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Why Are Tech Layoffs Rising in a Recovery?

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The brutal economic downturn that’s being called “The Great Recession” is, at least in a technical sense, over. Online advertising and IT spending are inching back up, and many tech companies have seen their stock prices more than double from the lows reached in March. Even if it’s not the most robust of recoveries, it’ll do. So why are tech companies suddenly slashing jobs again?

The past couple of months have brought a renewed surge in job cuts at technology companies, including many that were undergoing second or third rounds of layoffs. Take AOL: It laid off 700 workers in early 2009. Earlier this month it cut another 100, followed by news this week that additional 1,000 would go. Those layoffs may cut operating costs, but they’re not exactly a cheap undertaking. AOL said that, all told, it will incur $283 million in restructuring charges.

With AOL’s (s twx) latest round, I count 17,400 jobs that tech companies — since late October alone — have said they’ll eliminate or have done so already. There are undoubtedly many more that haven’t been officially announced. The pace is significantly slower than in January and February, when 30,000 or more job cuts were announced in a single week. But it also represents a marked increase over the spring and summer, when the bloodflow slowed to a relative trickle.

What’s driving the recent increase in job cuts? A few things. Companies are drawing up budgets for 2010, and it’s common for them to eliminate some positions in November and December (however heartless this seems from a human standpoint). But the cuts often extend into the new year, which suggests the bloodletting could continue for a couple of more months.

Different companies have different reasons for the restructurings. M&A activity has also been on the rise in the tech industry, and integrating two separate operations into one often means some workers must go. Adobe reduced its head count by 9 percent in conjunction with its $1.8 billion acquisition of web analytics firm Omniture, for example.

Other companies are cutting because, despite a sense of relief that the worst economic pain is behind us, much uncertainty lies ahead. Applied Materials (s amat) said it would cut between 1,300 and 1,500 positions, even though it reported an increase in sales and orders. When facing uncertainty, cutting costs has a strategic appeal: It shields you from sluggish demand, and keeps profits — and the stock price — high in the meantime.

Still others are being buffeted by rapid changes in their core markets and are paying the price for failing to keep up, such as Microsoft, which announced 5,000 job cuts in January and recently eliminated another 800. Microsoft (s msft) is not only seeing netbook sales put downward pressure profit margins of its PC operating software, but Windows Mobile is facing daunting competition from Android (s goog) and others.

Some of the biggest rounds of layoffs have come from other companies having trouble coping with evolving markets: Nokia (s nok), struggling for a foothold in the thriving smartphone market, is shedding as many as 5,700 jobs. Sprint (S s), facing disappointing sales of the Palm (s palm) Pre will cut up to 2,500. And AOL has been floundering in its search for a role on the web for years.

Not all tech companies will be cutting positions. A recent survey by Robert Half Technology, an employment consulting firm, found that 43 percent of CIOs interviewed see retaining workers as their top staffing priority. And companies that follow one round of layoffs with another may regret it in the end. Too many layoffs send a bad message to customers and partners, while chasing away the top talent. That can cause even more problems, and more layoffs, instead of a real recovery.

17 Responses to “Why Are Tech Layoffs Rising in a Recovery?”

  1. Tech companies are driven by Wallstreet and the quarterly earnings. They require constant improvement in profit. As the top line does not grow, which is the case currently, the cost line needs to continuously reduce. The easiest way of doing that is by removing the most costly employees, and so the oldest people are taken out. In the long run, the history of enterprises are eraised. This actually put companies in danger of redoing the same mistakes as before.

  2. Mgmt_Idiocracy

    Perhaps there are layoffs because upper management and mid level management are clueless. They rush from trend to trend and outsource more of their core competencies and expect magic to occur in implementing new “productivity” gains in shorter and shorter time frames. Then they don’t meet those impossible milestones and stagger off to the next hot button trend.

    Let’s run run run to virtualization! Hey, what happened to VMWare and their own virtual environment on the launch of Fusion 3.0? Their virtual platform (if they were using their own “dogfood”, crashed and burned.) Why no coverage of that?

    Let’s run run run to cloud computing! Oops, Gmail is down. Oh noes Amazon Elastic Cloud is down. Yeah put your assets in a third parties hands–bright choice. Kinda like the choice to outsource all your knowledge workers to third party firms. All that labor saved goes straight to the executives in the form of stock grants, executive bonuses and golden parachutes.

    The only way they can see to boost their bottom line is to layoff people or outsource them so that Wall Street looks favorably on them and raises their stock prices. In return, Wall Street pays out huge bonuses to itself for short term thinking.

    There is more worse news on the economy, it is not just the commercial real estate that is going to come crashing down, it is all the firms that were bought by leveraged buyouts that are next. And they will cause a new wave of unemployment as well, which will ripple through the economy. All these LBOs were based on loading up the acquired companies with debt. But fear not, wall street banks will do fine.

    • This downturn will get worst in 2010 when the commercial buildings that can’t be filled tank over 150 banks. Unless we give investors (overseas investors) something to tell them can make money in the US, things won’t get better. Government stimulus is nothing more than giving some investor a portion of their investment back.

  3. HereAndNow

    It would be more interesting, to contrast the companies that are laying off, to the companies that are hiring. Or to illustrate it in another way, the kind of jobs that are on the decline, to the kind of jobs that are on the incline.

    I suspect that:
    1. the dramatic rise in smartphone sales is creating opportunities for smartphone app developers.
    2. the movement toward cloud computing is creating opportunities for web app developers.
    3. the movement toward “green” technology is creating “green tech” jobs.
    4. …

    Technology shifts are normal. Being a vacuum tube designer was probably exciting, until the transistor came along.

    Companies & workers need to adjust to new market realities.

  4. This article misses a couple of things:

    – The uncertain tech funding environment (VCs have to take into consideration that not all their LPs will respond to capital calls)
    – The upcoming rise in capital gains taxes (2010 Bush tax cut expiration)
    – The potential of health “reform” to raise the cost of coverage paid by employers (see what happened in Mass, Maine, Tennesee, and Hawaii when they had politicians control what coverage was mandated in insurance policies)
    – The possibilty of Cap and Trade to raise the costs of doing business (hint: those datacenters use a lot of energy)

  5. There’s a 4th factor: you aren’t reading about anything happening outside of the Left Coast.

    Here in New Mexico we have solar tech companies from India to California building facilities. Hewlett-Packard has already held 2 job fairs for a tech support center under construction.

    There’s more. Just read beyond

  6. I would agree that these first two points are a major factor, but there’s a 3rd factor not mentioned here:

    1. Mergers and acquisitions
    2. Rapid changes in core markets
    3. *Technological advances that reduce staffing needs

    It is this 3rd point that cannot be overlooked. There are some major players out there that rival long established, global corporations yet they have less than 50 employees total. Things like virtualization, the cloud, low cost CMS’, vastly improved development frameworks, etc.

    As with all shifts however, we’ll see brand new core markets open up with new and unexpected competition in areas that are not yet realized. This will sprout up new jobs, and it will happen almost suddenly once the crumbling dust settles.

    Companies with long term vision see this coming and are making their moves on the staffing chess board accordingly.

  7. There are three large forces at work, independent of larger macroeconomic swings, hitting the U.S. (and European I would imagine) tech economies:.

    1. The information technology industry, in total, is maturing. Remember, at one point trains and air travel were “high-tech”. At some point innovation in certain areas starts to reach ceilings. There are always new opportunities (phone apps as an example), but the new opportunities often don’t fully replace the others that are moving to sunset status.

    2. The continued move of innovation to lower-cost employment centers in emerging economies continues unabated (as discussed ad nauseum by the Friedmans of the world).

    3. Technology companies are becoming perpetually more efficient by consuming their own dog-food. We all talk about great things like Software as a Service (i.e. Salesforce, Google Docs, etc), but we don’t really examine these shifts as having significant economic (meaning jobs) impacts. Using managed software services means less IT folks internally to manage, less consultants for implementation, and so on down the line to the developer.

  8. The downturn laid bare weakness of many kinds in all sectors of the economy. The more honest corporate view that the downturn has forced upon execs and managers has resulted in many different reasons to downsize or cut.

    Disruptive processes of any kind — war, political upheavals, natural disasters, economic recessions — are destructive of bases. When bases crumble significantly, one can leave the scene, or rebuild.

    Crumbling exposes weaknesses before total destruction is complete. Crumbling — if looked at frankly, courageously — creates openings for new opportunities. By cutting back in weak areas, capital and energy are conserved, and can be put to use to strengthen already-strong areas, or to start new ventures.

    The tech industry has wide areas where companies have gotten old and stale. MS’s problems are just the biggest example. Crumbling would have happened without a big downturn. It would have been less open to public view in the beginning, but it would have happened nonetheless.

    The only way for tech companies to survive in the super-vibrant global marketplace is to allow some destruction, some crumbling, in areas that are weak because they’re overloaded with hard-to-maintain, and no-longer paradigm-viable, functionality and design — and use awareness of the crumbling, and why it’s happening, to conserve and redirect resources, to create new products, expand into new markets, and strengthen existing products and markets.