It's an age old-question but I still don't have a good sense of the answer:
When leaner economic times come around and tech companies downsize their work forces, they speak about culling "nonessential" employees and "growing smarter". How do they deal with the political problems of admitting to having hired a sizable number of "nonessential" employees to begin with, and, moreover, the obvious implication that their previous growth strategy was indeed "stupid"?
Let's say you have a company with 10 employees, and a revenue of 50 million. If you hired an extra web designer you could optimize your website and squeeze out an additional 1% = 500k. Worth it!
Times go bad, revenue drops to 10 million. You fire the non-essential designer and take the 1%=100k revenue hit. If you had fired an essential employee, your revenue would have dropped some double digit percentage, so those you have to keep around.
You expand/contract the business to the point where the marginal employee costs you the same as the marginal revenue they can bring in.
Well that's the theory for stable profitable companies. For startups I guess you'd have to think of the marginal expected future revenue.
There are many, many metrics in the startup/tech industry that are discussed for running a successful company. Marginal productivity increase/employee is not, and never has been, one of them. Then again, maybe that's why layoffs are taking place.
Ok, how does this work in the situation where you have hired management, the managemet gets paid the most, and their performance can't be accurately measured. Also you're not familiar with the marginal returns of the employees they manage.
I think it's a valid question whether that's still a valid approach in a modern, high-value knowledge economy (and yes, I'm including oil well operators in there).
Honestly interested from companies that have been through grow-shrink-grow. Is it as clear as that, re: being able to find new people when the time is righr? Or is there enough of a ramp-up time for new employees that the equation is more complex?
The usual estimate of ramp-up time for employees at a startup is considered to be a month or two, but the business cycle is measured in years, so if you expect a secular downturn, firing people makes sense.
I think oil is actually complicated and rare enough that it might actually be an example where you don't want to lay them off, since finding replacements may be quite hard if you lay off those positions for a few years, so you may want to try and weather the storm while the Saudis flood the market with oil.
Having said that, companies make bad decisions all the time since making good decisions is a lot harder than everyone seems to think.
Sure you can be productive after a month or two, but having the same in depth knowledge of a product will take a lot longer. My last place claimed they couldn't afford to give me more money, yet they are now employing two people to do my job (and I doubt they will be as effective as me).
This is very specific for people who work on systems, such as programmers.
I have a devshop and have sent his over and over again. The actual cost per employee isn't really paying them salaries to do stuff, but rather the salaries you pay them to learn stuff and get acquainted with the system. We call it ROL (Return on Learning). We've learned that on average it takes 3-8 months for an intelligent person to become fully productive within any system.
Since we started hiring for the capacity to learn and culture fit, rather than existing technical skill, it's changed our business for the better.
That said, turns out even if you're in the Bay area with all that great talent pool, chances to find local people who just happen to want to work with you are practically nill. Once you truly internalize this concept of ROL, there is no other way but to work globally with remote people and teams. Without that, you can't access a sufficiently large talent pool.
I think the ROL is actually the leverage factor people have in mind when they say "10x" engineer.
In my experience, the more specialised the work, the more one has to select for a balance of capacity to learn with a certain amount of objective skills and experience present today. I tried the strictly-capacity route in the past (it was all I could afford) and, while these people had all the potential in the world, the ramp-up time was simply more than the business could sustain when customers expected high-end knowledge and expertise now. It was aggravated by a lack of time and resources typically found in a woefully undercapitalised startup, of which a consequence was inability to properly structure and manage the learning process.
I also think "having someone already in the company with X knowledge, who will be working closely enough with new hire to share it" is a huge multiplier in ramp-up rate.
The amount of un- or poorly-documented things in decade+ legacy systems can be a minefield, but so easily solves with a quick "Oh, X, we always do Y because Z."
Because you learn and adapt over time. Things that look stupid in hindsight needn't have looked stupid at the time. In particular, specialists are good when it looks like you're growing, but if you have to scale back, you prefer generalists. Knowing the right balance in advance would require a crystal ball.
An employee is more than just cash - you may onboard employees anticipating future growth or projects. You may have hired them and just kept them for future reasons. You may even keep them on the payroll to just keep everyone's morale high.
I've heard of companies doing the opposite. Instead of laying off, they hired more. Sure, you cut shot term cost by firing, but you also lose the human resources to develop any long term value. What of your product? If every of you competitor is laying off, and you decide to actually hire more and double down, you might be able to get the competitive advantage.
You are guided by your VCs and your advisors to hire expecting growth. They want you to accelerate your company as quickly as possible, so that you can be bought by Yahoo, Google, Facebook, etc. So you plan to double headcount, etc, but once revenues flatten, or drop, you need to start cutting costs, because you didn't achieve the growth that you planned for.
Blame the market for changing. Seriously, it's that simple. "Market now values x over y and we're doing the smart thing and adjusting our strategy....."
This question is one that isn't asked. And if it is, history's rewritten to make sure it wasn't asked.
1) any employee who asks runs a good risk of getting fired, so they don't ask. If anyone is crazy enough to do so, what I've seen happen is this : everybody immediately looks at the guy asking, wondering if he'll get his head lobbed off. Everything goes very, very quiet. Management moves to the next question as if nothing happened. The guy is never heard from again.
2) any shareholder who asks approved the stupidity (this, of course, doesn't stop them from blaming others, but generally not publicly).
3) the big shareholders, who make the decisions, control who can film the shareholders meeting and who can report on it, and they make sure reporters who get to enter agree beforehand on what questions to ask. This means that if you go to a shareholder meeting of a large company, you'll see that question asked, and usually it turns the whole meeting into a shouting match (and once, I've seen it turn into an actual fight). Then the next day you open the newspaper or online sites and read a reporter describing a serene and cool meeting echoing almost exactly the press release of the earnings.
Management of long-running companies is stupid. Management that just left long-running companies is stupid. Well, perhaps stupid isn't the right word, but they're looking for very specific outcomes, which don't usually have anything to do with running the business well. Poking holes in how they're running things is easy, because people who do the hole poking are looking at the interests of the business itself, not of the people investing in it (they may want an exit, or even an entry : they want to buy extra shares, so it'd be real helpful if a "medium-size" business disaster happened).
And why not hire smarter management ? Senior management isn't hired (in most cases). They buy themselves in, then get to write the "reason" they get hired. It's never that they paid good money (usually in the form of shares, so technically they loan money to the business). Note that senior managers often don't use their own money to do this, but money of people they represent. Very often risky bank loans come with the string that a board seat and a C-level position must be given to a "to be named" individual.
(If you're working for a startup that got a bank loan and a sudden "weird" executive, I guarantee you this is what's going on. Same for investments. A good thing is that companies like Andreesen Horowitz are pretty forthcoming with that this is a requirement)
So the purpose of management generally isn't to run the business. It's to make the balance sheet look good for the duration of his investment. Making sure a loan is repaid at all costs. Making sure their company gets a good opportunity to buy shares (ie. break out news that kills the stock price, then sudden takeover happens, or at least gets closer)
Also, keep in mind hiring is partly done because open job openings that change regularly is something a lot of investors look at. This is one of the value-investing tricks in the category of tricks that everyone knows about. So it is gamed.
Not every company is running like this of course, but as a general rule, any company older than perhaps 20 years is. Or, more generally, any company whose stock has at some point really stalled is run like this. It'd be more accurate to say that any company that ever needed a bigger loan than their rating would justify is, but that's a very tough call to make.
Read this for an especially egregious example, bordering on fraud (but it isn't fraud. They never lied about the numbers, they just changed them so people who don't dig deep would see a huge improvement that wasn't real ...) https://foragerfunds.com/bristlemouth/dick-smith-is-the-grea...
When leaner economic times come around and tech companies downsize their work forces, they speak about culling "nonessential" employees and "growing smarter". How do they deal with the political problems of admitting to having hired a sizable number of "nonessential" employees to begin with, and, moreover, the obvious implication that their previous growth strategy was indeed "stupid"?