It’s in Big Tech’s DNA to overhire in the boom and deflate in the downturn

The mea culpas from tech CEOs announcing massive job cuts have become a familiar refrain: “We hired too many people.” “We were much too optimistic.” “This did not play out the way I expected.”

That’s a mashup of statements from Salesforce, Stripe and Meta. The tech industry continues to shed jobs: Google and Microsoft announced thousands of layoffs last week and Spotify this week.

So, why did so many tech companies make the same mistake of overhiring?

Marketplace’s Meghan McCarty Carino spoke with Anup Srivastava, a Canada research chair and professor at the University of Calgary. He said going big during boom times is baked into the business model of the industry. The following is an edited transcript of their conversation.

Anup Srivastava: It’s a winner takes all. There is only one LinkedIn, there’s only one Facebook, there’s only one Google. That’s a network effect. So you have to become big and capitalize on so-called winner-takes-all profit structure in order to make money. So they were buying lottery tickets, they were experimenting and the party has come to a stop.

Meghan McCarty Carino: Right, during the good times, it really felt like, you know, there was such a competition to expand headcount as quickly as possible, to be seen, as, you know, the best place to work to get the best and the brightest. And now it almost seems like reducing the footprint is spreading like contagion.

Srivastava: Absolutely. Unlike atoms and molecules, the talent is limited. We have only so many talented, educated people. So people were trying to corner them, even before they really had the need for them. Now, when, you know, the interest rates have gone up to 5%, the cycle has reversed. But let me add one more thing. It’s not that much of a reversal. If you see the headcounts had gone up by 30, 40, 50%. And the reversals that we have seen is only 5 to 7%. So I think the correction is not complete yet.

McCarty Carino: Now, these mass layoffs present an especially tough situation for workers on H-1B visas, which are very common in tech. Tell me more about the implications for these workers.

Srivastava: It is a major disruption. You know, I have personally gone through this. I came to the United States in late ’90s on H-1B. And I know that how disruptive it can be. You know, just visualize that you have left your home country, you have moved your family here, you bought a house, you have taken loans, you have bought car, your kids were born here, who are technically U.S. citizens, and now you have 60 days to wind up everything and go back to your home country. In normal circumstances, for a tech worker, if a tech worker is fired, they will typically get a job. They would line up a job within a week or a month or so at best. Nowadays, it’s a systematic disruption. It’s not just Big Tech, it goes back all the way to the initial startup. The whole ecosystem has been affected. So the hope of finding job right now is not good. And these people are likely to move back to their home country. Frankly, this will at simply at last, it’s a disbelief. They don’t know what has happened. It’s like a bad dream. 

McCarty Carino: Of course, the biggest impacts are, you know, to those people who are having their lives disrupted. But I mean, what could this mean for the status of the U.S. as an innovation hub? I mean, could this bring growth to tech hubs elsewhere in the world?

Srivastava: So the U.S. will continue to attract the best talent in the world. The U.S. is a magnet to attract the talent. And I don’t think that there is any country in the world that can disrupt that. Maybe Israeli startups, they are at forefront, but I don’t see any competition. However, the pace of acceleration of tech will be affected, relatively speaking U.S. will remain attractive. However, this value creation, this prime mover of economy which created value, will definitely slow down, if not come to a standstill.

McCarty Carino: Now there is a lot of tech talent that is flooding the job market. What could this mean for smaller companies or even companies outside the tech sector that have been looking for workers with these skills?

Srivastava: It is a great opportunity for so-called Main Street. Think about banks. The challenge was going towards fintech, now it’s available for banks. So it’s a great opportunity. Now, let me add a word of caution here. That the culture that these folks were attracted to, and that’s not prevalent in Main Street. Main Street itself demands 9-to-5 jobs, and it imposes some discipline, cultural misfit, or fitment will be a great problem.

McCarty Carino: Tell me more about why Main Street has been in need of this kind of tech worker and how difficult it’s been to get those folks over the last decade or so.

Srivastava: So Main Street needs transformation. Technologies are one way, one directional process. We all know that many of these industries were or are ripe for disruption. So think about Amazon. When Amazon came, people were laughing. Walmarts or Sears of the world were laughing at them. When Tesla came, General Motors and Fords of the world were laughing at them. But over a period of time, they realize that this tech disruption is real. Similarly, banks might be laughing at fintechs today, but they’re also ripe for disruption, so they need people. Now, there are two factors that they’re unable to attract such good people, talented people or ambitious people. First is compensation itself. You know, last two years or so, we saw some compensation just touching the sky and starter salary going to [$300,000 or $400,000]. A person with five to seven years experience making half a million dollars or $700K was not unheard of. Now, Main Street cannot offer that kind of salary. Second is the world culture itself. The world culture is about operational efficiency, which is if I spend $1 today, I expect $1.20. By the end of the year, tech is saying, let’s spend $1 today, let’s not earn anything for next five years, but 70 years, let’s have a big payoff. This is a massive difference in management philosophy and in hiring policy. So it’s not easy to get the talent, which is looking for payoffs from stock options or is potentially thinking of, let’s learn something and let’s start our own business tomorrow. It’s entirely different from people who hire 9-to-5 workers.

McCarty Carino: What do you see as some of the long-term ripple effects of these Big Tech layoffs?

Srivastava: So let’s go all the way to a person starting something of a new idea in his or her own garage. And it is expected that that idea will grow so that it becomes an attractive acquisition target for a company like Facebook or Microsoft. Now, if that cycle stops at the very top end, then it is going to have a ripple effect all the way to startup activity all the way to series, several series of rounds of funding. So we are going to definitely see slowdown in innovation, slowdown in startup activity. We will see many projects being abandoned and much of intellectual property, you know, half wastage getting lost in the process.

Related links: More insight from Meghan McCarty Carino

Srivastava goes into more depth about where all this laid-off tech talent might end up in a piece he co-authored for the Harvard Business Review. He points out it is not just banks and retailers with a digital presence that need tech skills, but any company with a remote or hybrid workforce.

CNET reports that the U.S. Office of Personnel Management has thousands of tech jobs open in the energy, transportation, health care and national security agencies, and it’s actively going after this workforce. It’s even created a dedicated website for tech jobs and plans to issue new guidance giving offices more flexibility to raise pay to attract these workers.

As to how many jobs have been lost in tech so far, that’s being tracked at a website. So far, January — which isn’t even over yet — has seen 56,570, more than any other month since the pandemic began.