Why Tech Companies are firing people?

In 2020, one of my friends, who just graduated from college with a Bachelor’s degree in Computer Science, got an offer of 25 LPA from a tech company. To say the least, I was taken aback, because you see, he did not graduate from an IIT or any other Ivy League college. He did his graduation from a tier 3 college and still managed to get that job. 

I was shocked and a bit jealous, to be honest. At first, I thought he was lucky, but then I kept hearing stories like these. IT companies were hiring like crazy. Fresh CS graduates had multiple offers. IT giants were paying insane salaries to engineers. The boom in the IT segment was such, giant companies were fighting like cats and dogs for good talent.

Then one day, I was in a meeting with a mentor, where I discussed the scenario with him and he said “The recession in IT would come faster and would hit harder”.

Fast forward to 2022, Twitter, Facebook parent Meta, Amazon, payment platform Stripe, Salesforce, ride-hailing company Lyft, and a growing list of startups and small companies laid off thousands of their workers. 

According to the data from Layoffs.fyi, a website that tracks tech layoffs, 217,404 employees across more than 1,300 tech companies have been fired since the Covid-19 pandemic.

Tech companies, which were thriving a few months back are now trimming their resources, why?

Well, for starters, tech companies were in a delusion that the internet consumption post-pandemic would be the same and hired people like there was no tomorrow. 

Amidst the pandemic, people were locked indoors and spent considerable time streaming videos, shopping online, or just scrolling the internet. But once the pandemic ended and people went back to their normal lives, their internet consumption went down drastically. 

Patrick Collison, CEO of Stripe, a US-based payment solutions company quoted,

 “We overhired for the world we’re in,” “We were much too optimistic.”

It wasn’t just Collison, who accepted the overzealous hiring during the pandemic. After Elon Musk, fired approximately 50% of Twitter’s workforce, its co-founder and former CEO Jack Dorsey admitted they grew the team quickly.
 

Facebook and Instagram's parent company, Meta, shed 11,000 employees on Wednesday, or 13 percent of its workforce. CEO Mark Zuckerberg blamed overzealous expansion. He wrote “I made the decision to significantly increase our investments,” he wrote in a letter to employees. 

“Unfortunately, this did not play out the way I expected.”
The reckless expansion and mindless hiring by the IT giants isn’t the only reason for these layoffs. A part of it is attributed to the soaring inflation and aggressive interest rate hikes by the Federal Reserve.

In order to fight inflation, the Federal Reserve is aggressively increasing interest rates, and due to that venture capitalists are being more conservative with their investments, making companies focus on profitability over growth. IT giants are also cutting their costs as their revenue is affected by increasing inflation.
 
High inflation and low consumption have made companies cut down on their advertisement budget. On top of that, a global economic slowdown or recession is expected in the coming year. 

As per a survey by KPMG, Most U.S. CEOs—over 90%—already believe a recession is on the way, and over half of them, said they’re planning preemptive layoffs within the next six months.

CEOs of IT companies blamed these layoffs on the worsening economy, but they failed to acknowledge the fact that they overhired during the pandemic. As profits soared and the companies were convinced the pandemic-fuelled boom would continue, they aggressively expanded by hoarding the most prized and expensive resource in the software industry: talent.

What do you think? Who is responsible for these massive layoffs? Tech giants or economic slowdown or both?