Over 150,000 people have been let go so far this year. Are layoffs a confession of bad management?
When Mark Zuckerberg declared 2023 “the Year of Efficiency” for Facebook parent Meta Platforms, several questions seemed unavoidable: Aren’t companies supposed to be efficient every year? If this is the Year of Efficiency, what were all the previous years—the Years of Squandering? Is Zuckerberg suggesting Meta can return to profligacy in 2024?
Most pointedly: If Zuckerberg had discovered efficiency a few years earlier, would the 21,000 layoffs planned or carried out since last November have been necessary?
Similar questions nag other tech giants—Alphabet, Amazon, Microsoft, Salesforce—plus other players that in total have announced layoffs of more than 150,000 employees in the sector in 2023. We heard little talk of efficiency when tech stock prices were rocketing to giddy all-time highs in the waning days of 2021. Now many of those companies’ CEOs are suddenly embracing belt-tightening and other business virtues taught in Management 101. Were those CEOs guilty of self-delusion, of refusing to confront hard reality?
“Layoffs are definitely a confession of poor management,” Jeffrey Pfeffer, a professor of organizational behavior at Stanford Business School, told me. His reasoning: Research shows that generally, layoffs don’t improve a company’s fortunes. Quite the opposite: They don’t reliably raise a company’s profits or stock price, but they do reliably reduce remaining employees’ morale, commitment, productivity, and trust. University of Colorado professor Wayne Cascio, who has spent a career studying layoffs, concludes, “As a group, the downsizers never outperform the non-downsizers.”
Contrary to widely held belief, layoffs are not inevitable. Some companies—Patagonia, Toyota, and others—have avoided layoffs for decades, and have thrived.
Companies that have gone through heavy layoffs can attest even decades later to the damage they inflicted: Famously, Hewlett-Packard faced a crisis of survival when World War II ended. Most of its revenue from a major customer, the U.S. government, suddenly evaporated. The cliff-like drop in government spending overall triggered a deep recession. To avoid certain demise, the company laid off 60% of its employees. Bill Hewlett and Dave Packard were so traumatized by the experience that they resolved never to let a mass layoff happen again, and in their 30 remaining years of running the company, they never did.
Aren’t there difficult moments when layoffs are the best of bad options? Yes, says Peter Cappelli, a management professor at the University of Pennsylvania’s Wharton School, but those moments are rare. “The evidence seems pretty clear that except for really unusual situations—the company is about to go under, it’s the start of the Great Recession—large layoffs actually seem to hamper the ability to restart when things improve,” he tells Fortune. “There is good evidence for this from financial data.” For example, voluntary employee turnover increases significantly at companies that conduct mass layoffs. The total costs of turnover—severance costs of those laid off, plus recruiting and training replacements when business recovers—can be 1.5 to 2.5 times a given job’s annual salary. “All in all,” writes Cascio, “the significant indirect costs associated with employment downsizing may wipe out the direct savings in labor costs.”
One could argue that now is one of those “really unusual situations” Cappelli cites, at least for tech CEOs. The pandemic was a once-in-a-lifetime boom for many of their companies. Some CEOs have framed their recent layoffs as the aftereffect of staffing up to meet the pandemic-era surge in demand. Salesforce CEO Marc Benioff put it in those terms, for example, when he announced a layoff of 8,000 employees: “As our revenue accelerated through the pandemic, we hired too many people leading into this economic downturn.” Stripe cofounders Patrick and John Collison, in an email telling employees they were laying off 1,100 workers, wrote, “We overhired for the world we’re in.”
Read more: ‘All layoffs are bad:’ Recent Salesforce and Meta job cuts show even good severance packages won’t soften the blow for workers
But look closer and that explanation loses much of its punch. Far from heavying up in response to the tech boom of the pandemic, some of the firms now laying off thousands did the opposite. SEC filings show that Alphabet, Meta, and Salesforce had been hiring robustly since long before the pandemic, and each increased headcount at lower rates during 2020 and 2021 than in the two years prior. (Relevant information for Stripe isn’t available because it isn’t publicly traded and does not publish audited data.)
In addition, some of the layoffs have jettisoned employees whose employment had nothing to do with the pandemic. Alphabet, for example, is laying off employees in some of its long-running moonshot projects, including its Verily health care company, its Intrinsic robotics unit, and its Waymo autonomous vehicles business. Amazon is culling staff from units that work on the Alexa digital assistant, Echo speakers, and physical stores, all of which have been chronic money losers.
Tech CEOs who insist the whipsawing economy forced them to lay off workers must also confront the inconvenient example of Apple, which has announced no layoffs since the pandemic began. SEC filings show that Apple experienced the same boom as the rest of Big Tech; its rate of revenue growth more than doubled. Yet CEO Tim Cook barely nudged the company’s hiring upward, staying at the modest single-digit rates of growth the company had maintained for years. Those are far lower rates of staff increase than at Alphabet, Amazon, Meta, Microsoft, or Salesforce before or during the pandemic. Apple remains America’s most valuable company. Since January 2020 its stock has clobbered the Nasdaq, the S&P, the Dow, Alphabet, Amazon, Meta, Microsoft, and Salesforce.
Skeptics might note that Apple is the only company in America’s Big Tech group that gets most of its revenue from manufactured products, and that it outsources the manufacturing, mostly to Foxconn. But Foxconn couldn’t get enough workers into its Chinese iPhone plants as a result of COVID lockdowns and employee protests. (Analysts estimate Apple missed out on $7 billion of revenue because of this labor shortage.) While other Big Tech firms were announcing layoffs, Apple needed more workers, not fewer.
No single factor explains Apple’s superior performance, says analyst Shannon Cross of Credit Suisse. But in the flush days of the pandemic, many companies went on spending sprees, she says. By contrast, “Apple generated $90 billion of free cash flow in 2021, and they didn’t spend like crazy. It’s not that they don’t invest. It’s just that they’re very, very careful about where they do it. There were science fair projects going on at other companies that Apple probably didn’t pursue.”
Read more: How to rebound from a mid-career layoff: ‘Be your own HR department’
For some Big Tech firms, the trauma of mass layoffs is more than a painful response to tough times. It’s a company culture transition to a new life stage. “We’ve never had an efficiency focus in the company before,” Benioff admitted to Wall Street analysts in March, “because we’ve had 24 incredible years where we’ve had to just grow, grow, grow.” It won’t be that simple anymore. (Benioff had more to say to Fortune on the topic; see our story, also from the April/May issue.)
Even more striking is the tone of Zuckerberg’s latest letter to employees, in which he announces 10,000 layoffs in addition to the 11,000 he announced last November. He uses the words “efficient” or “efficiency” 20 times, and much of his message could have been written by the CEO of an old, bloated industrial company. “Flatter is faster,” he says. “In our Year of Efficiency, we will make our organization flatter by removing multiple layers of management.” The days of “move fast and break things,” Zuckerberg’s founding motto, seem very long ago.
These waves of layoffs are indeed a confession of bad management. And perhaps it’s time to acknowledge that the Big Tech companies created their own plight. Now much depends on which companies will take the next step after a confession and mend their ways.
This article appears in the April/May 2023 issue of Fortune with the headline, “Are layoffs a confession of bad management?”