Can US tech giants recover after job cuts and falling revenues?
The article has been authored by Devroop Dhar, MD and board member, Primus Partners.
The year 2022 reminds me of Charles Dickens's famous quote, 'It was the best of times, it was the worst of times'. As the pandemic receded, it brought a ray of hope, joy and happiness around after two difficult years in the lives of many. However, by the end of the year, there was economic mayhem with a war in Ukraine, a looming recession along with rising inflation and a slowdown in the job market in several parts of the world, especially in the United States (US) and Europe. The tech industry suffered the significant brunt of it, as they saw trillions of dollars in market value disappear. While many large tech firms had made unprecedented profits during the time of the pandemic as people adopted technology from all walks of life, much of it disappeared in recent times.
During October 2022, seven major tech companies, including Facebook, Apple, Amazon, Netflix, Google, and Tesla, lost a total of approximately $ 3 trillion in market value. Both Google and Microsoft lost around $700 billion each, while Facebook (Meta) lost about $600 billion. Amazon became the first public company to lose a staggering trillion dollars in market value, making the situation more severe.
The big tech firms have responded to the change in market dynamics and potential economic slowdown with a series of job cuts. The likes of Microsoft, IBM, Amazon, Meta, Google, Twitter, and Salesforce, among others, have announced or executed job cuts as one of the measures to respond to a slowdown in demand, margin pressure and investor anxiety in the near term. The last two to three years had seen significant hiring in the tech industry as the pandemic-induced demand for digital spurred growth. Microsoft alone had hired more than 75,000 people since 2019. Many feel that companies had created over-capacity anticipating a continuation of the digital momentum, which has been impacted by the slowdown.
While the present economic situation and associated job loss is definitely a cause of concern, looking at history, it is definitely not the first instance of such a scenario. The last 20-odd years have seen numerous instances of layoffs in the industry, fuelled by external factors in the economy. 2000-2001 saw a dotcom crash; 2007-2009 saw a mortgage and sub-prime crisis compromising the position of several large investment banks and the eurozone debt crisis; 2014 witnessed the economic impact of falling oil prices, the Russian crisis, slowdown in Brazil and China. Layoffs are, therefore, cyclical, but with each cycle, the tech industry innovates and reinvents itself to emerge stronger. As companies are pushed to the wall, they focus more on technological innovation and the same benefits them later. Each cycle of recession and job loss has been followed by significant hiring, and I expect the same here when the economy stabilises over the next 12-18 months.
While due to uncertainty and interruptions in the business world, job losses do happen; however, studies have suggested that the majority of leaders would prefer to cope with tight budgets and talent development challenges than having to cut positions and terminate employees. While layoffs may bring in some short-term respite to cash flow and margin pressures, it impacts the morale and culture of organisations. The employees who remain often tend to be unsure and under pressure, thus impacting overall productivity. Therefore, layoffs should be seen as only the last option for cost optimisation considering their long-term impact on the firm.
If there is one lesson we can draw from past financial crises, it is that businesses need to be prepared to survive and respond rapidly. During the recession, companies that embraced a strategic attitude were able to expand. They broadened their clientele and embraced cutting-edge digital technologies in the months before the recession, which made them more resilient. Overall, big tech companies need to look at five key principles to overcome the present crisis and emerge stronger:
1. Focus on Innovation: Technologies like AI and Web3 are clearly disrupting the world. AI would have a significant impact on how consumers and businesses use and consume services, and tech companies need to focus on innovation and advancement in this space. Companies succeeding in the future would be the ones who win this game of innovation.
2. Investment in new technologies: The next decade will see technologies impacting our lives which probably don't exist today or are at a nascent stage. Companies investing in new age and futuristic technologies would be the winner in days to come.
3. All hands on deck: Large firms tend to have a sizeable pool of people who are managing teams without being hands-on or being creators themselves. It is an oft-repeated aspect that firms end up creating 'managers who are managing other managers' instead of creating leaders or creating performers. In the race to be more competitive, client-focused, and innovation-driven, agility is key. Large tech firms need to focus on getting everyone on board to be agile and contribute to innovation and growth. It would be all about execution and not just strategy and thought.
4. Be close to customers: The recession and economic downturn is the right time to get close to customers. First, it will allay fears of the impact of job loss on service delivery. Secondly, more often than not, their clients may also be experiencing the shocks of economic downturn and, therefore, may be more amenable to ideas and support. Nothing builds a strong and loyal customer base than the support extended during their downturn.
5. Upskill and reskill the workforce: Once the market turns around, it would be costly to hire talent into organisations. Therefore, it would be prudent and important for big tech companies to focus a lot more on upskilling and reskilling the existing workforce to make the organisation future ready. The world may soon see shortages in developers and programmers focused on AI, Web3, AR/VR, amongst others, and the best way to get this talent into the firm would be through the training of existing employees.
Every time after a recession, big tech firms have bounced, and 2023-24 will not be any different. If we look at the recession period of 2007 - 2009, all the large tech companies focused on innovation and new products to overcome the crisis. Google launched Chrome in 2008, which is today the leading browser with more than 65% market share. Microsoft launched Windows 7 in 2009, which turned out to be one of the most successful OS for them. I foresee all of them coming back on track through a focus on innovation, new technologies and client-centricity. The crisis should be seen as an opportunity and not a threat. Adopting these five principles, they will be able to build a culture of innovation and resilience along with a strong client focus, all of which will be crucial to regaining the confidence of the markets as they bounce back.
The article has been authored by Devroop Dhar, MD and board member, Primus Partners.