Never let a good crisis go to waste
What's really going on with all the tech layoffs
Al Davis, former owner of the Oakland Raiders, once remarked to his coach John Madden,
“We’re only a few injuries away from having a really good team here.”
Counter intuitive - right?
How could injuries to your starters make you better?
There are a lot of tech firms taking advantage of a good crisis right now. More than 77,000 workers in U.S.-based tech companies have been laid off in mass job cuts so far in 2023, according to a Crunchbase News tally.
The layoffs, in my opinion, fall into three camps:
Real: Actual moves to correct ugly financial profiles and preserve cash runway
Delayed: Long over due performance management
Opportunism: A convenient opportunity to remove highly paid, experienced workers, and backfill them with someone waiting in the wings who’s younger, hungrier and CHEAPER.
Real
The reason most businesses die is because they run out of money. Dems are the facts.
And this falls into two camps.
The first - ready to die
There are some companies that literally are watching their cash runway evaporate. They’re staring down the barrel of single digit months. This is a real, existential threat that calls for slashing headcount to stay alive. Perhaps they didn’t raise much during COVID and just timed it all wrong. Perhaps their product didn’t resonate with a specific segment of the market like they thought. Perhaps their VP of sales got hit by a bus. Either way, they don’t have much time and need to part ways with some employees to save the rest.
The second - life after (topline) death
But there are also a lot of companies who do indeed have a ton of cash in the bank. Some raised (literally) four funding rounds in two covid years. They wasted a bunch of money, sure, but it’s not like the balance is going to zero any time soon.
What they are worried about, however, is if their topline growth rate drops. And some are seeing signs of it as sales cycles drag on and SMB deals drop like flies.
While most people are pocketwatchin’ the bottom line, these companies are more concerned about the topline implications from this economic shift.
To make this more real, if they were previously hiring to an annual revenue growth plan of 150%, but that falls to 75% (which is still stellar), that basically halves whatever runway they thought they’d be able to subsidize through in-period billings. Said another way, although there’s cash in the bank, shit’s about to get real if growth doesn’t go bananas, as they planned. Great will not be great enough. They need world-beating.
Delayed Performance Management
Basically no one was fired during the COVID bonanza. In fact, there were a handful of people holding down two, even three full time jobs.
Anecdotally, it feels like most of the headlines I read cite 5%, 10%, or 15% of the workforce. We have to remember that the average annualized attrition rate in big tech is north of 20%. That means most people get a new job every three to four years (especially if you are an enterprise sales rep or product manager who can get a 33% raise each time they jump ship). Don’t believe me? Make a list of five of your friends and how many jobs they’ve had in the last ten years. If you are under 40, I bet this is (on average) about right.
After three years of hiring sprees with limited performance management, 5% to 15% makes sense. In fact, I’m shocked these figures aren’t higher.
If you figure that one-third to one-half of all attrition is due to poor performance, and not an employee deciding to leave on their own, and most firms didn’t let go of anyone for two to three years, 10% - 15% adds up real quick.
People don’t like what Elon is doing at Twitter, and the guy is kinda weird and kinda heartless and not someone I’d want to hang out with on a Friday night, but there are a lot of CEOs and CFOs in private circles envious how he’s able to pull the trigger and still have a platform that’s pretty much still working the same at a fraction of the cost. He saw dead wood, and he cut it.
Opportunism
Never let a good crisis go to waste. This year is a get out of jail free card for a lot of CEOs who want to re-write sins of the past or just remove some expensive heads to let the youth get gametime. And these sins are not due to a person’s inability to do the job. It’s not because the person wasn’t trying hard or smart, but because you can get at least 80% of the results at 50% of the price from someone younger.
And let me be clear: this isn’t agism - it’s cost-ism; it’s labor arbitrage; it’s a calculated gamble. If you had someone who was ten years younger at 50% of the price, 80% of the skills and 125% of the upside, you might start to think that’s a pretty good roll of the dice compared to the well established, but perhaps complacent, employee who’s +20 years in and pulling down a cool quarter million a year.
I know a lot of companies who are using this “crisis” to cut out a few of the “clay layers of middle management” (I’m talking a VP reporting to a VP who reports to an SVP who reports to an EVP type deal).
Conclusion
Layoffs are not, on the surface, “good”. When you get down to the personal level of it, it’s someone’s mother, father, brother, sister, friend who is faced with a difficult circumstance. They are people at the end of the day, who are caught in a terrible situation.
What hasn’t been talked about enough is the “why”. When you start to drill into the third and fourth layer of what’s going on, I hate to say it, but it makes sense.
To bring in friend of the newsletter, OnlyCFO:
Direct payroll-related costs typically make up 70%+ of a software company’s expenses. But even this percentage likely underestimates the cost of headcount because there are also indirect costs associated with people - a big one is all the software licenses that are purchased for people.
Payroll costs are the biggest lever companies have to increase the free cash flow part of the equation in order to boost their valuation multiple - adhering to rule #1 of maximizing shareholder value.
And the headlines all require a greater degree of perspective. Yes, Dell laid off nearly 7,000 employees. That’s a “large” number. But you’ve got to remember that 165,000 people work at Dell. To put that in perspective, that’s just smaller than the population of Salem, Oregon and just larger than the population of Springfield, MA. I’m sure there’s some dead wood in there.
I think back to this quote from Ryan Hall, the American record holder in the half marathon:
“I like to look at sacrifice as a forest burning down. Fires are messy, dangerous, and even catastrophic. But they’re essential for clearing the forest of dead underbrush and preparing if for new growth.”
The forest is burning down. Let’s hope we can grow something in it’s place that will last longer and grow taller (without getting too greedy over the day’s sunlight).
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