Understanding Business Objectives In The Chaos Of Corporate Layoffs
News of layoffs from Silicon Valley heavyweights and the startup world are grabbing headlines and eyeballs each day now. Professional social media platform LinkedIn is inundated with posts from laid off employees expressing anguish at the way they were locked out of company premises and office computer networks abruptly. There are several reasons for what has been happening but it would be better understood by first looking at business fundamentals and other underlying factors.
All companies aspire to grow their revenue and profit margins Year-On-Year (YOY) and this is the mandate of their top executives. Business strategies are created for both revenue generation and cost saving (money saved is money created) based on market analysis and macroeconomic conditions. This results in the initiation of projects which when executed results in the development of products, services, etc. which can either be commercialized and monetized to generate revenue or used internally to increase efficiency and thereby reduce cost to companies. Bigger companies will have multiple projects and startups will be mostly working on developing a single product/service. Now, there are business evaluation methods (NPV, IRR) to establish if a project can be successful but there can be hurdles during project execution, introduction of similar products/services and other market changes, changes in macroeconomic conditions and availability of funds that can fail the project and failure of companies in case of startups.
There is a business evaluation model called PEST which is used to analyze macroeconomic conditions to determine the success or failure of a business initiative. PEST stands for Political-Economic-Social-Technological. PEST was later extended to PESTEL to include Ecological and Legal factors. Ecological can be largely divided into two factors — natural disasters and diseases. Companies have traditionally ignored ecological factors during business evaluations. The first time I came across ecological factor becoming relevant was after the devastating Mumbai flood in 2005. A client that had outsourced its IT operations to a service provider based out of Mumbai asked for a disaster recovery (DR) team to be set up in Bangalore. But diseases were completely ignored.
When the COVID pandemic struck in 2020 and countries went into lockdown, supply chains got massively disrupted. Companies were forced to modify their strategies and operations with immediate effect or close down. As the lockdowns extended, many of the ongoing projects became redundant temporarily while new business opportunities started coming to the fore. Online home delivery and educational platforms popped up and thrived. Hiring increased substantially to implement and support new projects. It was evident that lockdowns had to end or would cripple economies of countries but where companies seem to have grossly mistaken is in their assumption that businesses would not or take a long time to return to pre-covid situation. My understanding is, if businesses had done their evaluation by considering ecological factors and specifically the factor of diseases and understood the implications, the world would not have had to go through what it had to for two years of the pandemic.
It is well known that majority of projects initiated by companies and majority of startups fail. Companies try to absorb employees in failed projects into other projects whereas startups are left with no option but to let go off their employees. But organizational consolidation amid fears of impending economic recession, disruption caused by Russia-Ukraine conflict and rising inflation and interest rates have resulted in the layoffs we are seeing now. There are different categories of employees that have been impacted now.
1) Employees on bench — Employees who are not assigned to projects or are out of projects and yet to get new projects are assigned to bench where they are trained on new technologies and topics while they continue to receive their monthly salaries. Normal practice is, most employees on bench get assigned to new projects and those who don’t are let go after a specific period of time. When layoffs due to consolidation is initiated, bench employees are the first ones to be affected.
2) New/recent joiners — When projects slow down or become redundant, new/recent joiners get impacted first when projects are shut down or team sizes are trimmed.
3) Senior employees — Yes and no surprises. All companies expect their employees to upskill themselves along with increasing experience and move up the ranks. While it is true that the corporate pyramid becomes thinner with increasing height, employees who choose to do nothing or continue staying in specific roles become redundant with time and replaceable. In a previous job, I have seen experienced people of a specific skill being let go and people with less experience of the same skill being hired to fill up those roles. Senior resources are needed in projects only till the time the projects become stable and all information is documented. Then projects can be run easily with a couple of senior people and team members with lesser experience who need to be paid far less salaries. This is also a way for the companies to reduce expenses and make the projects profitable. Moreover, new graduates are leaving colleges with the knowledge of latest technologies and who need to be paid only a fraction of what the senior employees are being paid. This is also making senior employees redundant and expendable.
Top executives are needed for businesses to ride through the storm so they will not be let go off now. In the recent past, some companies were offering high severance packages for top executives to take voluntary retirement because new and young leaders bring fresh perspectives into leadership roles.
It is important to note here that as employee headcount increases the number of internal staff in human resources, facilities and other departments also increase. These employees play no part in revenue generation and add on to cost to the company. Employee reduction also results in the reduction of internal staff count.
Do we need to fear or worry about layoffs? Lush green forests dries out in the summer heat and just a single spark of fire is needed to burn it to the ground. All that smoke and heat, in turn. rises up and brings rain. From the ashes, life springs up again. Life is cyclic and this is the Universal truth. Difficult times force us to introspect and is the time for reality check. These are the times which help us to understand if we want to learn something new and get back into the market or find our true passion and set our lives in a new direction. Any transition is difficult and no one is living happy, peaceful and stable lives which is what everyone is aspiring for. Challenges will come in everyone’s life at some point in time. Overcoming them and moving forward is what makes us truly successful.
