Money, Productivity, and Solved Space

The Three Things You Didn’t Know Were Causing Layoffs

Intro

We all see the constant layoff announcements across tech, the rapid development in AI, and an increasingly concerning economic situation. You might be wondering “what is really going on?” and “where is this all going?”. And while I have seen many people talking about the individual puzzle pieces, I have yet to see an article that puts them all together in a way that really answers those questions.

In this article, I am going to dive into the three main drivers to the revolutionary shift that we are seeing in tech and white collar work:

Money - how the flow of money from the FED and through the economy is largely at fault for the boom and bust we have seen the last few years

Productivity - how technology, knowledge, and networks are empowering professionals like never before.

Solved Space - how more and more areas of business, on both a macro and micro level, are being solved and thus requiring less resources

As always, I am going to be as efficient as I can to convey the ideas effectively and make this easy to follow with clear headers. Let’s start by following the money…

The Money Cycle

While we often see ourselves as masters of our own destiny, it is often hard, if not impossible, to remain unaffected by the pull of the powerful ebb and flow of events in the world. Similarly, companies, no matter how much they try to predict the economy and markets, will always be subject to broader movement of the economy, technology, and trends. Most powerful and influential on the trend of recent layoffs has been the flow of money.

The FED and QE

To understand the flow of money through the economy, we have to go to the source: The Federal Reserve.The FED is the only bank that is allowed to print US Dollars and uses this power to regulate the flow of money into the system in an attempt to maintain economic balance. When the government enforced lockdowns came, the FED knew that this would hamstring the economy and therefore made the decision to pump money into the American economy through a process called Quantitative Easing.

Under the name of QE, the FED prints money and uses it to buy bank securities. This effectively puts more liquidity into the hands of banks which they are then expected to lend out to businesses to stimulate the economy. A good chunk of this newly printed money found its way into the hands of Venture Capital groups who put it to work funding tech companies. Because VCs could borrow this money so cheaply, they were willing to take on much more risk and it became much easier for companies in the tech world to land huge funding rounds.

Inflation

Early in 2022, the FED turned off the money printers, banks ran out of cheap liquidity, and VCs suddenly demanded their companies shift from growth mode into profitability. VCs weren’t going to be able to keep fueling growth focused companies and with the economy tightening, it would mean finding profitability, or at least finding a way to extend runway, would be the only way to survive.

But why did the FED stop QE? I mean, it was great for tech right? All this growth, companies offering huge salaries, valuations through the roof, why would anyone want this to stop? Well QE isn’t free. When the FED prints money, they aren’t creating anything of value, but actually stealing a small amount of value from every other dollar out there through the wonders of fiat currency.

An easy way to understand this is by looking at the relationship between company value and stock worth. If a company is worth 10 million dollars and they give out 1,000 shares, each share is worth 10,000 dollars. But if the company issues 1,000 new shares, this does not increase the total value of the company, but splits the existing value amongst the new total shares, decreasing the worth of each individual share from 10,000 to 5,000 each.

Similarly, as the FED prints money, it is stealing value from existing dollars to give value to the new dollars; breaking the collective buying power of the dollar into smaller and smaller pieces, making each dollar less valuable. If you are wondering why you are paying so much for groceries right now, you have the FED and its money printing to thank. If the FED did this for too long, they risk making the cost of living so high that people whose salaries are not keeping up with inflation will simply not be able to live. And given how fast inflation has been rising, it was obvious to anyone paying attention that the money printers fueling tech growth would need to be shut off.

Optimized for Growth

When it comes to building a new company, it is typically ideal to grow as quickly as possible. The idea being that first mover advantage is important and the faster you can take over a space, the more you can leverage that market dominance later to create greater profitability. The common problem with growth optimization is you need funding to get you through those initial stages, but from 2020 to 2022, money was so easy to come by that companies optimize entirely for growth with little thought about profitability.

However, there are two problems with going all in on growth. First, there are a lot of ways a company can seem to grow, but won’t actually help them be profitable. A company can point to things like users, engagement, or clicks while those metrics might not lead to revenue, or talk about how much they hired, but unless those hires are driving value, a large headcount might be more of a liability than an asset. Ultimately, growth is a fuzzy concept and what a company claims are strong signs of growth, might not actually be important to their profitability later.

Second, a company focused on growth is built differently than a company that is focused on profitability. Recruiting is a very easy example of something you need for growth, but less so once you’ve plateaued in size. The people who are figuring out initial product market fit are very different from the people who are making small optimizing tweaks to an established product. Pivoting from growth to profitability is usually done slowly as you can repurpose internal resources, but a quick shift means firing and hiring.

Pivoting to Profitability

This brings us to our most immediate reason for the wide scale layoffs. As soon as that money dried up, almost every tech company that was optimized for growth now needed to hard pivot into profitability. This meant they no longer needed the teams that would help them grow, either by building their products and services, or by hiring to expand the company, and so these teams found themselves redundant by no fault of their own.

Additionally, companies were also very relaxed with inefficiencies when funding was cheap, but now that profitability is the measure of success, those fluffy growth metrics I talked about earlier came under real scrutiny. Any role not driving revenue for the business was in danger.

No Escape

A question you might ask is why didn’t tech companies see this coming? I mean, this was the inevitable outcome that was predicted back in 2021 by online finance minds like Peruvian Bull. Certainly big companies with trained professionals also understood that cheap money from the FED would dry up and they would need to pivot from growth to profitability. 

My answer is that even if company leadership knew that the money would run out, in order to stay competitive, they needed to gobble up funding like everyone else. In a corporate environment that often wants immediate results and I have no doubt every company was under pressure from their VCs and board members to deliver and no CEO is going to tell their board that they aren’t going to borrow cheap money and optimize for growth while all their competitors are doing so. It was an inescapable vortex that pulled every company in whether they saw this coming or not.

Productivity

One of the things that I think Ray Dalio of Bridgewater gets wrong when it comes to his model of the economy is productivity. Dalio states in his video, that economic productivity increases linearly. However, I would argue that evidence points to the fact that professionals in white collar roles are experiencing exponential productivity gains, or at the very least, have the capacity to do so. Functions that used to take a whole team can now be done by a few individuals. This is due largely to an increase in productivity tools like AI and organizational software, evolution and availability of knowledge, and searchability of networks. This shift in productivity is already starting to mean companies can do way more with much less.

Productivity Tools

In my own domain of recruiting, applicant tracking systems, networks like LinkedIn, and sourcing tools make finding, managing, and interviewing candidates much easier. The process itself is faster as we can use scheduling links that are connected to calendars, record interviews for others to watch, and compile feedback.

This phenomenon is universal across tech. Every department has some sort of SaaS product to manage their workflow and automate, optimize, and align work. Engineers have more powerful frameworks and libraries. Not only that, but think of the communication tools like Slack and GSuite. It is now easier than ever to share information across the business and ensure alignment of work.

I haven’t even started to talk about how AI tools like ChatGPT can be leveraged across every department to vastly increase productivity by automating much of the rote work such as compiling and organizing information, creating content, or figuring out solutions. The community has been talking AI to death recently, and I am not here to give my deep talk, but the takeaway here is that AI is already having a profound effect on productive ability in white collar work.

Better Transferred Knowledge

Not only is the ability to do work amplified by the tools being developed, but the knowledge and understanding of strategy and best practices are becoming more honed and more widely available. Want to know how to write a resume? Approach the interview? (Shameless plug) I have those articles up on my website and many other knowledge enthusiasts are also sharing their own best ideas. All this information is typically free and openly discussed. You simply don’t need to go to college anymore to gain access to the best information.

Searchability Networks

Another key factor is how easy it is to find what you need because of the development of networks and the tools used to establish and search them. If I need to find candidates for a role, I can easily search LinkedIn or put out a job post on the job boards everyone checks. Sales people looking to sell B2B can also use LinkedIn to find the right people at companies to reach out to.

Not only the network of people, but also information. Engineers can almost always find a way to resolve a bug by looking it up online or asking in an engineering forum. Gone are the days where you would have to figure many things out by yourself.

What Increased Productivity Means

The bottom line, the tools available in tech are empowering professionals to be much more productive. I think many people know this, but have been getting by doing only what is expected, and not achieving at that higher level. And you might have been getting away with it, but leaders are starting to realize that large downsizes will not actually hurt productivity.

This idea of productivity is so rarely discussed because I think most people are afraid of what it might mean. No one thought, or at least wanted to believe, that thinking or skilled work was going to be automated as it has been. And now that things are getting easier, people don’t really want to see the expectations for their workload increase. The problem is that there are professionals out there who are taking every advantage they can get and are not shy to tell their boss they can do their whole team’s job. 

Get Ahead of The Wave

My suggestion is to be an early adopter and show everyone how to use these tools. It is only a matter of time before AI becomes naturally integrated into everything (just look at what is happening with Google Workspace). It will not take long before every business adopts these tools as they are so powerful and not doing so would make them dramatically less competitive. Therefore, you will reap more value in the long run by the reputation you build as an early adopter and proselytizer than by hoarding the knowledge for yourself as you probably only have a few months left to do so.

Solved Space

Solved space is the idea that any time we approach a new domain, technology, or market, it can take time to understand the space and develop terms, strategies, and best practices. However, once a new domain has been understood and mapped out, it is much easier to replicate and share that knowledge for others to use. Similarly, once product market fit has been established, it doesn’t take as much work to maintain a product and provide updates.

Chess is Solved

If you have ever played chess, you know that because chess has been around for so long, much of the best strategies have already been discovered and mapped out. You simply do not need to do the heavy lifting of developing those strategies from scratch on your own. And if you didn’t take advantage of this solved space, you would be much further behind anyone who would.

Tech Space is Becoming Solved Space

When it comes to the tech space, not only are more and more specific markets being mapped out in this way, the general strategies for building and running companies are getting more and more refined. Both specific and general knowledge. We have agile, devops, and other best practice philosophies. Leveraging this established knowledge, companies don’t need as many resources to get the same results.

A Built Product is a Solved Problem

You can think of a tech product as a largely solved problem. It might have taken Facebook a while to build its platform, but once built, Facebook doesn’t need to spend nearly as much resources on maintaining what has been built. Sure, it is good to come up with UI updates or increased functionality, but the core problem has largely been solved. The heavy lifting done.

Growth vs Profit, Build vs Maintain

Much like the teams needed to grow a business are different from the one that are needed to make it profitable, the teams you need to build a product are much different than what you need to maintain it. This is a core idea in Ben Horowitz’s The Hard Things About Hard Things. Inexperienced or bad leadership will often realize too late that the business needs have shifted and thus their personal needs have also shifted. We are simply going through a collective realization that as more things become solved, fewer professionals are needed to run what has been built.

Conclusions

The increase in productivity and more solved space means that there are simply going to be less and less white collar positions needed to do the same work. While the money printer was running, companies didn’t really care if they were running inefficiently, but now that the FED has to stop QE to avoid hyperinflation, and the economy is tightening, companies are shifting into profitability mode and will be looking for any positions that aren’t positively affecting their bottom line.

This is a serious problem as I do not think there is a general awareness among professionals and even leadership of what is happening. Or at the very least, they are afraid of the problem and not really addressing it head on. The skillsets people will need to be successful in tech careers are shifting very rapidly, and unless people learn to adopt new tools and embrace this augmented, more efficient way of working, they are quickly going to find themselves being replaced by those who are.

Big Shifts Are Opportunities

For companies to be successful, they need to be rethinking their strategies to align to the reality shift that is already here. The immediate problem that companies have is charting a path to productivity and understanding the necessary strategy and resources to do so. Key to this is realizing that because of the productivity increases of new tools, the people resources they require have shifted dramatically and this needs to be accounted for if the company wants to be optimally efficient. I expect that most companies are overstaffed and/or incorrectly structured. While it is never fun to do layoffs and restructuring, it is better to do this now such that you can commit fully to the teams you have post shift.

If you are an employee, my suggestion is to get ahead of the shifts companies will be making. Those who ride the wave of increased productivity and knowledge and can drive value for their businesses will be valued like never before, but those who don’t will find themselves washed away. I would also point out that even if you are on top of the wave, you need to make sure you are part of a company that is as well. I suggest looking for businesses that understand the need to be profitable in the current market and have already thought critically about their employee base so you don’t get blindsided by a restructuring that is no fault of your own. While we can’t control the macro shift that is coming, we can be smart about how we adapt.

I hope you found this article helpful in laying out the current situation in a way that was clear and understandable. Feel free to share this article and check out my website jameskdonovan.com for more content. I write on a range of topics that I think are valuable to professionals on the path of kaizen or continuous improvement. I also do interactive live streams, and love to connect with people on social media so feel free to connect and reach out. Knowledge is Power!