What caused tech layoff 2022–2024
After serving in tech for almost 20 years, I consider myself very lucky to rise along the last decade of the booming cycle, surf along the last lucrative wave and experience the downturn start in 2022.
When the US interest rate starts rising in 2022 to combat high inflation, this has a massive effect on the tech layoff that we see from 2022–2024.
US inflation started shooting up in 2022. The Federal Reserve raised the interest rate from 0.25% to 5.5% over a short period of time.
The rationale was that when interest rates are high, it will be more expensive to borrow money hence there will be less money that circulates in the economy. When people are spending less money, inflation comes down.
Ideally, that’s how the macro economy finds equilibrium.
The problem with that was a lot of tech companies were operating and expanding through credit (borrowed money) instead of revenue from the business.
Obviously, the tech companies have an obligation to pay back the loans. When the interest rates got higher, it became expensive for the tech companies to pay back.
It is also no longer financially feasible for tech companies to take up new credits because the interest rates got higher, which means it got a lot more expensive to take on a new loan.
After the interest rate hike, a lot of tech companies could no longer continue operating like how they used to since 2008, which was when the US Federal Reserve (FED) started Quantitative Easing to save the 2008 financial crisis.
From 2008 till 2021, the economy was flooded with credit liquidity.
It was relatively easy to get funding and inflated valuation for companies. Many private equity firms invested in tech companies.
The playbook was to achieve growth at all costs because the shareholders needed the valuation to grow and to trade the equity for a higher price.
Grow the market shares. Grow the revenue. Grow the number of products. Grow the headcount.
Tech companies have to grow even at the cost of borrowing more money.
It was the rational thing to do because the capital market was rewarding companies that show growth. Not to mention the market is flooded with credit liquidity. Why leave the money on the table?
That was when the tech companies were raining money.
The tech workers’ salaries were inflated quickly because every tech company wanted to grow and they needed tech workers to materialize the growth.
The tech companies were competing for the limited pool of tech talents hence the salary was rapidly inflated to attract the tech talents.
Tech workers started getting double digit salary adjustments. A promotion every 1–2 years was common. Job hopping yields 20–30% increment easily.
The industry has created a highly inflated salary among tech workers.
To put salary into perspective, a senior engineer in tech can be making the type of salary that a director or VP will be making in other industries.
The compensation got so lucrative that folks outside of the tech industry started taking short courses and bootcamp to join the tech industry. There was also no shortage of folks who did not have a computer science background that got involved in tech with non-technical roles.
The party went on until Covid-19 hit.
In the early part of 2020, companies were afraid of a potential economic downturn. Hiring, promotions and bonuses were frozen. Some layoffs and furlough leaves started to take place for a short period of time.
But soon, the market realized Covid-19 has a significant positive impact for the tech businesses instead of a negative one.
The needs for technology skyrocketed due to the needs to conduct business virtually. Tech companies continue to blossom because it was one of the most promising businesses for the world to invest in during the Covid period.
Tech companies doubled down and went on a hiring spree to bring in more tech workers for growth.
At the same time (Covid), governments around the world released stimulus packages to ensure their respective country’s economy does not go into recession due to Covid lockdown.
Now, not only the tech industry is flooded with cheap credit, the economy is flooded by newly injected liquidity from the governments.
The consequence, high inflation.
The bad news is, high inflation destablizes the economy. The US FED started raising interest rates in 2022 to try bringing the inflation down.
It has been effective to a certain extent but raising the interest rate has a blanket effect all over the entire economy, which leads us back to the expensive loan (high interest rate) to be paid by the tech companies.
The theme for tech companies has moved from growth to 1) survivability for startups and 2) profitability for enterprises.
Companies need to survive and continue to thrive on their own revenue without the cheap credit in the past.
What we have today in the tech industry is the obsession with profitability.
Putting aside the accounting mumbo jumbo. The equation is fairly simple:
Profitability = revenue — expenses
Companies need to either increase the revenue or reduce the expenses to achieve profitability.
In the short term, there will always be a limit on how much revenue can be increased without incurring additional cost. However, it is relatively easier to reduce expenses in the short term with minimal impact.
Like it or not, the biggest expenses for most companies are staffing (spells, employees’ salary).
Hence, the layoff.
In the beginning, low performing individual contributors were targeted.
Then, there was a constant push for the managers to raise the bar for performance evaluation to identify more low performers.
Next, the managers themselves are on the list.
During the same period, Elon Musk bought Twitter (rebranded to X) and cut 80% of the team size to prove to the world that they don’t need that many people in the company to keep the platform running.
Lots of non-revenue generating projects are dropped and the remaining employees take on additional responsibilities working extra hours.
CEOs around thought that was brilliant and admired the move.
Also during the same period, chatGPT (and other LLMs) was released and the world believes genAI will significantly reduce the needs for tech workers and some other white collar jobs.
Hence, more layoff.
Reducing staffing cost, removing redundancy, combining roles, shutting down product lines, just to name a few are the efforts companies try to improve profit margin.
In other words, everyone is expected to do more with less.
Tech companies around the world are pushing hard to get more productivity out of their employees in order to not only achieve but to further optimize profitability.
Layoff has been happening for the last 3 years. Are we getting to the end of the tunnel?
Unfortunately, I have a pessimistic perspective in the near to mid term future.
By mid 2024, we are still hearing about lay off from the big techs.
Hiring is hard to come by. If there is an opening, the candidates go through a lot more scrutiny in the interview process. Companies are looking for unicorns who can wear multiple hats instead of just someone good enough to do the job.
Like it or not, executives have very little interest in hiring and to some extent will make hiring challenging.
The expenses on staffing are regularly scrutinized. It is not uncommon to need a CFO or CEO to sign off any new hire even for junior roles.
Promotions are hard to come by. Many promotions are frozen due to budget constraints. If it happens, it goes through extremely stringent criteria.
There is very little room for leadership roles, because organizations want to have workers on the ground working instead of managers counted as overhead.
Profitability and artificial intelligence are the themes in earning calls. Public companies are rewarded with rising share prices only if they meet earning targets and having AI in their future plans.
Tech companies are reverting back to the fundamentals to ensure the business makes a profit and continue making better profit.
Until companies cut till it hurts the profitability, layoffs will continue to happen to improve margin.
In the next article, I will offer 5 things you can do to significantly reduce your risk from layoff. Stay tuned.