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Amazon, Salesforce: Big Tech Cost-Cutting Trend Spills Well Into 2023

Published 01/06/2023, 12:09 PM
Updated 07/09/2023, 06:31 AM
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The tendency of major U.S. tech companies cutting workforce to balance economic slowdown has continued in 2023. Two of the largest U.S.-based tech companies - Amazon (NASDAQ:AMZN) and Salesforce (NYSE:CRM) - announced layoffs earlier this week as they attempt to protect mid-term margins and profits. Shares of both companies gained on announcements as analysts continue to urge large companies to cut costs as the U.S. stands on the brink of a recession.

Amazon is planning to lay off over 18,000 employees, marking the single workforce reduction at a tech company in the past year amid the persisting market downturn. The layoffs will mainly affect Amazon’s corporate ranks, which will see a 5% reduction. Overall, about 1.2% of the company’s overall workforce is expected to be affected.

Bigger-Than-Expected Cuts at Amazon

The move marks a significant increase from the original reduction target of 10,000 employees in November. Back then, Amazon announced it would begin laying off employees in its device business, retail, and recruiting divisions. The e-commerce giant already let go of thousands of employees in 2022, while the rest of the cuts are expected to be made over the following weeks.

Amazon CEO Andy Jessy said in an official blog post:

“Amazon has weathered uncertain and difficult economies in the past, and we will continue to do so. These changes will help us pursue our long-term opportunities with a stronger cost structure.”

The decision follows a period of stellar growth for Amazon, which has significantly benefited from the coronavirus pandemic as customers switched to online shopping due to lockdown restrictions. To meet the surge in demand, Amazon expanded its logistics network and hired hundreds of thousands of employees. However, the company now acknowledges that it had hired too rapidly during the pandemic.

Slowing growth as customers return to in-store shopping urged Amazon to start a comprehensive cost-cutting plan to address unprofitable units of its business. The e-commerce giant made selective cuts last year to reduce expenses, shutting down physical stores and businesses like Amazon Care. The company then announced a hiring freeze prior to making the layoffs.

Salesforce Cuts Jobs and Reduces Office Space

On the same day, cloud-based software maker Salesforce announced its plan to trim its headcount by 10% and shut down some offices after the Covid-19 pandemic left the company with a bloated workforce in the midst of an economic downturn.

Salesforce said the move would see it incur between $1.4 billion and $2.1 billion in charges, whereas just $800 million to $1 billion will be recorded in Q4. Just like Amazon, cloud solutions providers such as Salesforce and Microsoft (NASDAQ:MSFT) saw rapid growth during the pandemic and are now forced to slash costs and delay new projects.

Marc Benioff, co-CEO of Salesforce, said:

“The environment remains challenging, and our customers are taking a more measured approach to their purchasing decisions.

As our revenue accelerated through the pandemic, we hired too many people leading into this economic downturn we’re now facing, and I take responsibility for that.”

The San Francisco, California-based company reported nearly 80,000 employees at the end of Q3, around 10,000 more than in the year-ago period. The company said it increased its workforce last year to meet the growing demand for its services. The company’s shares tumbled more than 2% at the market open Thursday after losing around 50% of their value in 2022 after four consecutive quarters of slower-than-expected growth.

“It (the company) is certainly not alone as the sector has grappled with a demand environment that has meaningfully softened over the last 12 months,” William Blair analyst Arjun Bhatia said.

The analyst added that the layoffs give Salesforce a decent chance to meet its 2026 target of a 25% operating margin. However, the current macro conditions could place the company’s $50 billion revenue goal at risk.

“There is a high likelihood of right-sizing by other software firms,” said Rishi Jaluria, an analyst at RBC Capital Markets.

Piper Sandler analysts think that Salesforce’s workforce reductions could help the company cut its operating expenses by $1.5 million or more per year and boost its operating margin to 26% from 21%. However, the forecasts are based on the assumption that demand drivers remain unchanged, which is unlikely, the analysts added.

Final Thoughts

The workforce cuts by Amazon and Salesforce mark the latest in a series of workforce reductions over the past year as slowing demand, and recession risks weigh on the tech industry. Facebook (NASDAQ:META) parent company Meta Platforms said in November it would slash its headcount by 13%, with Lyft (NASDAQ:LYFT) and HP (NYSE:HPQ) announcing similar decisions.

Overall, technology companies cut over 97,000 jobs in 2022, up by a whopping 649% compared to 2021, according to data by the outplacement firm Challenger, Gray & Christmas. The figure is three times higher than the runner-up automotive industry, which cut 31,000 jobs last year.

Andrew Challenger, senior VP at Challenger, Gray & Christmas, said the overall economy continues to add new jobs but noted that employers are “actively planning for a downturn.” As a result, corporate hiring is experiencing a slowdown as companies adopt a more cautious approach ahead of 2023.

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Shane Neagle is the EIC of The Tokenist. Check out The Tokenist’s free newsletter, Five Minute Finance, for weekly analysis of the biggest trends in finance and technology.

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