The largest representatives of the global IT segment continue to lay off employees en masse. The reasons may be not only investments in new technologies, but also the desire to satisfy the interests of shareholders
In 2023, technology companies laid off more than 260 thousand employees. At the time, management justified the measures by citing excess hiring during the pandemic, high inflation, and low consumer demand for products. However, mass layoffs will continue into early 2024, even as employment in the IT sector has returned to pre-pandemic levels and consumer demand has begun to recover. At the same time, according to Gartner estimates, global IT spending will increase by 8% and exceed $5.1 trillion in 2024. xutechs.com looked into the possible reasons for the ongoing waves of layoffs.
Statistics of layoffs in the IT sector
According to the Layoffs portal, which tracks work trends in the technology sector, in the first weeks of 2024, almost 160 IT companies, including Meta (a Russian court declared it extremist and banned its activities in the country), Amazon, Microsoft, Google, TikTok and Salesforce, fired already more than 41 thousand employees.
Asset management company BlackRock, software giant Okta , live streaming platform Twitch, payment processor PayPal, and payment processing company Block have announced cuts due to the need to reduce costs.
Network equipment maker Cisco intends to lay off thousands of employees to restructure its business to focus on high-growth areas. The same measures are being taken by Amazon, which is preparing to fire several hundred employees of its Prime Video and Amazon MGM Studios divisions in order to direct investments into more profitable areas. Xerox Corporation will cut 15% of its workforce, or about 3 thousand employees, for the sake of restructuring and investment in digital services. The developer of the Unity game engine announced the dismissal of 25% of the staff, or 1.8 thousand people, for the sake of a “reboot”.
Google: global layoffs for investment in Gemini
Alphabet (Google’s parent company) announced in January 2024 that it was laying off about a thousand employees across several teams, including those who developed Google Assistant and hardware products including Fitbit wearables and Pixel smartphones. The rest were united into one team, which will be responsible for Nest, Pixel and Fitbit products.
Google CEO Sundar Pichai then warned employees of the possibility of more “role cuts” at the company in the coming months. “We have ambitious goals and this year we will invest in our top priorities. The reality is that to create the capacity for these investments, we will have to make difficult choices,” he wrote. At the same time, Pichai assured that the scale of layoffs in 2024 will not be comparable to last year and will not affect every team. According to The Verge, this time they will affect teams for equipment, advertising sales, YouTube, etc. Engadget published a note from the head of Alphabet X’s innovative development division, Astro Teller, who said that the company “will focus on creating many projects as independent companies financed by market capital.”
Back in 2023, it was reported that Google could fire up to 30,000 people from its advertising business to make more of Gemini’s AI capabilities, especially with large advertisers.
Last year, Google laid off about 6%, or 12 thousand workers. The media calculated that the mass layoffs cost the company $2.1 billion, which was spent on severance pay and other expenses, and in just one month of 2024 it had already spent $700 million. At the same time, Google ended 2023 with growth in most of its main business areas . The company’s fourth-quarter revenue was $86 billion, up 13% year over year. Its core digital advertising and cloud computing businesses have grown due to Google’s investments in generative artificial intelligence.
Microsoft: cuts in the gaming division for the development of AI and clouds
Microsoft also announced in January that it would lay off 1,900 employees in its gaming division, or 8% of its workforce. Most of the cuts will come at the recently acquired subsidiary Activision Blizzard, and will also include some employees at Xbox and ZeniMax. At the same time, it became known that the company has formed a new team to work on cheaper and smaller artificial intelligence models in order to take advantage of more opportunities in this market. “Microsoft is redoubling its efforts to implement artificial intelligence systems that are smaller and cheaper to operate than those from OpenAI,” the IT giant said in a report. The team became part of the Azure cloud division.
In 2023, the company laid off 10 thousand employees. Despite this, Microsoft’s revenue grew 18% to $62 billion in the fourth quarter of 2023. The largest increase in revenue was in the cloud services segment, which has gained many AI features over the past year. At the end of January, Microsoft overtook Apple in market capitalization. “We’ve moved from talking about artificial intelligence to using it at scale,” said Microsoft CEO Satya Nadella.
SAP: restructuring to introduce generative AI into products
German enterprise software giant SAP announced it would cut 8,000 jobs due to a shift in the company’s priorities towards generative artificial intelligence (GenAI). Employees will not be laid off yet, but will be sent on long-term leave and to retraining programs. The restructuring program will free up $2.2 billion, which SAP will use to develop artificial intelligence in products and its implementation in its own processes to increase efficiency. The company has already appointed its first AI director to lead a dedicated team. She will be involved in the implementation of artificial intelligence in SAP products and help clients work with them.
In 2023, the company has already cut more than 3 thousand jobs. At the same time, for the fourth quarter of the year, SAP exceeded the forecast for operating profit. Thus, revenues from cloud computing increased by 25%. SAP top management notes that in 2023, the order book in the cloud increased by 27% and reached a record high. According to them, focusing on AI will allow the company to ensure scalability of its operating model.
However, not all experts agree with this point of view. “There is a herd effect in technology,” says University of Washington Foster School of Business professor Jeff Shulman. “Layoffs seem to be driving share prices higher, so companies see no reason to stop.”
According to the expert, layoffs continue due to the fact that all previous waves of layoffs went relatively smoothly, while “the remaining employees feel more comfortable, and investors appreciate this.” This is confirmed by the reaction of Wall Street. In January 2024, the S&P 500 index (a stock index of 500 selected US public companies) reached several all-time highs, and Microsoft’s value exceeded $3 trillion. At the same time, the NASDAQ Composite index, which is dominated by technology companies, grew by 43% in 2023 after falling by a third in 2022. Layoffs manager Roger Lee believes these Wall Street moves are motivating technology companies to cut costs and, therefore, cut staff.
Stanford business professor Jeffrey Pfeffer called this phenomenon “copycat layoffs” back in 2022 . He says that when one large technology company downsizes, the board of directors of a rival may wonder why not do the same. The general trend, the professor argues, is diverting attention from individual companies, and they are using layoffs “as a cover to compensate for bad decisions that led to investments or strategies not paying off.”
Experts are confident that interest rates that have risen since the pandemic, as well as the need to invest more in artificial intelligence, do not sufficiently explain the massive layoffs.
“This is how the American capitalist system works,” says Mark Zandi, chief economist at Moody’s Analytics. “Companies strive for profitability and shift resources from one place to another very quickly.”
Technical Analyst at DA Davidson Co. Gil Luria also notes that due to economic problems and inflation in 2022-2023, purchases of software and cloud services have decreased. Now, according to him, purchases have stopped declining, but have not yet recovered to previous levels. In this regard, the heads of IT companies, in order to demonstrate income growth at the level of previous years, began to lay off highly paid employees.
According to Zandi, workers are no longer choosing high-paying tech jobs, but rather lower-paying jobs or alternative employment opportunities.