Anyone keeping up with the tech world in the last 3 years has learned to dread the word “Layoffs”. It’s easy to recall Netflix’s decision to cut off a large percent of its stuff in early 2021, as well as the ensuing chaos. If one of the seemingly untouchable MAANG had to cut staff then everyone did. And cut they did. Start-ups, scale-ups, established firms and even the rest of MAANG followed suit with mass layoffs, the era of cushy tech (and tech adjacent) jobs was declared over by journalists’ analysts and commentators around the world, grass root support groups for laid off employees formed, and an air of uncertainty started to permeate the industry.
But why is that word so dreaded? How did we get here? And what do we ought to learn?
Cost of firing VS cost of hiring
Laying off employees is never a fun process. The obvious part is the human cost. Hundreds of talented people unemployed overnight, countless tasks and checklists left on empty desks never to be completed, any sense of security shattered even for those “not impacted” by the first of God-knows how many rounds, skeleton crews needing to pick up the work of their vanished colleagues. The picture is bleak, but it might never reach the stakeholders in their fiscally secure ivory towers, so why should the proverbial cold-hearted profit-seeking capitalist care about lay-offs? Cost cutting is a quick way to increase profit margins after all. So, let’s talk money and let’s talk cost.
In contrast to popular belief the cost of an employee doesn’t start or end at their salary and benefits. Anyone that’s ever interacted with a hiring process can intuitively understand that finding people to fill a position is a not insignificant expense. Advertisements on job-boards, fees for headhunters, employer branding activities, access to CV databases and of course the time of hiring managers that is used up on interviewing potential hires instead of providing value to the company are all a rather large upfront cost to obtaining a new employee. SHRM estimates that the current average cost of a new hire is at 4700$ across all sectors and regions with a 44-day time-to-hire. Both these metrics rise substantially for specialized and corporate roles.
And yet the hiring costs are but the tip of the iceberg when it comes to new hires. When an employee enters a new role, you can safely assume that full productivity won’t be reached for at least 3 months, perhaps way more depending on the type of position (R. Williams, “Mellon Learning Curve Research Study” (New York: Mellon Corp., 2003)). Of course, the salary for those 3 months will be paid as normal, meaning that oftentimes the new employee can be a fiscal liability until they familiarize themselves with the systems and procedures of the company. That process can be accelerated through a well-structured training regimen but that is in itself costly. The tradeoff of hiring someone is the promise that once that employee reaches their full potential in that role the revenue they’ll generate directly or indirectly for the business will be significantly higher than the cost their salary represents, to the point of paying back the initial hiring and training expenses as well as accounting for the risk premium of them never reaching the revenue-generating potential the company envisioned when hiring them.
So, in fiscal terms it makes more sense to view hiring new employees as an investment with high initial costs that pays dividends over time rather than a static expense. Laying off your staff therefore is pulling out of a potentially profitable investment right after putting in the initial capital without giving it time to mature. It doesn’t take a savvy investor to realize why that’s a bad move.
But as many of the companies laying off staff admitted waiting for their staff to reach that point of productivity just wasn’t an option. Many things can be blamed for that from a bad market turn, a sudden scarcity of Venture Capital, an unsustainable business model and most importantly a tendency to over hire, especially for supporting roles.
Putting HR in its place, as an integral part of the company strategy
Spotify’s third round of lay-offs in 2023 was a textbook example of the last point. The market, having somewhat stabilized from the turbulence of the early 2020s and with the company fresh out of an extremely successful quarter, overachieving in both subscriber count and revenue, still had to cut a large 17% of its staff. To their credit Spotify handled the process with a level of transparency and care above and beyond the standard offering up to 5 months salaries as severance to affected workers. Yet the fact remains: Under the best of conditions the company was still severely overstaffed.
So how did this happen to so many firms? While exact details are impossible to speculate on, most HR professionals probably have a decent idea of what may have happened: hiring for the sake of hiring. Unfortunately, it is all to common to see HR excluded from conversations on strategy, sustainability and long-term viability of a firm having headcount and hiring treated as an afterthought that will be shaped to the needs of the strategy and not as an integral part of it. Naturally that leads to a highly reactive hiring style that only ever pushes back to the demand of management for an increased headcount when the HR department itself starts to be understaffed for the new size of the company. When that wall is hit the solution seems obvious, hire more HR personnel to then hire even more. What at first viewing might seem like a virtuous cycle of growth can quickly turn into an unsustainable practice if the hiring happens with no plan.
The way to avoid this should be obvious by now: a proactive, well-thought-over, hiring plan. By having HR at the strategy table and consulting their expertise at every step of the planning process, a company can integrate hiring as a core part of their overall growth strategy instead of a way to facilitate unreasonable expectations set by well-meaning managers far removed from the reality of hiring. This by no means implies an inflexible and rigid hiring plan a firm sticks to no matter what but a well-articulated plan that accounts for various future possibilities and external factors and depicts the future needs for people, explains their role and potential value in straightforward terms, and in synergy with the financial plan accounts for the costs of those hires not just as a static expense but as an investment in people, an investment that demands as careful a planning and consideration process as any other of a similar size.
To re-iterate, provided that the hiring of personnel is conducted with the same level of care and planning as any other form of resource management, lay offs are not an inevitable result of market downturns since a healthy business can plan for such circumstances and not find itself forced to adapt such extreme cost cutting measures.
