Tech Recession?

In this article, we look at how significant job cuts and other factors are evidence of a tech recession, what the causes are, plus what tech businesses can do to survive and move forward.

Tech Recession Evidence – Job Cuts

Much of the evidence of a tech recession has come in the form of tech companies’ laying-off large numbers of employees, most notably since November last year. For example:

Google

This month, Google’s parent company Alphabet laid off 12,000 employees, which represents around 6 per cent of its workforce. Lay-offs included many senior leaders and some staff members who had been at Google since the early days. Apart from several hundred job losses for sales employees in 2009, Google had never experienced a major layoff. Tech commentators have also noted how the many famous perks that Google workers traditionally enjoyed have been seriously curtailed. It has also been reported that hedge fund mogul Christopher Hohn (in communication with Alphabet CEO Sundar Pichai) has argued for the need for more drastic layoffs, e.g. around 20 per cent.

Spotify

Sweden-based US-listed music streaming company Spotify recently cut 6 per cent of workforce (around 600 people) in a cost-saving exercise. As well as employees, the job cuts included its chief content officer Dawn Ostroff. Investors seemed to favour the cost-cutting as shares rose by more than 4 per cent in pre-market trading following the job losses. Spotify also announced (October) that it would slow down hiring for the rest of the year and into 2023.

Microsoft

This month, Microsoft has also announced that it’s laying-off 10,000 employees across its global operations. The company employees 220,000 people (6,000 in the UK). Microsoft’s CEO, Satya Nadella, reportedly informed staff in a blog post that less than 5 per cent of the company’s worldwide workforce will be affected by layoffs. He also said, however, that hiring would continue in key sectors despite the cutbacks.

Salesforce

Business software company Salesforce has announced that it will be laying off 8,000 workers, i.e. 10 per cent of its worldwide staff. The reported reason is that the company hired too many people during the pandemic and now needs to adapt to an economic slowdown.

Twitter

Many of Twitter’s problems followed the takeover by Elon Musk, which led to a 40 per cent drop in revenue as 500 advertisers pulled out (90 per cent of Twitter revenue was, until recently, from advertising). The company slashed roughly 50 per cent of its workforce (reports showed Musk’s leadership sacking an estimated 80 per cent of contract employees without formal notice). Sackings included top executives, e.g. Chief Executive Parag Agrawal, Chief Financial Officer Ned Segal and legal affairs and policy chief Vijaya Gadd. Thousands of (outsourced) content moderators were dropped, which fuelled fears of a drop in quality and possible rise of misinformation which deterred advertisers even more and knocked investor confidence. Recently, it’s been reported that Twitter is conducting more cost-cutting efforts to lessen its revenue drops such as auctioning its San Francisco office (surplus) assets including a blue neon sign of Twitter’s bird logo.

SAP

The German software giant SAP has also announced layoffs of 3,000 employees as part of a “targeted restructuring programme” to “strengthen its core business” and “improve efficiency.”

The company anticipates that the restructuring could deliver annual savings of 300-350 million euros from 2024 onwards.

Why?

There are several main reasons for what appears to be tech recession, not just in the US, but globally. For example:

Cost savings as consumers are squeezed by high living costs and businesses reduce their advertising, i.e. increased caution among consumers and businesses.

A downwards shift in spending attitudes among personal and business customers alike.

The US tech sector trying to adapt to the tougher economy and fears of a recession in the world’s largest economy.

Businesses globally practicing prudence because certain parts of the world are in a recession, and other parts are expecting one because of the slowing economy.

Tech businesses finding themselves with an excessive head count following a hiring binge over many years, and particularly since the start of Covid-19 to meet surging demand.

A worsening business environment, e.g. worries about an economic downturn, high inflation rates, increasing interest rates, and other issues.

Pressure from the fallout from Russia’s war in Ukraine on the global economy, e.g. pressures in the global supply chain from costs related to inflation, followed by rising interest rates to tackle the price pressures, resulting in dented demand among consumers and business customers.

Preparation for a recession, expected as a result of aggressive interest rate hikes by global central banks to curb inflation.

PC Market and Intel

A tech recession is also evident with companies like Intel (chip makers). For example, Intel suffered a double-digit revenue decline in Q4 2022 with its two biggest business units being hit as a result of a massive PC market slump. An IDC report showed that PC sales had fallen by 28.1 per cent during the same period. Gartner also reported that this was the steepest decline since it started tracking the PC market in the mid-1990s.

Why The Decline In The PC Market?

Reasons for a decline in the PC market that have affected chip manufacturers like Intel include:

The shift to mobile devices. The rise of smartphones and tablets has reduced the need for traditional desktop and laptop computers as consumers shift towards more portable and convenient devices for personal use.

The Increased cost of PCs. With the shift towards more premium, high-performance devices, the cost of traditional PCs has gone up, making them less accessible to budget-conscious consumers.

Substitution with cloud computing. Cloud computing has allowed users to access computing resources and software over the internet, reducing the need for personal devices.

The slower rate of innovation in PC technology. The pace of innovation in the PC market has slowed, reducing consumer interest and investment in upgrading their devices.

The economic downturn affecting consumer spending on items like PCs. Economic recessions and downturns have led to a reduction in consumer spending on non-essential items, such as PCs, as individuals prioritize their financial stability.

What Can Tech Companies Do?

Some of the ways that the big tech companies could combat the tech recession, besides cost cutting through job losses, could include:

Diversification of revenue streams.

Innovation and development of new products and services.

Expansion into new markets and industries.

Investment in research and development.

Partnership and collaboration with other companies.

Improving efficiency and productivity.

Building a strong brand reputation.

Focusing on customer satisfaction and experience.

Optimising pricing and marketing strategies.

What Does This Mean For Your Business?

Despite many businesses being on a hiring binge for many years and enjoying huge demand during the pandemic, lots of tech businesses have now found themselves with too many staff in tough market conditions in a post-pandemic world, during an economic downturn that’s bracing itself for worsening conditions.

The resulting knock to consumer and business confidence and spending power has led to a decline in adverting spend and spending generally, leaving tech businesses with little choice but to cut costs, trim perks, focus on the core business, and find ways (such as those listed above) to survive and move forward amid further gloomy projections. For many tech businesses, it’s been the first time they’ve had to make major job cuts and there are likely to be more going forward.

By Mike Knight

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