CHARTS: We analyzed revenue per employee to show why Amazon, Meta, and others are axing workers with brutality and speed
Mass layoffs at tech firms indicate they want to become efficient.
One productivity metric to watch is revenue per employee, which has fallen at some big firms.
We crunched the numbers to show the bloat — with one notable exception.
Tech's year of efficiency is in full swing, but some companies have more to do than others to turn their fortunes around.
More than 300,000 workers in the sector have been laid off since the beginning of 2022, as companies discover that their pandemic gains aren't permanent and the economy slows down.
Meta CEO Mark Zuckerberg has talked about the need to get "leaner" and flatter." Amazon boss Andy Jassy stipulated the importance of simplifying in a note announcing the firm's second round of layoffs. The two companies have laid off a collective 48,000 staff in the last five months.
Tech investor and PayPal mafia member Keith Rabois recently said it's about time major firms cut back after years of over-hiring. As he sees it, the biggest tech firms are bloated and unproductive and he's called for a refocus on one particular metric: Revenue per employee.
This is a get-back-to-basics measure of efficiency and productivity, assigning a hard dollar value to individual workers. It's calculated by dividing a company's annual revenue by the number of its employees. A company might appear financially healthy if it's doing massive revenue — but if it has masses of workers and poor or waning profitability, low revenue per employee might signal inefficiency and bloat.
But just how bad is it?
We crunched the numbers for big tech companies between 2018 and 2022 — and the analysis shows why so many are brutally cutting back on jobs.
1. Tech giants grew. They didn't become more efficient.
Tech companies swelled in the years up to and during the pandemic, but more manpower didn't necessarily mean more money.
The chart shows Amazon, Meta, and Twitter in particular hired heavily from 2018, but also experienced declining revenue per employee. It probably isn't a coincidence that all three companies have been among the most aggressive with job cuts over the past few months.
Amazon's workforce grew from 647,000 five years ago to 1.5 million last year, a period of time in which its revenue per employee declined 6.9% to $333,550. Meta's revenue per employee fell 14% in that time as the firm more than doubled its workforce. Twitter's revenue per employee cratered by almost 60%.
Pursuing a bigger workforce may have stunted productivity, according to John Van Reenen, professor of economics at LSE. "It's possible because often CEOs think 'bigger is better' and it's nice to build an empire to look important," he said.
2. Size isn't everything
And how have tech companies fared against each other?
Twitter produced the least revenue per employee by the end of last year — $317,333 — though this isn't necessarily a surprise, given it only employed 7,500 staff. By comparison, Alphabet generated $1.5 million per employee in 2022, with an employee base of 190,234.
The chart above shows Amazon and Salesforce are producing roughly the same revenue per employee as Twitter despite having tens of thousands more workers: each employee at Amazon generated $333,550 in revenue last year, while Salesforce employees generated $394,911. Bigger doesn't always mean better.
In Google's case, increases in employee numbers each year did coincide with small increases in the revenue generated by each person — until the market fell into a panic.
Apple, Microsoft, and Salesforce were the only other companies that managed to increase productivity in that time by improving revenue per employee while also increasing the size of their workforce.
For Van Reenen, what this highlights is that rather than there was an expansion drive to meet the demand for tech from "a huge boom in online shopping and software tools designed to facilitate remote working."
That, in some cases, was a mistake — something Meta boss Mark Zuckerberg admitted as he announced layoffs.
"Many people predicted this would be a permanent acceleration that would continue even after the pandemic ended," he said in November. "I did too, so I made the decision to significantly increase our investments. Unfortunately, this did not play out the way I expected."
"What tech bosses hadn't taken fully into account was that there would be a switch back to the offline world as things returned to a kind of normal," Van Reenen said.
3. One company to rule them all
Apple hasn't had to make the drastic cuts that its peers have done, and the chart below shows one reason why.
Since the start of the pandemic in 2020, Apple's revenue per employee has soared, climbing from $1.9 million that year to $2.4 million in 2022.
Though the chart shows how revenue per employee rose, on average, for Alphabet, Amazon, Meta, Microsoft, Salesforce, and Twitter from 2020 to 2021 amid the pandemic tech boom, they collectively struggled to maintain that momentum. Apple bucked that trend.
Read the original article on Business Insider