Axe Time

Today's newsletter is a 7 min read:

• 🪓 Axe Time: Tech industry cuts down staff. How does this impact Law Firms and their Clients?
• ➕ Plus: A once in 50,000 years comet is here, Ford cuts jobs, Microsoft invests in AI and Google is getting sued.

🤿 Deep Dive

Axe Time

In brief:

• Tech companies keep cutting staff, but they still need to please investors.

What's going on?

In short, tech companies over-extended themselves off the back of record profits during the COVID period when they benefitted from a boom in e-commerce spending and remote work.

Now, many of these businesses are reporting disappointing growth rates and dealing with sagging share prices as customer behaviour returns to normal.

• Result? The tech sector announced 97,171 job cuts in 2022, up 649% compared to the previous year amounting to the highest since the dot-com crash more than 20 years ago.

Bad Choices

Taking a look back it is evident that tech companies got ahead of themselves. Below are a few examples we collated:

• Peloton, a fitness startup, doubled its workforce in the first year of the pandemic but then laid off almost 3,000 employees a year later due to decreasing sales.
• Meta announced a large investment in a new Metaverse division, but its main product (Horizon Workrooms) is not attracting a large user base.
• Salesforce bought Slack for a large sum but then laid off 8,000 employees, including Slack employees they had recently hired.

Will this keep happening?

Probably, yes. These companies are too overexposed as things stand and they need to cut costs where possible.

It's worth noting that the cuts are disproportionately affecting human resources and recruiting, with companies apparently reluctant to let go of the high-value coding talent they spent years assembling.

How does this Impact Law Firms and their Clients?

💼 What does this mean for law firm's clients?

Tech Companies

• How are they affected? The effect of the job cuts on tech companies is likely to be negative, as it could lead to a decrease in productivity and a loss of skilled employees. Additionally, the job cuts may also indicate that the companies are facing financial difficulties and may not be performing as well as they were previously. Ultimately, investors and potential customers may lose confidence in the business and that could further negatively impact the companies. This could also lead to a decrease in innovation and competitiveness of the companies in the industry.

US Government

• How are they affected? The job cuts in the tech industry could lead unemployment rates to rise, putting a strain on government programs and resources. Additionally, a decrease in job opportunities may lead to more competition for jobs and a decrease in overall economic growth, which can affect government revenues and spending.

Tech Industry Employees

• How are they affected? The tech industry in 2022 has seen the highest number of announced job cuts since the dot-com crash more than 20 years ago. Companies such as Amazon, Microsoft, Coinbase, Flexport, and Salesforce have announced job cuts, with the total amounting to 97,171. This is a significant increase from the previous year and points to a trend of job cuts which is negatively impacting employees in this industry.

⚖ Which legal departments would this impact?

Employment

• Advising: Tech companies, and employees involved in redundancies.
• Trend: Increase in work due to the job cuts in the tech industry and potential job cuts in other industries as the economy cools down.
• Advising on: Compliance with employment laws and regulations, particularly around redundancies to avoid claims for unfair dismissals, as well as assist with drafting and reviewing severance agreements for laid-off employees. They would advise employees on the possibility of claiming on unfair dismissals, and their rights in redudancies. Specialist advice with IP colleagues may be required over work done during employment (See below).

Corporate

• Advising: Tech companies, and employees involved in redundancies.
• Trend: Increase in work as companies in the tech industry focus on financial sustainability and seek to restructure their operations.
• Advising on: Restructuring of business operations to cut excess costs by liaising with their employment colleagues, and preparing required documentation to raise funds from external investors where necessary. This latter point is particularly relevant for smaller companies (like start-ups) who may struggle to deal with the downturn in the industry. Corporate lawyers may also need to advise on the effect of redundancies on vesting of shares. Many employees of tech companies take on vested shares as part of their contract, and the companies will need advice on how to deal with them e.g. let them keep them, or transfer them to company ownership.

Intellectual property

• Advising: Tech companies.
• Trend: Increase in work as companies in the tech industry lay off key staff with insider knowledge of their operations.
• Advising on: Managing the risk of redundacies in the context of protecting their IP. Many of these employees will have worked on sensitive information, and companies will need to ensure confidentiality is protected. Usually employment contracts have clauses governing this, and ensuring that any IP generated by an employee in work is transferred to the employer (but it will be something IP/Commercial lawyers will check thoroughly). They will provide general advice to ensure the companies' IP is protected in the event of any redundancy strategy.

Cyber Security

• Advising: Tech companies.
• Trend: Increase in work as companies in the tech industry lay off key staff with insider knowledge of their operations.
• Advising on: Managing the risk of redundacies in the context of protecting the companies' data. So-called data exfiltration i.e. the unauthorized removal of data, increases when employees leave. In a September report analyzing customer data, the cybersecurity company Cyberhaven found that employees are 69% more likely to take data right before they resign. Cyber security lawyers will need liaise closely with the company to plan for this event to ideally avoid it (e.g. by limiting employees access to sensitive data prior to redundancies announcements), and on handling any data exfiltrations post-announcement.

Litigation

• Advising: Tech companies, and Employees.
• Trend: Increase in work as redundancies in the industry continue.
• Advising on: Companies will hope they can handle this process peacefully with nice severance packages, but there is always a risk of litigation in lay-offs. Some employees may file claims for unfair dismissal, or for any other employment related issues. Litigation lawyers will be on hand if things turn contentious, and will liaise closely with employment on all this.

🔮 What trends does this highlight?

• Can't slow down: One big problem for tech is that it can’t simply return to the slow-and-steady mode of the past. Venture capital-backed startups push for growth over short-term financial sustainability, to position themselves to go public or get acquired, while share prices at publicly traded tech companies have been based on assumptions of ever-increasing growth. If these companies all pivot to conservative strategies they may fail to capture the imagination of investors in the way they always have.
• Cut and Hire: Because of the above, Tech companies will continue to cut less crucial staff, but at the same time hire in essential areas. Why? Well, cutting staff is good to reduce costs but it doesn't give the right idea to investors. On the flip side, hiring in key areas like programmers, coders, and developers to boost new products is a big plus. So yes, the trend is cuts will keep coming but don't miss the restructuring of tech companies in key areas to boost long term investment.

📰 News Spotlight

🌠 A Once in 50,000 Years Event: Comet C/2022 E3

• An green comet named Comet C/2022 E3 will pass by Earth for the first time since the Stone Age. Comet C/2022 E3 orbits the sun every 50,000 years and is now visible to the naked eye in the northern hemisphere.
• Next week it will reach its closest point to Earth, a mere 27m miles away, as it heads back to the Oort cloud at the edge of the solar system.

💰 AI Billions

• Microsoft is making a "multiyear, multibillion dollar investment" in OpenAI, an artificial-intelligence company. This new investment, worth $10bn, builds on the $1bn Microsoft invested in OpenAI four years ago.

🚗 Ford's European Job Cuts

• Ford plans to trim about 3,200 jobs across Europe as the automaker slashes costs in a shift toward electric vehicles. A majority of the affected positions are concentrated in Germany, and include roles in product development and administrative areas. The cuts would affect roughly 65% of development jobs in Europe.

🔍 Google Under Fire

The US Justice Department is poised to sue Google regarding the search giant's dominance over the digital advertising market. The case is expected to be filed in federal court before the end of the week.