Tech Companies Cut Jobs To Chase Growth, But Watch Out For Those Shareholder Returns

Publicly listed technology companies under pressure to make deep job cuts can underestimate the often negative impacts redundancies may cause, both financially and culturally, as well as the harm to shareholder returns.

According to data tracking service Layoffs.fyi, some 675 technology businesses have so far waved bye-bye to 193,950 employees in the year to date, compared to 164,591 chopped by 1,056 companies in 2022.

Yet those workers have perhaps found an unlikely ally in biz tech analyst Gartner, which says that big-scale layoffs can fly in the face of the very thing they are intended to generate – shareholder value.

"Given the high cost of capital, renewed investor focus on profitable growth and widespread forecasts of a global recession, CEOs are asking CFOs to reduce their costs," said Vaughan Archer, senior director, research and advisory in the market watcher's finance practice.

The blunt instrument many tech, retail and financial services companies are choosing is job cuts – in the case of Google parent Alphabet, one activist investor even called for CEO Sundar Pichai to go further than the 12,000 redundancies he announced in January and elevate it to 30,000. Investors circling Salesforce earlier this year called for more too.

Archer says CFOs can miscalculate the affects of large-scale workforce reductions.

"The first thing to recognize is that there is an immediate upfront costs to layoffs as a business will need to reorganize itself around a small group of employees and typically incur costly upfront severance payments."

He added: "Thereafter, a business is likely to see an increase in both costly contractor hiring and demands for increased compensation from remaining employees who are now under a greater burden."

Although it might be tempting to lighten the payroll to ease the burden on falling growth rates, Gartner reckons the initial savings are typically offset by the "unforeseen consequences of layoffs within three years and in many cases can be detrimental to shareholders returns in the long term."

Layoff cost savings will be eroded, warns Gartner, even if a company manages to sidestep a "vicious cycle of employee turnover driven by outstretched staff and lower morale." When trade picks up again, businesses will need to rehire "likely at higher rates" than those who were laid off.

"In the more negative scenarios, the factors detailed here are also going to harm growth in existing and new business, and ultimately a firm will start losing its customers," said Archer.

• Microsoft puts the freeze on employee salaries, CEO pay still as hot as ever
• Miffed Googlers meme on CEO's $226M pay award amid cost-cutting campaign
• IBM pauses counting its billions to trim Red Hat staff
• Microsoft ditches plans for 500,000 sq ft London office

"None of this is conducive to long-term shareholder gains. CFOs need to work cross functionally with peers in HR, recruitment, sales and service to ensure they are properly accounting for the potential cost of layoffs."

Almost all of the elite tech companies have laid off vast numbers of people: Microsoft is axing 10,000, 12,000 are going at Google, Amazon is expunging 27,000, and 19,000 are being forced out at Accenture. Oh, and Meta is pushing 21,000 out the door too.

In their most recent full financial year, those companies collectively made $176 billion-plus in net profits on the back of more than $900 billion in revenues. Commercial reality is catching up with them, but their job-cutting policies might seem disproportionate to some. ®