The company wants to get by with 600 fewer employees in the future.
(Photo: IMAGO/TT)
Dusseldorf The technology industry is firing more employees than ever before. In the first few weeks of 2023, US tech companies alone laid off around 60,000 employees, compared to around 160,000 in the previous year. With SAP, a German software company is now cutting 3,000 jobs.
At first glance, the job cuts come as a surprise, given that most tech companies are making good profits despite the difficult economic environment. SAP also made a profit of 4.7 billion euros last year.
At the same time, tech companies regularly complain about the difficulties in finding suitable IT staff such as developers or cloud specialists. So why are companies laying off so many employees? The answers reveal a complex reality.
The technology industry grew enormously during the corona pandemic: people spent much more time at home, subscribed to more streaming services for evening entertainment, bought more video games, consoles and other consumer electronics – mostly from online retailers.
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Many companies have also had to expand their IT infrastructure, moving from their own servers to the cloud, driving the business of providers such as Amazon’s AWS, Microsoft’s Azure and Google Cloud.
The historically growing corporations also built up personnel historically. Facebook parent Meta and Amazon doubled their workforce during the pandemic, while Microsoft and Google increased their workforce by half.
SAP also hired more than 11,000 new employees during the pandemic. Wedbush analyst Dan Ives says many companies have “spent like rock stars did in the 1980s.”
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As the impact of the pandemic and countermeasures became less noticeable, the tech industry grew at a slower pace. The bosses didn’t expect that. “In retrospect, I know that I invested too ambitiously compared to the growth in sales,” says Daniel Ek, CEO of Spotify, who is now laying off six percent of the workforce with 600 employees.
The problem is more common in fast-growing start-ups: They hire more employees during growth phases in order to be prepared for further growth. If development stagnates, the additional employees become an unnecessary cost factor and have to go.
The copycat effect
In view of the continuing shortage of skilled workers in the IT area, which is important for the technology industry, the layoffs are surprising. According to the Bitkom industry association, there was a shortage of 137,000 IT experts last November in Germany alone, and vacancies remained unfilled for an average of seven months. Due to demographic change, the number is likely to increase in the long term.
In addition, severance payments are not only financially expensive. The motivation and morale of the remaining employees also decreases. Jeffrey Pfeffer of Stanford University points to “extensive evidence” from the science. Accordingly, companies performed better after crises if they had not laid anyone off.
Pfeffer brings “social contagion” into play as the reason for the mass layoffs in the tech industry. “The companies imitate each other,” said the professor in an interview with the university newspaper “Stanford News”.
He spoke to managers who knew the layoffs were damaging the company. But the supervisory boards saw the layoffs at other companies and also called for measures in their own company.
Because the supervisory boards themselves are under pressure. The share prices of many tech companies are in the basement, investors are correspondingly dissatisfied. Hedge fund manager Christopher Hohn praised Google boss Sundar Pichai for throwing out 12,000 employees as the “right step”, even if he believed he should have fired almost three times as many.
Tech companies are hiring in growth areas
The board members are reacting to the crisis, sorting out and concentrating on the core business. Microsoft is significantly reducing its own Metaverse division, but is expanding staff in growth areas such as artificial intelligence. SAP is also strengthening its business with business software and making cuts in marketing and sales programs.
Due to the increasing specialization of the professions, it is often not easy to retrain employees for a new profession. The skills of a cloud engineer cannot be compared to those of a developer.
In addition, companies repeatedly use waves of layoffs to get rid of older employees, who usually earn more than their younger colleagues. Some layoffs could also be a reaction to the sharp rise in salaries in the IT industry in recent years.
More: SAP is cutting around 3,000 jobs