Are layoffs justified in a business downturn?

The very companies that were hiring in droves a few years ago are now suddenly laying off people in big numbers. Are business leaders unsure of and underprepared for the changing trends?

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Of late, headlines have been all about layoffs, downsizing and retrenchment. All the big tech firms— including Amazon, Microsoft, Facebook’s parent company Meta and Google — have reduced headcounts significantly in recent times.

Why this need to trim the workforce? The reasons vary, from macroeconomics challenges and rising inflation, to precautionary measures in anticipation of a recession.

While the causes for such drastic measures may differ from one organisation to the other, the truth is that such large-scale layoffs can never be justified. After all, a year down the line, these same companies that are asking employees to leave today, may seek talent aggressively to fill vacancies and expand their teams.

What about accountability?

Deeper examination of the situation reveals that many of these companies are pretty vague about why they are resorting to laying off their employees. When Microsoft recently announced its intentions to cut 1000 jobs, globally, a company spokesperson told the media that Microsoft was “making structural adjustments” just as all companies do, when “we evaluate our business priorities on a regular basis”.

Microsoft also said that it “will continue to invest in our business and hire in key growth areas in the year ahead”.

“All these leaders became irrational at some point and overhired. They forgot their business cycles. AlsoIf the phenomenon of over-hiring is justified, then such layoffs are also justified.”

Gajendra Chandel, senior HR leader

On the other hand, some promoters and CEOs, such as Mark Zuckerberg, CEO, Meta, have been upfront. Zuckerberg took full responsibility for laying off 11,000 employees and admitted that it was due to his mistake that the Company had to end up taking such a difficult decision. “Unfortunately, this did not play out the way I expected,” Zuckerberg admitted in a prepared statement. He referred to how “online commerce returned to prior trends, but the macroeconomic downturn and increased competition” had signalled losses and “caused our revenue to be much lower than I’d expected”. He was clearly apologetic when he admitted, “I got this wrong, and I take responsibility for that”.

High expectations

It is clear that wrong predictions and irrational expectations from the business were some of the reasons for these mass layoffs. These are the very tech firms that were hiring aggressively during the pandemic and even before that. Therefore, the real reason is probably that irrational decision making led to excessive hiring of talent. And when things failed to turn out as expected, there was no option left but to downsize.

“All these leaders became irrational at some point and overhired. They forgot their business cycles,” observes Gajendra Chandel, senior HR leader.

“In terms of ethics, I believe such layoffs cannot be justified. Companies such as Tata in India do not have a history of retrenching people.”

Pradyumna Pandey, CHRO, Mother Dairy

Pressure from investors

Chandel also points out that all these tech firms are also under pressure from their investors. “These layoffs can also be attributed to the greed of big financial ventures and investors of the companies,” asserts Chandel.

Christopher Hohn, a billionaire investor who holds a $6 billion stake in Alphabet, Google’s parent company, had reportedly written to Sundar Pichai, CEO, Google, expressing his concerns over the ‘excessive’ headcount at Google.

In his letter, he highlighted the need for Google to lower headcount as the people cost of the company had spiked. Hohn also pointed out that on an average, a Google employee was being paid higher than the market rate; that while the people cost was not a concern in the growth period from 2017 to 2021, it is now a major concern. With a workforce strength of about 1.87 lakh presently, Google has one of the largest workforces.

“We need to understand that a layoff is not resorted to just for the sake of it. It is a purely commercial call. But somehow, in India, such decisions are never taken well by anybody.”

Kamlesh Dangi, group head HR, Incred Financial Services

It appears that the ongoing layoffs in the tech sector are largely the fault of the business leaders and their wrong predictions. Unfortunately, the people are paying the price for the same.

Talking to HRKatha, Pradyumna Pandey, CHRO, Mother Dairy, says these layoffs, in the Indian context, can never be justified. In countries such as the US, people have a social-security net and can depend on support from the government, but that is not the case in India. “In terms of ethics, I believe such layoffs cannot be justified,” says Pandey. He pertinently mentions that companies such as Tata in India do not have a history of retrenching people.

However, in a free market, such instances are quite common and layoffs like these have happened in the past as well, points out Chandel. “If the phenomenon of over-hiring is justified, then such layoffs are also justified,” reasons Chandel with a hint of sarcasm, referring to the tech firms.

Since we are actually talking about the tech sector here, we also need to understand that in the tech industry the cost of employees is fairly high compared to other sectors. In the IT services sector, the employee cost can be anywhere between 60 to 70 per cent of the total cost of the firm, whereas in the tech sector, this can hover around 50 to 60 per cent, as per experts in the industry.

“We need to understand that a layoff is not resorted to just for the sake of it. It is a purely commercial call. But somehow, in India, such decisions are never taken well by anybody,” asserts Kamlesh Dangi, group head HR, Incred Financial Services.

Dangi goes on to clarify that it is very difficult to say whether layoffs are justified or not, since they are a business reality. “Layoffs are a business reality and we all know it, but yes, as an organisation it should be the last thing to do. We should avoid it,” adds Dangi.

According to Chandel, as much as the business leaders and short-sighted investors are blamed for these repeated layoffs, employees are also responsible to some extent. “We should understand the signals. When a sector or company is booming at one time, it is sure to see a downturn too, and we should examine whether our skills are the core skills required for the business or just peripheral,” advises Chandel.

As most of the HR leaders believe, in a free market, layoffs followed or preceded by a hiring boom will continue to happen if the business leaders continue on their unreasonable path. “They will have to stop being too irrational,” says Chandel. “I will not be surprised if these same tech firms go on a hiring spree a year from now,” concludes Chandel.

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