Tech tries a new trick: efficiency

Or, why big tech is ceding the future to cheer up morose shareholders

The technology industry is trying a new trick this year: efficiency.

After a decade or so of cheap capital, optimism, and rich valuation multiples for tech companies, the new austerity may seem like the end of an era. It is. This year tech companies are going to have to do more, with less.

With a diminished staffing footprint and continued growth, there’s a good chance that we will see tech giants demonstrate better operating leverage than they posted in recent periods. In many cases the cost cutting will be useful, at least from a financial perspective.

With trimmed costs and an underlying economic picture that continues to refuse to slip into recession, we may anticipate modest top-line growth in 2023 amongst major tech companies contrasted with more muted cost growth. The result should be greater profitability, especially if you are content to ignore layoff expenses and instead focus on more operating-focused metrics.

Perhaps this moment was always coming. Tech hired aggressively during the last tech boom — and excessively in its final years — in part to get ahead of future growth; if your industry anticipates strong demand expansion, hiring today is a good way to ensure a ramped workforce to meet that demand tomorrow.

The problem that many tech companies ran into is the fact that while demand for a great many technology products and services accelerated during the first years of the COVID-19 pandemic, it turned out that they were enjoying more of a demand pull-forward than a sticky stimulation in long-term demand growth. The good times in retrospect now appear transitory, while the new climate of tighter budgets appear more intractable.

When demand doesn’t materialize and you hired in anticipation of those sales, you wind up with a cost base that may feel towering when compared to the revenues you forecast. Cutting back on human costs may seem like good sense. (This should be all the evidence required to spur tech workers to get off their collective backsides and unionize; their employers will coddle them right up until they throw them out the window, we’ve recently learned — why not fight back?)

We’ve heard this tune before

Everything we’ve discussed thus far should feel familiar to startup-watchers, as for an even longer period of time we’ve seen small tech companies get cost-conscious, cutting staff and budgets and, I presume, more speculative product work. Why did big tech layoffs arrive entire quarters after startups yanked their belts tighter? Not only are big companies slower to execute than their smaller rivals, but the largest tech concerns were also more profitable and wealthy than startups — thus able to absorb changes to growth patterns without needing to course correct. Their cuts were always going to come later.

Regardless, the same market shift from rewarding growth (at all costs) to profitability (at least cash flow positivity, I suppose) that has greatly shaken up startups and their venture backers has arrived at the largest tech companies.

Are the cuts smart?

But is it good that we’re seeing big tech companies curtail expenses in hopes of demonstrating more attractive operating leverage in 2023? Yes and no. Yes, if you are focused on the near-term value of their shares. No, if you are more concerned about their health ten, or twenty years from now. You see, when big tech cuts, they don’t attack their core businesses in the same way that cauterize the parts of their corporate empire that are more future-facing, and risky.

What do I mean? Read on. Here’s TechCrunch discussing part of Google’s cuts:

Area 120, the Google in-house incubator responsible for products such as Checks, Tables, Stack and ThreadBite, has been significantly affected by broader layoffs at Google parent company Alphabet. A spokesperson tells TechCrunch via email that the majority of the Area 120 team has been “winded down,” and that only three projects from the division will graduate later this year into core Google product areas.

Here’s Tom’s Hardware on what Microsoft cut:

We got official confirmation regarding Microsoft’s plans for 10,000 layoffs just ahead of the weekend. The job cuts were significant, even for an employer the size of Microsoft, with the numbers representing nearly 5% of its entire workforce, or one job in twenty. As we still reel from the news, social media posts(opens in new tab) by ex-employees have started to paint a clear picture of the business areas where Microsoft felt it could shed entire teams of workers. Some will be surprised to learn that teams behind projects like HoloLens, AltSpaceVR, and MRTK (Mixed Reality Tool Kit) have been culled in their entirety.

And here’s CNBC on what Amazon is saying goodbye to:

Amazon is finally starting to launch drone deliveries in two small markets through a program called Prime Air. But just as it’s finally getting off the ground, the drone program is running squarely into a sputtering economy and CEO Andy Jassy’s widespread cost-cutting efforts.

CNBC has learned that, as part of Amazon’s plan to slash 18,000 jobs, its biggest headcount reduction in history, Prime Air is losing a significant number of employees.

Sure, the three companies are going to be Just Fine. But they are cutting back and deleting projects that could have created new product lines for their empires, or at least helped ensure that their offerings were future-proofed. Now, instead, their parent companies are looking to save a buck and so the fun stuff has to stop.

There’s a long history of tech experiments becoming a big deal. Gmail and AdSense at Google are examples of side projects becoming big. It’s also cliche amongst tech fanatics to note that big innovation for corporate products can begin as silly noodling. Hell, the argument even holds up in the consumer realm. I recall Microsoft explaining to me back in the day that some non-commercial research that the company had done to learn how to track bone movements wound up helping create the Kinect product for Xbox, which wound up being one of the fastest selling devices, ever.

In the short term, increasingly aggressive rent-seeking by a more hungry set of tech giants should create the results that public-market investors covet; more profit, more quickly is rarely something that Wall Street hates. I doubt consumers are going to wind up winning much in this business model shift, but, hey, this is capitalism.

And that’s actually good news. My favorite part of capitalism is creative destruction, and we should get a lot of that in the coming years — all thanks to big tech deciding to get all conservative and mature.

How so? Startups are building today in a far more talent-rich environment thanks to mass tech layoffs, one in which it should be easier to both attract, and retain excellent staff. And startups get to stack talent while their largest rivals, the incumbents that could squash them if they wanted, are busy pulling back from new projects like stung puppies, simply in hopes of making their public-market shareholders happy.

Big tech is effectively ceding bits of the future to other, smaller, and more aggressive companies to ensure that their already massive profits and cash flow look a bit better for a while. Sure, it certainly seems that cutting staff and projects that could build their future is a silly, and counter-productive way to build longer-term cash flows, but investors are an impatient bunch and tech companies are just that: companies. So they wind up bowing to external pressures to cut, the future be damned.

What’s the point of being an insanely rich tech conglomerate if you can’t simply ignore economic reality and use your cash like a weapon to get greedy when others are fearful? I don’t know, really. For startups there’s even more good news out there. Here’s TechCrunch on what venture group NEA just announced:

New Enterprise Associates, known by the acronym NEA, has closed a new pair of early-stage and growth-stage funds, both hovering a little over $3 billion to a total of $6.2 billion.

Hella free talent, snakebitten incumbent rivals, and plenty of venture money to go around? Sounds like fertile ground for a new generation of startups to grow up and kick big tech ass. Let’s go!

The featured image on this post is an excerpt from a piece of Christoper Campbells’s work, whom I wish to thank.