Twitter, Stripe, Coinbase, Salesforce, Zendesk, Tesla, Meta, and others have announced significant layoffs in recent months, even though unemployment rates are among the lowest in 50 years.

Facebook parent company Meta announced last week it would cut 13% of its staff or 11,000 workers, with Meta CEO Mark Zuckerberg saying he overestimated how long the pandemic’s e-commerce boom would last.

Last week, Amazon announced it will cut 10,000 employees, a small fraction of Amazon’s 1.5 million workers, which includes tech as well as corporate staffers, according to The New York Times. The layoffs, the largest in the company’s history, are expected to continue into next year.

And, of course, there’s Twitter, where new CEO Elon Musk announced the company would slash almost half its 7,500 employees. (Third-party contractors responsible for monitoring Twitter comments for misinformation and hate also reported being laid off.)

The list of companies trimming jobs this year includes online payments giant Stripe, which this month laid off roughly 14% of its staff, or about 1,100 employees; Microsoft, which said in October it had let go of less than 1% of employees, or fewer than 1,000 people, according to an Axios report; Shopify, which announced in July it laid off 1,000 workers, about 10% of its global workforce; Coinbase, which in June cut 18% of its  full-time jobs, a reduction of around 1,100 people; and Tesla, another Musk-run company, which also announced cuts in June of about 10% of salaried workers.

So just what’s going on?

One common thread among the companies laying off large numbers of workers in a booming economy is a mismatch between the number of managers and the number of lower-end workers, said Victor Janulaitis, CEO of business consultancy Janco Associates.

Janulaitis cited four major issues that can lead to layoffs:

  1. There are too many managers and too few workers.
  2. There are too many layers of management.
  3. Projects that do not have a good ROI have been taking up too much talent.
  4. Overall costs have outgrown existing revenue streams.

“This drove them to cut staff and eliminate projects,” he said. “The large tech companies have processes that are geared to growth of market share and revenue targets…. When they start to look at productivity and profitability, the only short-term solution is to cut cost and staff size.”

Seth Robinson, vice president for industry research at CompTIA, a nonprofit IT trade association, agreed, saying, “layoffs that have taken place in the tech sector are largely a function of strategic correction.

“Many businesses accelerated growth during the pandemic and made strategic bets on future direction,” he said. “While some of those bets have paid off, others have not — especially as the general economy reacts to high inflation and changes in consumer behavior. The layoffs, which are not only limited to technology professionals, are a result of redefining strategies based on current conditions.”

Currently, most organizations appear to be trying to balance recession fears with a growing digital skills crisis, the Great Resignation, and near-record unemployment rates of around 3.5% in the US. (Tech worker unemployment rates are even lower: around 2.2%. In fact, CompTIA’s monthly Tech Jobs Report has shown 23 straight months of job growth, with job postings remaining strong.)

“It’s a good bet that tech companies that haven’t yet laid off employees are carefully considering whether or not to do so,” said J.P. Gownder, a vice president and principal analyst with Forrester Research. “It wouldn’t be surprising to see more layoffs in the next few months, particularly among firms whose fiscal year ends on Dec. 31. They want to set up finances for success in 2023.”

Even so, “many of the laid-off tech workers have skills that will be valuable in other sectors,” he said. “Nearly every company, regardless of industry — finance, healthcare, retail — is now a ‘technology firm’ that relies on software developers, engineers, and IT talent. So top tech talent who lose their jobs will find other positions, most likely.”

A hiring strategy problem?

S&P 500 firms, Fortune 2000 companies, international banks… “they all have the same problem,” said Tony Lysak, CEO of The Software Institute, which offers IT consulting and education services. That problem: with tech unemployment at all-time lows and digitization projects increasing, organizations are gripped by a fear of losing out on tech talent.

“We need them, and can’t get them, so let’s pay more,” said Lysak, summing up how many companies have approached hiring during the past two years.

In short, enterprises brought on board as many experienced tech workers as possible. But their experience was typically specific to a technology, leaving organizations overly heavy with mid-level workers compared to less-experienced employees who can be upskilled over time to create a more sustainable workforce.

“That’s how you get that highly bloated middle — 60% to 80% of your tech workforce is highly paid engineers…, instead of having a more balanced workforce where 30% to 40% of workers have that zero- to two-year’s experience…,” Lysak said.

Another problem adding to the hiring mismatch, he explained, is when software products quickly become a market leader — whether it’s middleware, front-end processing, data analytics, or security — there’s a lack of workers with skills to manage the platforms.

“That, to me, is the digital skills gap,” Lysak said. “For example, ServiceNow — over the last five or six years, it’s grown to $5 billion to $6 billion [in revenue]. Ten years ago, the same was true for Adobe or Salesforce. The same thing happened with the three big cloud vendors and a lot of the middleware and cybersecurity vendors. That’s led to a shortage of talent. Essentially, skills can’t keep up with innovation.”

To plug those gaps, enterprises panicked and began quickly hiring — bringing in a raft of tech workers with seven to 10 years’ experience and highly specialized skills. On top of that, companies tended to pay two to three times more than what they would have for someone with less experience but with the right education, aptitude, and attitude to be part of a sustainable workforce, Lysak said.

“How do I do something this year and do something repeatable this year, next year, and forever?” Lysak said. “Most of the banks and high-tech firms I speak to, their hiring criteria always has this certain number of years’ experience.”

Recently, Lysak said, he was working with a corporation who told him they needed 100 employees with seven to 12 years of IT experience. They’d been attempting to fill the positions for nine months without success.

“So, they end up overpaying for middle-tier people who are probably halfway through or toward the end of their career and are [job hunting] for a pay raise,” Lysak said. “These companies aren’t thinking about how they’re investing for the future.”

Successful hiring isn’t just about hitting key performance indicators; it’s more about bringing in employees who can be mentored and grow professionally over time. While those new workers aren’t going to be a CTO in a year or two, they can begin filling mid-tier positions, such as a delivery team leader, within that time with a modest and reasonable pay raise, Lysak said.

By refreshing 10% to 20% of the talent pool each year from the bottom up through upskilling, and certifying new employees in current application needs, companies can avoid a default recruitment strategy of hiring workers with five to 20 years’ experience — and higher pay requirements, he said.

As companies become more digital, there is a constant demand for robust infrastructure, internal software work, cybersecurity initiatives, and data analysis. “These activities may be subject to economic conditions — just like any other business activity — but they are critical to daily operations rather than speculative investments for new strategies,” Robinson said.

A forumla for success

Essentially, Lysak believes any tech project requires one expert to lead (L) and mentor an underlying team of engineers, developers, consultants, etc. For simple, repeatable tasks that could mean an L+8 ratio; for more complex tasks, companies could be looking at an L+3 or L+4 team ratio. 

At the department level, leaders should be performing an ongoing talent gap analysis so they can identify — based on location and tech needs — any gaps, and then plan accordingly on how to maintain the workforce.

Companies seeking to fill positions to support digitization efforts should be looking for employees with software development, IT operations, and security skills. To create a sustainable workforce, just 10% need to be truly “senior leaders” — meaning those with department-level leadership skills who are hired by C-level executive — and 20% should be project-level leaders.

As much as half the workforce doesn’t need high-level tech experience, Lysak said, because with 12 to 18 months of mentorship, new employees can become team leaders. That allows companies to replace any workers who leave with those who’ve acquired needed skills.

“So, people leaving in the middle ranks, you can promote those with two years’ experience quite easily, so you don’t have to hire in the middle ranks,” Lysak said. “It becomes self-fulfilling, which also creates a great company culture.”

If layoffs are a must, do them right

While layoffs may be a short-term answer, they run the risk of doing long-term damage, according to Amy Mosher, chief people officer at Isolved, a human resources service provider. She said sizable layoffs can undermine the workplace (and employee experience) because they leave workers feeling vulnerable. Large layoffs also hurt employee morale and productivity, with 74% of senior managers seeing a decrease in engagement and trust after a downsizing, according to Mosher.

Sixty-nine percent of employees are worried that the state of the economy could impact growth opportunities within their company, Mosher said.

Layoffs not only impact those employees let go, but they can have a negative impact on those left behind.

“We’re seeing layoffs in many industries and that can be disheartening for employees. These mass layoffs create a domino effect within companies. Stress, burnout, and lack of trust will strip down the company culture that many leaders have worked so hard to rebuild post-pandemic,” Mosher said. “With a lack of culture, you’ll begin to see your top talent walk away and look for new opportunities.”

Organizations should be thoughtful with their messaging around layoffs by being transparent about the support they offer impacted workers — and those who remain, according to Katy Tynan, a vice president and principal analyst at Forrester Research.

Communicating to all employees that the company is offering outplacement services, severance, coverage of healthcare costs, and so on can go a long way toward helping those who have been laid off. “But also [it signals to] those who remain to have confidence that they will be treated fairly and supported if they are impacted in the future,” Tynan said.

While some layoffs may be unavoidable, many organizations cut before understanding the skills they need — or will need — and lose valuable employees, Tynan explained.

“Talent intelligence tools can be helpful in broadening an organization’s visibility into their talent, allowing them to pursue a redeployment strategy rather than laying off some resources while also hiring in new talent,” she said.

Companies also need invest more in their leaders’ development training. Sixty-five percent of companies spend less than $2,500 per leader per year on leadership development, according to Forrester. “Yet those leaders have the most influence on engagement and productivity,” Tynan said.

“Despite needing to reduce spending, companies that are laying off employees need to double down on spending on manager development so that those employees who remain can be as engaged and productive as possible,” she added.

Copyright © 2022 IDG Communications, Inc.

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