Balancing Efficiency, Risk, and Staffing Decisions in Uncertain Times

Two trends have put IT and other business budgets under increased scrutiny in the past year or so: economic uncertainty driven by geo-political instability and rising inflation, and the advancement of ‘game-changing’ tech – notably generative AI. 

The natural reaction for business leaders during times of caution is to ‘batten down the hatches’ – to reduce overheads and to protect cash – before seeking out more productive ways of working and better ways to drive sales.

However, if business history has taught us anything, it’s that cost reductions that are reactively driven and pivoting of revenue streams which are ill informed can cost a business a great deal more over time.

The growing weight of IT spending

A continuing trend or are IT teams now experiencing increased financial pressure?

Throughout the same period (2023 into early 2024) news headlines were filled with stories of significant layoffs across multiple sectors – most prominent in the technology sector which, for over twenty years (since the 2001 doc.com bubble burst) appeared to be immune to the risk of economic downturns.

Data compiled by Layoffs.fyi showed that over 260,000 team members were made redundant across 1,186 technology companies in 2023. The trend has continued into the early stages of 2024, with approximately 42,000 further layoffs being made. This represents a 60% increase in job losses vs. 2022. 

Tech giants including Dell (13,000+ people), Microsoft (16,000+), SAP (3,000+), Google (12,000+), and Cisco (4,000+) have led the way, with a majority of ‘established’ technology companies citing the advancing capabilities of artificial intelligence as a key driver for adopting a leaner workforce.

Therefore, it is apparent that while businesses are seeing the value of continuing to invest into technology, their focus is shifting towards technology itself, rather than the people building and maintaining it.

Business is, increasingly, about technology.

A lesson from history

During the early 1990s, IBM (International Business Machines Corporation) embarked on a strategy to streamline their operations and boost their competitiveness in an increasingly aggressive market. The result of this strategy was the laying off of over 60,000 employees.

In the years that followed, IBM experienced major operational challenges and a chronic lack of innovation. The loss of vital skills, knowledge and experience that came with such a significant reduction in headcount began to strangle the business.

Though the layoffs were, arguably unavoidable (the catalyst for the layoffs was the accumulation of sizeable losses, to the tune of $8bn per quarter in early 1993) the requirement for such a brutal tactic actually stemmed from a period of complacency and denial through the late 1980s and early 1990s. An over reliance on the previous success the company had enjoyed, and a lack of response to the accelerating threat of competitors. Pragmatism and a willingness to evolve in those years might have avoided the swathing job cuts.

Arguments over the necessity of such a large amount of layoffs aside, the loss of knowledge and experience proved to be the next big problem IBM faced in the ensuing years. 

From being a company which was, undeniably, one of the major influencers in the evolution of technology through the 20^th century, IBM lost competitiveness in software as a consequence of the skills and knowledge loss, ultimately driving a pivot into services over time while other companies, notably Microsoft, moved into the dominant positions in software.

Does a reduction in IT headcount increase risk in business?

Though IBM managed to navigate the troubled waters it faced, not least because of the brand credibility and investor backing they had built over the decades, it’s clear that the loss of knowledge and experience caused extensive damage. 

Now valued at $150bn, the company is a mere 5% of the size of Microsoft – the company it lost its dominant position to.

Though the IBM example is fairly extreme (in both the scale of their financial issues and the requirement for them to pivot their business model completely) the lessons held within it are not.

A loss of vital skills and knowledge, particularly in so called ‘legacy’ technology which is intertwined within business operations, risks:

It is estimated that for every hour of system downtime in business, $100,000 in unplanned costs are incurred while fixes are sought (Source: Gartner). The savings made through layoffs, therefore, can easily be lost in the attempts to stabilise systems.

An alternative option?

Of course, the need to reduce overheads in business will always be there, whether driven by external factors (e.g., economic downturns) or internal ones (including a need to pivot or evolve the business).

But with technology stacks arguably being more complex than ever, caution should prevail.

A growing trend is plugging the gaps created through a loss of knowledge internally with an outsourced partnership – a team who can ensure specific technologies are proactively maintained and upgraded, and that the risks of glitches or outages is mitigated – allowing the business to get on with the core elements of their plan.

Tech stacks themselves are a partnership of different systems, coming together to unlock growing business capabilities. A trend to manage IT through specialised partnerships might just be the next big thing.