The Vicious Cycle Of Overhiring And Layoffs

"We overhired for the world we're in. We were much too optimistic," wrote Patrick Collison, CEO, Stripe recently

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By S Shanthi

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As recession looms, more and more companies are resorting to layoffs as part of their cost-cutting exercise. While the current layoffs spree started with the bigtech companies, it is no longer restricted to Silicon Valley. It's happening across the globe and startups are following suit. The frustrated employees are blaming overhiring by these companies in the past as a key reason for this. They say that companies balloon the number of employees as soon as economy recovers and let go of people when things are not favorable.

"We overhired for the world we're in. We were much too optimistic," wrote Patrick Collison, CEO, Stripe on a note to its employees after letting go of more than 1,000 employees this month.

What led to overhiring

Companies across the world, including in India, have gone on a hiring spree thinking the demand would last forever and then ended up taking the hard decision of layoff. "Organizations have many aspirations and projects in mind and when the markets are good they want to quickly capitalize on them and they hire ahead of time. When the signals from the markets are not promising, all these projects take a backseat and most of these projects are bound to fail," said Vijay Yalamanchili, CEO of Keka, a HR tech startup.

Staffing redundancy though taken up as a contingent plan, may eventually become the reason why cash outflow may go higher than the inflow based on the market conditions. Sujay Prakash, General Partner, Weave Capital explains with an example. "There may be proxy team members being allotted in each domain to prevent a halt in operations due to attrition, however, if the product or services are not performing as desired in the market for a longer duration or the operating costs increase due to inflation whereas the income remains the same, the ratio between the operating cost and income may get imbalanced."

Then it becomes the organization's call to either sail through this phase by raising funds, mergers, budget cuts, etc or reduce the cost of operations by reducing the staffing redundancy. "Also, the intent to overachieve desired outputs in a shorter duration eventually results in underutilization of resources post achieving the output. In such cases, an organization may try to push excess team members onto a different role altogether which may result in attrition in the long run or they reduce the excess team members to manage the operating cost better. In such cases, where the organization desires to achieve more in lesser time, it is often advised to hire candidates on a contractual basis so that the employment clarity and security for both parties are transparent from the initial phase," he added.

Overhiring happens mostly in domains like engineering and technology, marketing, business development, sales and banking since these departments help with exponential growth strategies. "When there is a lot of fund at disposal, creativity and efficiency take a hit. When we consider taking the decision of adding five resources to your team does not seem to have a lot of cost and a lot of companies just go through it but, imagine doing this at scale and adding people across all departments, that's where the impact is," said Yalamanchili.

Another HR culture of rolling out multiple offers is also to be blamed to some extent. "On an average 3-4 offer letter are rolled out for a single position," he added.

Can we blame the startups?

"Every business tries to leverage opportunities for market share and growth. During the pandemic, not hiring talent despite rising demand and availability of funding, would have made little business sense," said Sumit Sabharwal, CEO, Teamlease HR-tech.

At the beginning of 2020, there was a complete shift towards online services such as e-commerce, online gaming, OTT services, edtech, among others. Companies witnessed growth and resorted to overhiring to meet the demand. "In 2020, the future looked very unpredictable, and most businesses did what the situation demanded. But yes, it doesn't mean that reckless hiring is justifiable for business growth," he added.

The new normal that everybody was speculating about is now upon us, but with another unexpected crisis of the Ukraine-Russia war. All these reasons have led to inflation and lesser investment budgets. "The key to running a successful startup is just-in-time responses to leads generated, quickly converting opportunities, and swift closures on new leads before they get out of sight. Hence only the way to match up to the speed and accuracy of a constantly in-demand consumer is the need to overhire," said Vishal Jain, cofounder, Roadcast, an AI-backed tech platform providing end-to-end supply chain management solutions.

While the companies cannot be totally blamed, it is important for them to remember that market volatility is inevitable and the lives and future of employees cannot be endangered, say experts.

Rather, they should plan aptly for the onboarding of the right number of new team members. "For this, the lifecycle of the organization's products and/or services should be created. This helps to narrow down the skill sets that shall be required for the outputs to be achieved. Further, considering the market volatility and disruptions, the startups should get an understanding of the period for which this planning shall remain apt," said Prakash.

S Shanthi

Senior Assistant Editor

Shanthi specializes in writing sector-specific trends, interviews and startup profiles. She has worked as a feature writer for over a decade in several print and digital media companies. 

 

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