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Is the Party over for the Tech Industry?

Introduction

Over the last 6 months we have repeatedly heard about upcoming recessions, inflation, and general industry downturns as we head into 2023. To some extent, we’ve been bracing for a recession since COVID first brought the world to a halt in 2020, but we managed to fend it off until the energy crisis hit this year. I believe for a lot of people, one of the more shocking events to come out of the current economic downturn has been the redundancies rippling throughout the technology industry. Layoffs accelerated from June 2022 onwards, with more than 28,000 employees from US-based technology companies laid off by mid-July 2022. These layoffs include some of the largest players in the industry: Meta, Snapchat, Tesla, Twitter, Netflix, and Amazon, whilst other organisations such as Google implemented a hiring freeze worldwide. The question that people seem to be asking now is: Is this downturn in the tech market just an expected growth slowdown after the hypergrowth period throughout COVID, or are we experiencing a halt to the tech industry golden era?

Slowdown or Halt?

The technology industry is often flagged as a high growth but high-risk sector. According to Josef Schuster, the founder of IPOX Schuster which operates within the stock market sector, “tech stocks are the highest risk, highest growth companies, and highest uncertainty.” This high risk but high growth environment creates an exciting industry to operate within that attracts incredibly high calibre talent - However, when the uncertainty and risk leads to significant redundancies, both companies and individuals can panic about the future of the sector. Below I explain a couple of reasons why the recent redundancies have occurred alongside why there is absolutely no need to panic when it comes to the future of your company’s hiring and retention rates.  

  1. Firstly, whilst the technology industry faired very well throughout the pandemic, it is no different to any other sector that has been affected by the current downturn in the macroeconomic environment. The technology sector has often acted as an aid to organisational growth throughout periods of recession, the first example of this being the 2007 – 2008 recession during which organisations who invested in emerging digital technologies had accelerated profits and surpassed their competition in the years that followed, creating a great long-term maintenance strategy. This was evidenced once again throughout the COVID-19 pandemic as the world was forced online. Businesses and individuals were forced to spend a significant portion of money on new pieces of technology for their homes, except those who had kept up to date with continued technological spending over the years who had significantly less issues moving online. However, this forced spending throughout the COVID-19 pandemic would turn into a double-edged sword as it created a significant period of hypergrowth for the technology industry which led to extreme growth projections for 2022 that were regrettably unachievable due to the decline in economic conditions.
  2. The second reason stems from the first - Over-projected growth leads to over-hiring which in turn leads to redundancies when growth targets are not reached. As we move out of the pandemic hypergrowth and into an economic recession, organisations are cautious with how they spend and those who are more risk-averse have dropped their spending on new technologies. Now, this doesn’t mean that growth in the technology industry has stopped altogether, based on CFRA research overall tech industry profits will grow 2% in 2022 and bounce back to 6% in 2023. But this slowdown in growth throughout 2022 compared to recent years does mean organisations who hired based on their continued hypergrowth projections are left with a large disparity between their current profits and their hoped profits, pushing the need for cutbacks within the business. We often see this example with organisations that go public during periods of hypergrowth. They use the advantageous economic environment to go public and encourage a ‘hiring spree’ before an IPO to look good on paper but then face difficulties keeping up with their over-projected growth once the environment becomes less favourable, leading to significant redundancies.

So… What do we do?

To answer our earlier question, I don’t believe we need to fear a halt in the ‘golden era’ of technology. It is incredibly plausible that the current turndown in the technology and wider sectors is caused by an expected slowdown after a period of hypergrowth during the pandemic. Continual investment in new technologies is a well-known method to help businesses thrive during economic turndowns which will help to keep the industry afloat, however, not all organisations will play into this concept which will decrease expected profits.

If organisations are to take any lesson from the current economic slowdown and resulting redundancies, it is to maintain steady hiring throughout each year based on conservative long-term projections rather than hiring sprees based upon hyper-growth periods that will inevitably crash. If your team has a significant increase in work that needs assistance in the short-term, but you are unsure as to whether or not this increase will continue, look towards fixed-term contract hires! Contracts can always be adjusted to permanent positions but hiring permanent people for a temporary increase in work will lead to redundancies, decreased retention rates, and unsurprisingly, a bleak company culture. On the other hand, if your team has a significant increase in work and you chose not to hire as you are looking to retain money in the short-term, the outcomes will similarly look like decreased retention rates and, unsurprisingly, a bleak company culture, costing significantly more in the long run… So all in all, remember steady hiring based on conservative growth projections will lead to less spending and improved company culture in the long-run, and fixed-term contracts are a great option if you are in a period of hypergrowth looking to hire with high uncertainty.

Posted 16/01/2023 By Gillian Stott

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