense, but a retention strategy involves more than that. It could be providing them with upskilling or making them feel more excited about their career path.
It’s unfortunately common for managers to use layoffs to cover bad practices and to avoid difficult discussions. But it’s clear from the research that layoffs are short-sighted strategies—often ignoring their effects on performance when the company eventually does recover.
How an Intelligent Offshoring Strategy Can Help Your Business Avoid Mass Layoffs
With a competent and reliable offshoring partner by your side, implementing the abovementioned strategies can be far less stressful and much more streamlined. iSupport Worldwide is a leading offshoring solutions provider that understands the value of building a committed and highly competent team for our clients.
We’re no strangers to rapid growth and understand the challenges SMEs must face when acquiring new employees to sustain expansion.
Contact us today, and let’s discuss the offshoring strategy that will take your company to new heights.