No Layoffs Will Fix Tech's Problems

In the tech industry, which thrives on perks, the world's largest companies are all promising to spend less, establishing a new territory for an industry where perks are king. There was already a big round of layoffs at Alphabet's Google in January of this year, which included more than 30 massage therapists, as Meta Platforms Inc., Facebook's parent company, shut down its laundry services for staff.

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The biggest tech companies are tightening up their fringe benefits and showing their talent the door. However, there is still a lot more that needs to be done.

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Hiring freezes and reducing perks are the easy parts of the process. Silicon Valley's largest firms are being forced to become more innovative again due to the fact that they have grown fat on old business models and have become sprawling bureaucracies. In order to accomplish this, we need to steer the culture of the organization away from protecting mini-fiefdoms and more toward advancing ideas in motion and getting product features out into the world. Big tech's stable, mostly technocrat leaders are facing an entirely new challenge, which is something they have never faced before. Satya Nadella, the CEO of Microsoft, Mark Zuckerberg, the CEO of Meta, and Alphabet's Sundar Pichai, the CEO of Alphabet's parent company, Google, has overseen years of continued growth largely by keeping things running smoothly.

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In the aftermath of the pandemic, they were able to accelerate their steady growth. The collective profits at Amazon, Apple, Facebook, Google, and Microsoft increased by 55% from a baseline that was already eye-popping in 2021. They would have been overtaken by Australia as the world's 13th largest economy if their combined sales had reached $1.4 trillion, making them the largest in the world.

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Now that shares and growth are under pressure, Zuckerberg has talked about flattening his leadership structure and reducing the middle management team. There is a desire from CEO Sundar Pichai to "reengineer the company's cost base in a durable way." That will mean more layoffs because even the latest painful cuts haven't brought staffing levels anywhere close to what they were pre-pandemic.

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It has been estimated that Facebook hired at least 30,000 new staffers during the pandemic, while Alphabet has gone on an even bigger hiring spree, expanding its ranks from 68,000 to 187,000 staff members. The number of job cuts announced so far by Meta and Google, however, has been 11,000 and 12,000, respectively. Last month, Microsoft announced that it would be cutting 10,000 jobs as a result of the pandemic that started two years ago. The company says it hired 58,000 people during that time period. Despite the painful truth, these companies will have to continue to implement cuts until 2023 in order to earn the market's trust in their commitment to reducing costs.

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As they know their bosses could cut them off at any time, they will have to continue to get the most out of their top talent.

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Change in the management culture of the tech industry will also be a challenging task. Zuckerberg and Pichai were already telling their employees months before layoffs began that they needed to work harder, with greater urgency, in the words of Alphabet's chief executive, and to come into the office more often over the last year.

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The company needs to get better at implementing new product features, especially when it comes to Google. Although Google is well known for its exciting moonshot projects, it is notoriously conservative when it comes to releasing new products and services, mainly due to the fact that it doesn't want to mess up its $150 billion search business or its lucrative advertising business too much by releasing new products and services. ChatGPT and other artificial intelligence tools such as NLP (Natural Language Processing) with the ability to generate conversational answers to any query have threatened the search business.

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In response to increasing pressure from ChatGPT's rivals, Google announced on Monday that it would soon release a competitor to ChatGPT called Bard to the general public. The service will be powered by LadMDA, Google's highly sophisticated model for handling a large number of languages. It has been a long time since Google developed a product so quickly, marking the start of a risky new era for the company while at the same time trying to cut back on spending at the same time.

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When it comes to doing more with less, it is much harder than it sounds, especially for companies in Silicon Valley that are used to throwing money at problems in order to make them go away. At least they are aware that this needs to be changed. As the company's Chief Technology Officer Andrew "Boz" Bosworth explained in an e-mail to the 18,000 Reality Labs employees, who are driving its metaverse efforts, Meta has solved too many problems by adding people to the organization. Therefore, Meta needs to learn how to solve problems by innovating and executing instead of simply adding more people.  

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As part of his earnings call with analysts last week, Zuckerberg used the word "efficient" or "efficiency" approximately 40 times. Meta's shares were up 20% after earnings day, despite a miss on profit estimates, as investors liked that direction of travel so much that they sent the stock up by more than 20% on the day after earnings. (By comparison, he mentioned "metaverse" just seven times.)

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In spite of all this talk about efficiency from Alphabet, Meta, and Microsoft, the world's biggest internet and software companies, it remains to be seen whether all this talk will actually lead to real improvements in efficiency. What will investors do if it does not happen? And if it does not happen, will they care? This week's rise in Meta's stock could be a sign that investors are looking for any excuse to resume their love affair with some of the most profitable companies that the world has ever known. It is quite apparent that there is not much point in agitating for efficiency from companies (barring Amazon) that regularly have net margins of over 30% on a quarterly basis. The margins for two other stocks, Walmart Inc. and Walt Disney Co., according to Trade Algo data, are 6% and 5%, respectively, whereas Walmart Inc. and Walt Disney Co. have margins of 6% and 5%, respectively.

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In spite of this, it didn't stop big tech stocks from getting battered over the last year in the markets because of the high margins they had. It is in the interest of Wall Street that these companies become leaner and meaner. The investor-friendly, technocratic operators of Big Tech are almost certain to comply with the law.