Friday, March 31, 2023

How layoffs affect and benefit Microsoft at the same time

  • Microsoft presented its economic results just a week after it cut 10,000 jobs in its workforce.
  • This measure designed to save costs has surprisingly backfired on their accounts.
  • Even this has caused their profits to fall by another 5%.
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Microsoft presented controversial financial results just a week after announcing layoffs affecting 10,000 people.

The combination of these factors has produced some surprising contrasts; Tech company wants cost savings.

First, how is it possible for a cost-cutting company to be penalized after laying off layoffs?

And second, if investing in technology is the solution that layoff companies will adopt to be more productive, why hasn’t Microsoft benefited from it?

Paradox 1: The layoff reduced your benefits by 5%

Microsoft this Wednesday decided to lay off 10,000 people, which is 5% of its global workforce. According to its CEO, Satya Nadella, with this decision it sought to align its “cost structure” with its earnings in order to try to meet the demand of its customers.

In a meeting with investors, its chief financial officer Amy Hood said she expected “moderate workforce growth” and little to no increase in its operating expenses. This is in reference to Microsoft’s current fiscal year which runs from July 2022 to June 2023.

In fact, in last quarter’s results, Microsoft had already included the layoffs and their associated costs on January 18. He highlighted the $800 million earmarked for compensation of affected workers (MDD); This is less than the estimate of $ 1.2 billion.

And so paradoxical situation number one happens. Despite the fact that the layoffs will allow Microsoft to save on personnel costs, its profits were down this second quarter, due to settlements for its employees.

Microsoft said operating and net profit would be lower in the absence of layoffs. The former would have resulted in a reduction of 3%, not 8%; While the loss of the second would be 7% instead of 12%.

However, there were also changes to its hardware portfolio and “costs related to lease consolidation activities”.

The effects of the retrenchment are expected to reflect in their accounts later.

«This adjustment of people is beyond the present moment. It reacts to downgrades in forecasts and therefore size adjustments. The process was designed to make the next quarters closer to the forecast, says Angel Barbaro, a professor at the EAE business school.

“Technology companies usually implement settlements above the requirements of the countries. This is to make friendly outings and avoid social problems where it operates”, explained Martin Pikaras, professor at OBS Business School and digital strategy expert at Gartner.

In the United States, Microsoft has already announced that compensation terms for laid-off employees will exceed market but, as usual, it did not elaborate on employees in other countries. He only mentioned that “they will adjust to each country’s labor laws.”

But all is not well when it comes to layoffs: Microsoft’s ability to lay off people reduces activity, and according to experts this risk may become apparent later.

«Implementation of mass layoffs also indirectly affects outcomes, in that it reduces activity, as former employees have done something that adds value. It will depend on where the layoffs come from and what impact they have on the contribution of value”, warned Esteban Almiral, professor in the Department of Operations, Innovation and Data Science at Essade.

Paradox 2: Even though the recession caused companies to spend more on technology and the cloud, Microsoft still had to lay off

Microsoft is not only one of the leading companies in the cloud market today thanks to its Azure division. In fact it is its branch which is growing the most and which has been successful in preventing its decline from reaching the category of collapse.

Microsoft billed $21,500 million in the cloud, up 18% from the same period in 2021. Within this, Azure grew its revenue by 31%, more than the growth of other products like Office Xbox or Surface for example.

In fact, their cloud applications are from the portfolios that other companies choose to downsize.

The reason: Spending on technologies like the cloud is often a way for companies to save costs and increase productivity. Something that increases the risk of recession even more.

“To protect profit margins, companies have one clear path to increasing productivity: technology. This means investing in greater use of robots and artificial intelligence, and where possible, rather than relying heavily on manpower ,” said Azad Zangana, senior Europe economist and strategist at Schroders.

This is supported by data from other analysts as well. Gartner’s projection shows that global spending on information technology (IT) will grow by 5.1% to reach $4.6 trillion in 2023.

The maker of the Windows operating system is investing in artificial intelligence as part of its cloud proposition, soon adding new features to it via ChatGPT, something that has recently become a reality for companies hit by rising manpower costs. can make its offering attractive.

This gives rise to a second paradox: that a company like Microsoft, which should benefit most from digitization, has to cut its own workforce.

Nation World News Desk
Nation World News Desk
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