How Do Tech Companies Determine Where To Cut Costs In A Layoff?

With all the tech layoffs happening, you are probably wondering how companies like Coinbase can lay off 18% of their staff or Wealthsimple lay off 13% of their staff, despite being profitable companies. In this post I will share my understanding of restructuring at big companies and startups, so that you can understand what goes on behind the scenes.

How Executives At Big Tech Companies Think Through The Layoff Process

1) The CEO, CFO & team determine financial objectives for restructuring – e.g. Profitability? EPS? Business model pivot?
2) C-Suite meet to discuss, get input from management consultants, then consider the optimal strategy to choose from to achieve their goals. Example layoff strategies include the below.

  • Thin 10% lowest performers across all departments (Jack Welch)
  • Propose wage reduction across the company (Lyft did this during pandemic)
  • “Last in, first out” (Coinbase rescinding offers)
  • Cut special projects (AI & blockchain teams getting scrapped)
  • Cut from cost centers (Reduce support team from 10 to 5)
  • Cut the most expensive employees and replace with cheaper ones (IBM continuously doing this)

3) Department leaders are given headcount reduction guidance, and have to make the hard decision of which staff to let go
4) HR and communication teams create the layoff method, timing, and messaging internally and externally for public relations
5) Layoff occurs

How Startups Lay Off
This blind post is pretty good in explaining tech startup layoff process

Example Startup

Imagine a startup has 200 employees with average salaries of $100k. We can assume annual costs are $25mil ($20mil labour, $5mil operating costs)
The startup has revenue of $50mil, of which we will assume all is profit.
The startup also has $50mil in cash reserves from a VC fundraise.

If revenue increases, startup hires more.
If revenue stays the same, runway becomes infinite, since startup is profitable. No layoffs.
If revenue declines 50% due to the recession / crypto winter / startup is at breakeven. Management could do layoffs to be defensive.
If revenue declines 80% to $10mil annual revenue, then startup become unprofitable, then they have to dip into cash reserves from fundraising. That means startup is burning $15mil/year, which gives a 3-4 year runway using fundraising. Layoffs are probable here.

Based on these scenarios, this startup would be unlikely to have a layoff, unless there is a severe decline in revenue. You can see how this could be much different for a company that is not profitable e.g. Uber has negative cash flow of $1bil but with over $20bil fundraised.

How To Minimize Your Chance Of Being Laid Off Due To Restructuring

  1. Work at a profitable company
  2. Work in a core business unit, not a special projects unit, unless that project is essential the company’s growth.
  3. Work in a revenue center, instead of a cost center
  4. Choose a role you know you can be a top performer at, to minimize being part of the bottom cut.

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