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Tech Sector Layoffs: Not What You Think

By Elizabeth Blakey
Mar 15, 2001 6:19 PM PT

Despite the common perception that the recent wave of technology layoffs is due to companies being unable to make payroll, it appears that is not necessarily the case.

Tech Sector Layoffs: Not What You Think

While some embattled dot-coms and tech companies are certainly at the end of their financial ropes, others have quite different reasons for trimming their workforces.

In this special report, the E-Commerce Times looks at the storm of layoffs across the tech sector to find out what lies at the center.

The Layoff Line-Up

In the last few weeks, an impressive line-up of high-tech giants has joined the dot-com companies in slashing jobs.

Intel, Cisco, Nortel, Dell, 3Com and Motorola have all cut their workforces in varying degrees since the turn of the New Year. Their displaced workers join the dot-com workers terminated by such pure-play e-tail companies as Amazon, and Egghead.

In each instance, the message sent was nearly the same: We're reducing costs because of the downturn in the economy.

Mixed Signals

Do the layoffs signal that the overall economy is in worse condition than previously believed -- or are workers being cut simply as a ploy to boost investor confidence?

"The layoffs are real," John Challenger of executive search firm Challenger, Gray & Christmas told the E-Commerce Times. "These companies are not just announcing a number of layoffs and then hiring more people. Investors would see through that."

Instead, Challenger sees the series of layoffs as a natural indication that the economy is in a slump, with the high-tech industry feeling the crunch along with other sectors.

Intel, for instance, announced a hiring freeze in order to decrease capital spending due to the weakening economy and sluggish demand for personal computers.

Shareholders Driving

Although capable of meeting payroll and paying their expenses, the high-tech giants are facing pressure of a different sort. Because most of the leading technology companies are publicly held, shareholders are behind many of the decisions being made at those businesses. Thus, the large cuts into employee ranks -- 12,000 at Motorola since December, for example -- are not so much signs of impending doom as they are attempts to please corporate investors.

"These high-tech companies are not like the dot-coms, struggling against going under. The high-tech giants are built to bring in a certain level of revenue," Challenger said. "Unlike in privately held companies, investors are a driving force behind the decisions made at these publicly held companies."

Rather than temporarily posting a lower profit margin during a period of declining sales, the tech industry leaders are cutting employees to lower expenses and maintain artificially high profit margins.

However, "cutting jobs is not just for show," Challenger said. "They really have to do it. If the revenues are not growing, the costs have to be cut."

Not Over Yet

"What we're seeing is a domino effect. One sector of the Internet economy fell through, and now all the vendors serving those companies are also falling," IDC analyst Jonathan Gaw told the E-Commerce Times.

Gaw said that "every industry has a boom-and-bust cycle, and information technology is hitting the downside. But do I think Cisco is going out of business? No. If you believe in the information and communication technology industries, you know that there is still going to be a need for routers."

However, for smaller companies that do not play in the same league as infrastructure giant Cisco, a different game is being played out.

"With the current state of the dot-com industry, startups know that they are not going to get new funds anytime soon," Gaw said. "So they have to make the money they do have last."

For the startups that did not turn the profit corner in 2000, making their existing capital last through 2001 means cutting costs -- and jobs.

End in Sight?

Still, the dot-com layoff trend did fall off by 9 percent in February after reaching a record high in January, according to a report by Challenger, Gray. In January, a record 12,828 employees were laid off by dot-com employers; but in February, the number dropped to 11,649.

According to John Challenger, the seasonal shift after the year-end cuts is to be expected, because December and January are "layoff season." Still, Challenger believes that year-over-year, 2001 will see more layoffs than 2000.

"I think there is cause for caution, if not alarm," Challenger said.

In the long run, however, the current high-tech and dot-com layoffs could end up costing more than they save.

"The tech industry has rarely been known to look at the long run," Gaw said. "And in the long run, layoffs are not cost-effective. After the bust is over, the rehiring costs are going to be high."

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