Economy

How over-hiring during the pandemic led to the rash of layoffs in 2022

Companies that scaled up rapidly when the Covid economy favored their businesses are now suffering the consequences.
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Hannah Minn

· 5 min read

For many Americans, the spring of 2020 was marked by economic collapse and historic job loss. But amid all of the chaos and despair, a few corporations appeared to have emerged as winners. Some used the rare economic moment to turbocharge their businesses by hiring with abandon.

With millions sitting at home, isolated, glued to screens, and increasingly dependent on digital goods and services, tech companies such as Stripe, Shopify, and Peloton pounced on a prime opportunity to corner their respective markets by onboarding scores of new recruits. Fast-forward to the summer of 2022, and a much different economic picture came into focus, as mass tech layoffs signaled an end to the pandemic-era hiring bonanzas. So far, 917 tech companies have laid off 144,554 workers in 2022, according to Layoffs.fyi.

Underlying such rapid growth is a business philosophy called “blitzscaling,” a term coined and popularized by LinkedIn co-founder and venture capitalist Reid Hoffman. As a theory, it’s simple, Joshua White, assistant professor of finance at Vanderbilt University, explained to HR Brew: “If you enter a new space or a new technology, whatever company becomes biggest the fastest—they’re going to have the most influence.” Hoffman, for his part, has recognized the risk associated with blitzscaling, writing in his and Chris Yeh’s 2018 book of the same name: “Blitzscaling is just about as counterintuitive as it comes.”

A few prominent CEOs, such as Coinbase’s Brian Armstrong and Stripe’s Patrick Collison, have partly attributed recent force reductions to overhiring during the boom time of 2021 to 2022. Scaling is a delicate enterprise, explained Daniel Space, a senior HR business consultant, especially when done at a lightning clip, and HR teams need to understand that too much focus on growing one area of a business will eventually cause ruptures in others.

“If you put too much in on one side, you’re essentially contributing to a really bad org design,” Space said.

Blitzscale. Shooting for the moon in any economic climate is a gamble, said Ari Ginsberg, professor of entrepreneurship and management at New York University, but the Covid economy created unprecedented opportunities for certain organizations. “It’s another…situation where high growth seems to make sense, but it turns out that it’s no different than what happens even in a regular situation, as far as what can go wrong,” he said.

Though the strategy is typically employed by startups that might burn through cash but rake in investment and public hype, Big Tech companies such as Amazon and Meta also cashed in on the craze. For many, the window of opportunity slammed shut sooner than expected.

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“There is this fire that was already burning in Silicon Valley to blitzscale. Covid comes along…with all of the government stimulus and this ability to attract employees, and the market valuations were so lucrative,” explained White. “The downside is that fire is going to burn out more quickly on the other side.”

Boiling the concept down may reveal the risky underpinnings of blitzscaling. As Hoffman recently wrote on LinkedIn, it’s all about prioritizing “speed over efficiency.”

Blitzfail. The culture of Silicon Valley encourages ruthless growth, sources explained. For Space, who has worked at two companies attempting to blitzscale, the strategy is a product of misguided leadership, which he attributed to three qualities: ego, greed, and ignorance. The ultimate downside, he said, is the human cost, even if meteoric growth eventually portends success for those in the driver’s seat. Citing his experience at a medical device company that conducted a 28% force reduction after a hiring spree, he said laid-off employees have “to live with the fact that they made these founders millionaires and lost their job along the way.”

For CHROs helping to spearhead a rapid increase in personnel, Space advised looking at the business holistically. At the same company, a focus on only beefing up the sales department left the rest of the company depleted. “They wanted more people that could be account managers…but they did not fully staff the support for it, whether or not it was product developers, marketing, IT people, finance people, [or] HR people to recruit for it,” Space said.

Following an almost 350% increase in sales department headcount, “everything started falling apart at the seams,” Space said. He doesn’t remember the process fondly. “I personally find hyper-growth modes to be very, very stressful without a lot of long-term success.”

As long as VCs have money to burn and society remains enamored with disruptive ideas and companies, the prospect of rapid growth will remain alluring for entrepreneurs and CEOs, White explained:

“I’m going to start this business, I’m going to rapidly try to grow it. If it fails, that’s fine. I’ll start something else. And there’ll be funding there for that.”—SB

Do you work in HR or have information about your HR department we should know? Email [email protected] or DM @SammBlum on Twitter. For completely confidential conversations, ask Sam for his number on Signal.

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