06 March 2023
A difficult time for tech
As storms gather across the economic climate, the one-two punch of the cost-of-living and cost-of-borrowing crises has pushed the middle market, and wider economy, into a recession. The Real Economy’s latest topical survey on business resilience revealed the stark finding that 31% of businesses are considering or planning redundancies. With 42% experiencing cost pressures, this creates new challenges in 2023, across all industries – including technology.
Technology goliaths, including Google, Microsoft, Meta, Amazon and Spotify, have announced major redundancies. But what has the impact been across the broader sector?
Boards have been aware of the worsening market conditions throughout 2022. Many made decisions to adjust their workforces early in 2022; ambitious projects were paused and hiring budgets were frozen.
Technology employment tracker Layoffs.fyi is now approaching 200,000 layoffs across the broader sector. Data collected from Layoffs.fyi and reports from listed filers when combined form a trend line, showing that technology businesses by and large are reducing their workforces by between 5%-15%.
It’s important to note that it’s impossible to analyse complete data of this trend across the whole industry. There is no such dataset, and as many technology businesses are privately owned companies, and will have communicated and enacted internally, without updates to the market.
Many privately owned technology companies are in earlier stages with Venture Capital or Private Equity backers. These investors are seeking returns. Rising inflation and interest rates means that medium and long-term returns are lower and inherently carry a higher risk profile. This increases pressure on boards today as they are asked to demonstrate progress in growing their business and give confidence that the business model is appropriately leveraged and solvent.
It could be for some Technology companies that the layoff numbers are much higher if the business had made significant, forward-looking investments in their workforce as a strategic play to achieve rapid growth.
How did we get here?
The cost of employment in technology was rising throughout 2021. A shortfall of supply against demand for skilled workers was combined with greater flexibility in remote working. Tech companies were able to build global workforces and workers were able to access new job markets remotely, boosting salary levels across the industry. 2022 was a difficult year – to put it mildly – and yielded a significantly more pessimistic economic outlook across all industries. Big Tech companies have not met market expectations and there has been a significant and sharp loss of shareholder value in listed technology companies.
Many technology companies experienced enormous growth in the pandemic and early stages of post-pandemic. Sustained periods of lockdown demonstrated that remote working, education and socialisation was possible across a range of platform and cloud-based tech solutions. 2022 saw a reversal of post-pandemic optimism. In many cases, the growth of these businesses did not continue as society emerged out of the lockdowns.
For many, this was sudden and sharp. Consider the position of Hopin – an online event management platform. The business had a value of $8bn at its peak and raised more than $1bn in 2019. 2022 brought three rounds of painful layoffs and transformation into a business with a broader vision and transition into adjacent markets. Whilst growth was cited as key, the importance of positive cashflow and strong capitalisation was emphasised in announcements made by the business in late 2022. Peloton is another high-profile case here. The spike in popularity (admittedly due to the extraordinary situation of being in lockdown) of exercising at home during the pandemic has faded away and fitness enthusiasts have returned to exercising in the gym.
Curiously, whilst Big Tech companies were the first to recruit in the new global talent pool, they have also led the way on reversing trends in remote working that appeared to be the new status-quo in the period during, and immediately after, the pandemic. Many looked to reverse remote working for a range of different reasons including loss of culture, creativity and productivity. This created an awkward situation in many teams as employees awkwardly adjusted to reverting back to the office. Even in 2023, resettling into a rhythm that works for business and employee continues to be a debate at board level.
What can middle-market tech companies do?
Employment costs are not the only expenditure that boards are having to manage as investors ask to see returns and progress in both the immediate and medium term. Boards faced rising costs and increasing pressure to deliver results, often against accelerated timeframes.
For many technology businesses the workforce reduction has already occurred – many made the hard decisions over the summer. The disruption of the layoffs will have been a distraction within the business – boards will now be looking to establish stability and take steps to move forward. It is natural to re-review workforce levels with the layoffs at Google and Microsoft making headline news. Boards will need to keep this under constant review.
An immediate challenge will arise from loss of institutional knowledge. When experienced employees leave, valuable expertise is lost. Morale will also be impacted as boards face challenges on how to get the best results from their leaner teams.
Many technology companies assert that their net position is increased heads over the last 12 months. Some analysts point to these workforce reductions as short-term corrections in the face of the challenging economic outlook. Greater liquidity in the technology labour pool through 2023 may ease cost of employment for technology companies. However, boards will continue to be looking to control spend in the organisation as we head into a period where business resilience will be key.
Tech skills still needed to drive growth
For the individuals impacted, there is still a need for skilled technology workers. The Technology industry is a notorious hoarder of skilled workers. However, as a consequence of the layoffs, skilled workers are now available in the wider recruitment market. Many are already finding roles outside of technology and will use their experience to revive growth and innovation across other industries. The silver lining of these layoffs may be that they nurture a revival across the broader economic spectrum.
Hopefully, as many as possible will find rewarding new roles. Technology companies typically live at the edge of innovation, and many have cultures that other companies aspire towards. Ex-BigTech experience will be a valuable commodity in the job market.
However, some may choose to exit the workforce entirely. And this creates a broader challenge. As RSM UK economist Thomas Pugh has commented, further labour productivity gaps are unwelcome. This will create challenges for technology firms, as they look to grow through and out of recessions.