When Microsoft announced this week that it was laying off 10,000 employees, it wasn’t exactly a shock. Other big companies, including Salesforce, Amazon and Meta, have already been down that road, and the news leaked far and wide before the official announcement on Wednesday. Alphabet joined in today, announcing another 12,000 job cuts.
Like these other companies, Microsoft is facing a shifting economic landscape and making adjustments to a workforce that was pumped up after the early days of the pandemic. Each of these companies added tens of thousands of employees to the payroll, and with the current economic uncertainty, they decided to dial it back (or at least use it as an excuse to cut costs).
Consider that Microsoft had over 220,000 employees at the end of last year, according to Statista. That’s up from 163,000 in 2020 and 181,000 in 2021, meaning the company added more than 57,000 employees in a two-year period before cutting 10,000 this week.
Image Credits: Data visualization by Miranda Halpern, created with Flourish
It’s not clear where the cuts are coming from, and there has been no official word from Microsoft. Bloomberg reported that engineering groups would be cut while also reporting that the HoloLens group took a hit after losing a big defense contract. Microsoft wouldn’t comment when asked by TechCrunch where the cuts were taking place.
This layoff represents a drop in the bucket for Microsoft financially, but it has a very real impact on the 10,000 people who were told they would be let go this week.
Microsoft hasn’t exactly been doing poorly, earning over $200 billion last year while committing $69 billion to pay for gaming company Activision Blizzard almost exactly a year ago. Today, it has a market cap of over $1.7 trillion — that’s with a T. In a filing with the U.S. Securities and Exchange Commission reporting the layoffs, the company indicated that it will write off $1.2 billion in costs related to the layoffs in the second quarter.
All of this is to say that this layoff represents a drop in the bucket for Microsoft financially, but it has a very real impact on the 10,000 people who were told they would be let go this week. If it was to impress investors, so far it’s not working — its stock ticked down in the days following the announcement before rebounding Friday.
With all of those financial resources, the question is why. What does Microsoft gain by cutting its workforce 5%? We spoke to a few analysts to try to figure it out.
A pretty good year
First, let’s take a quick look at Microsoft’s financials. Companies usually cut costs because the business no longer supports the workforce, but Microsoft has had a pretty decent year, as the chart below shows:
Image Credits: Microsoft earnings reports
While revenue remained fairly steady throughout the year, totaling over $200 billion, the growth rate made a steady retreat, getting dangerously close to a kind of growth malaise, a place most companies hope to avoid.
It’s important to note, however, that the strong U.S. dollar cut revenue in real terms for earnings from outside of the U.S., and being a global business, that had an impact on the company. Microsoft reported that the growth rate in constant currency, meaning taking into account those foreign currency fluctuations, would have landed at 16% for the final two quarters of 2022, a far better outcome.
Regardless, Microsoft remains a substantial business, bringing in steady revenue with an astounding $107 billion in cash on hand, per YCharts (although if the Activision deal is approved, It will presumably cut into some of that cash hoard).
So if it wasn’t a cost-cutting measure, what was it?
Cost-cutting or correction?
The why behind these cuts depends on whom you ask. It could simply be a good time to make cuts. It could be that Microsoft overhired amid the pandemic, or it’s reacting to economic unpredictability.
Al Gillen, an analyst at IDC who has been covering Microsoft for many years, said that it often uses an economic downturn as an excuse to reset.
“I think that there has been a theme I’ve seen with Microsoft where every time there’s a substantial economic event or some kind of a change in the industry, Microsoft steps back and says, ‘OK, what happens when we come out of this? Where do we need to be invested more heavily? Where do we need to invest less?’ And I think Microsoft uses these pauses in growth in the industry as an opportunity for them to rethink where they’re spending and investing,” Gillen told TechCrunch.
Forrester analyst J.P. Gownder sees it as cutting back after a period of intense hiring. “Microsoft’s announcement reflects a broad belief among Big Tech firms that they overhired over the past three years and that customer demand in 2023 will be uncertain,” he said.
Gownder was surprised by the layoffs, however, given Microsoft’s strong year. “Microsoft’s move is striking, insofar as the company made over $50 billion in sales and $17.6 billion in profit in the latest quarter, suggesting that the reduction in force isn’t coming at the hands of financial underperformance but, rather, turbulent economic conditions.”
Holger Mueller, an analyst at Constellation Research, said that the reasons for the Big Tech staff cuts might not all be the same, and it’s not clear what Microsoft’s reasons are yet.
“The tech industry, which showed itself resilient against COVID, is not resilient against rising interest rates. We can see from where the tech giants cut if this is about reevaluating investments, as we saw when Google cut jobs at Verily; trimming excess hiring that has not delivered to performance, as we saw with Salesforce and Benioff’s comments on the productivity of new hires; or just reducing personnel cost because of expected lower demand from customers. Each vendor has cut with a different strategy, so it will be telling to see what Microsoft will do,” he said.
CEO Satya Nadella did offer words of empathy to those affected in a blog post announcing the layoffs, writing that “we will treat our people with dignity and respect, and act transparently. These decisions are difficult, but necessary. They are especially difficult because they impact people and people’s lives — our colleagues and friends.”
But he also said that Microsoft hasn’t stopped hiring in spite of these cuts, giving more credence to Gillen’s analysis. “It’s important to note that while we are eliminating roles in some areas, we will continue to hire in key strategic areas,” Nadella wrote.
But by making these cuts, Nadella and fellow Big Tech CEOs are creating a period of turmoil and instability inside their organizations for what amounts to, in some cases, minor savings in the scheme of things. That Nadella is doing this while acknowledging the pain he is causing to the people affected probably means precious little to the folks left looking for work.
We will see what Microsoft’s numbers look like next week, when the company is scheduled to deliver its quarterly earnings report, but whatever the reasoning for this week’s cuts, it had to be especially difficult for the 10,000 people who were let go knowing their efforts contributed in some way toward $50 billion in revenue in Microsoft’s most recent quarter, and somehow that still wasn’t good enough.
Editor’s note: This piece originally incorrectly referenced a GeekWire report that some of the layoffs came from Nokia Group. That article was actually referring to a prior large layoff at Microsoft. We have removed that reference.