What can we learn from Spotify layoffs?

Analyzing what does it mean for other companies

Let’s analyze Spotify’s recent layoffs to see:

• What can we learn from it?

• Why is it a warning shot for many other companies?

First things first. If you are impacted by the recent tech layoffs, the previous post is for you 💝

Spotify announced 3 rounds of layoffs in 2023 (🪓=100 humans):

1. 2023–01: 🪓🪓🪓🪓🪓🪓 600

2. 2023–06: 🪓🪓 200

3. 2023–12: 🪓🪓🪓🪓🪓🪓🪓🪓🪓🪓🪓🪓🪓🪓🪓 1500

It is hard to work in Stockholm without bumping into someone who has worked at Spotify at some point. And when it happens, you’re sure gonna know! 😄

A while back, I shared the story of my 2019 tour of the Spotify office and my surprise upon discovering the virtual reality room at the audio streaming company!

I have never worked at Spotify and probably never will, but I've observed and heard enough of Spotify to know Daniel Ek is 100% spot on saying:

We still have too many people dedicated to supporting work and even doing work around the work. —Leaked internal memo, Business Insider

However — and this is important — what the Spotify CEO is saying is the symptom of a systemic problem. The root cause is multi-fold which we will get into.

Spotify’s growth resembles the story of a poor man who won the lottery and overspent because his mentality was poor. One morning he woke up to debt and started burning everything he had bought! 🔥

What was Spotify thinking when hiring some of the best talent in the market and then throwing a vision and mission document at them? That they just sit and do nothing? Of course, they’d generate work. But as we’ll see personal productivity is not even the tip of the ice burg.

The fallacy of productivity

From Google to Microsoft and Spotify, we’ve seen many layoffs in the past two years and while the deliveries were different, most of them have share these attributes:

• They are a reaction to the shrinking economy in the west

• They are decided top down (usually the CEO)

• CEO accepts full accountability while the employees pay an oversized price

• They’re marketed as efficiency improvement and productivity boost

But what exactly is productivity in this context? If those employees were the least productive ones that the company could spare, should other employees stay away from them?

When there’s not enough impactful work for everybody, work will be generated to artificially bloat the perceived productivity.

As we’ll see it’s not the micro-productivity (personal level) but rather macro-productivity (company scale) that motivates these layoffs, but even then, there are external factors at play and ironically layoffs add fuel to the fire.

Let’s step back and build a simple model. Assuming that there’s a 1:1 relationship between the headcount and the work bandwidth available to the company, we get this diagram:

This is of course very naïve because different people have different personal productivity levels. In reality the available work bandwidth looks like this:

• When the company is small, everyone is firing on all cylinders and there’s little bureaucracy to steal paid hours.

• As the company proves profitable, it starts to expand its available work bandwidth with more people. The new people require onboarding, management layers, and start to change stuff —which is paid short term for long term benefit of the company. There’ll be more meetings, more documents to write/read, more code to maintain, more duplication of effort.

• As more people join, more work will be streamlined. Standards and conventions evolve, HR (human resources) and TA (talent acquisition) expand and there’ll be more people working to support other people’s work (e.g. platform team, scrum masters, agile coaches, event managers, etc.).

• As the company grows in size and revenue, there’ll be more compliance, audits, gatekeeping, governance, etc. Moreover, alignment becomes a challenge when the distance between the C-suit and the leaf nodes of the organization tree increases.

Fake work

Companies are not charities. They are not measured by the number of people who work there (headcount) or the amount of work the company can extract from each individual (individual productivity).

Companies are legal entities driven by profit not ethical entities driven by values unless ethics ties to profit.

There is a point of diminishing return, where adding more people actually hurts progress, creates friction, and adds too much overhead (the mythical man-month). Moreover, the larger the company, the easier it is to slack off and hide in the crowd. There are thresholds at which the way a company is run needs to be revamped.

That calls for a change in leadership or leadership style. The way you run a small homogeneous country like Norway is entirely different than the way you run a huge multi-cultural country like India. Unfortunately, the way many companies are run isn’t that different from small medieval kingdoms. But that’s the topic of another post.

Of course, any motivated person wants to feel like they are doing something meaningful. And when there’s not enough impactful work for everybody, work will be generated! This phenomenon is known as fake work. It artificially bloats the perceived productivity by consuming paid work hours for things that don’t really matter to the company as a legal entity that primarily exists to make money. We’ll shortly touch on some of the symptoms of fake work to look out for.

Silicon Valley investor and CEO Keith Rabois attributed 2022's brutal tech layoffs to big firms like Google and Meta getting too bureaucratic and over-hiring staff who just did busywork, aka fake work. —business insider

These metrics aren’t completely irrelevant, but they ultimately contribute to how the companies are really measured: their ability to turn available work bandwidth into profit.

What does that mean?

Companies don’t exist in vacuum. Regardless of how much work they can do, their ability to make money depends on the available market.

Again, let’s start simple and assume that the company never over-hires. In other words, we’re boldly assuming that the company’s available work bandwidth, never exceeds the amount that’s needed to capture its available market:

The market demand is impacted by many external factors like inflation, war, customer needs, competition, etc.

What happens when the market shrinks? The company has a surplus work that it cannot convert to profit:

It doesn’t have to be just a market shrink. Sometimes a new technical breakthrough improves the productivity of the current headcount above the level that can be utilized for the available market.

According to a recent report from The Information, Google is considering a substantial workforce reduction, potentially affecting up to 30,000 employees, as part of a strategic move to integrate AI into various aspects of its business processes. —CNBC 2023-12-28

Regardless of the reason, layoffs are more likely when the company forecasts show that the available headcount is above the level that can be utilized to capture the market. It can be due to two groups of reasons:

• External factors: shrinking market, drop in customer demand, etc.

• Internal factors: fake work, lack of alignment, individual productivity, etc.

The gap between available work bandwidth and what is needed for the money-making engine of the business to run smoothly is not intentional and often not in CEOs full control, but the salaries and layoffs are.

Amid inflation, it is common for companies to be thrifty with salary raises. If you don't get the raise you were expecting, don't be mad at your company. Realize that different companies and markets have different capacities to convert your skill to profit.

If you're nearly as good as you think you are, you'll find a place that maps your potential to your expectations. Don't threaten or beg for money. Invest in you and bet on the only person you can always count on 🙌 And whatever you do, never compare. Comparison is the thief of joy.

Layoff is just one solution to optimize profit margin by reducing the cost of running the business.

It’s an easy one and yields short-term results with many negative long-term effects:

• By moving people from the employed basket to the unemployed basket, the company hurts the shopping power of the very society it’s trying to capitalize. The company offloads the cost of unemployment benefits to the state and insurance companies which in turn motivates an increase in tax and insurance fees for the businesses.

• It hurts the employer's reputation as a company that cannot take care of its employees and treats them like extra rows on a spreadsheet. This doesn’t affect the average talent desperate for any job. But top talent has options and considers this before joining the company.

• Layoffs demoralize the remaining employees because they don’t know when they will be next. The C-suit may see the layoff as a warning shot for everyone to get their sh*t together. In practice, however, the remaining employees may just start preparing a backup plan outside the company.

• Layoffs incentivize tactical (short-term) approaches over strategic (long-term) initiatives that require upfront investments. It incentivizes high visibility efforts over doing the right thing in silence. It hurts the culture.

Layoff is a last resort. It is a sign of defeat. It shows that the company has lost its long-term hope to convert its available work bandwidth to profit and goes after its own people as a last resort.

That long-term damage doesn’t matter to the short-term interests.

Salesforce firing 10% of staff, then having two truly standout quarters, then going on a hiring spree, then freezing hiring (easy to guess how Q4 2023 went!) is such a good example of QDC. Quarterly-result Driven Company. It's the curse of many publicly traded companies. —

Gergely Orosz

, Twitter

For many, the layoffs in the past few years were an eye-opening experience to understand how companies really operate. At the end of this article, we’ll build a mental model about how companies work and, in a follow up post we’ll discuss how an individual can reduce the negative impacts.

It’s a warning shot for the rest of us

As much as this post may be bashing Spotify, we need to acknowledge that Spotify is a market leader competing at the global tech league against Google, Apple, Amazon, etc.

Spotify cannot afford to be too slow or wasteful, or it will lose its market share.

Their layoffs are warning shots for the rest of the industry; Particularly the companies with a strong revenue stream which got fat over time.

Common patterns to look out for:

• Beurocracy: Too much focus on the process, gatekeeping and ceremonies instead of earning trust, aligning personal growth with organizational growth, and meaningful value.

• Fragmented responsibilities: Taking one role, breaking it into multiple titles, and assigning them to different people who in turn block each other. (🔴I’ll dig into this phenomenon in a future post)

• Distraction: woke stats, identity fabrication, culture engineering, and language control instead of substance and outcome. Companies are legal entities driven by profit not ethical entities driven by values (unless ethics genuinely ties to profit).

• Fake work: remember the “legal entity”? The main reason it exists is to generate money. Fake work is any activity that doesn’t contribute to that goal or fights against it.

• Show off and self-promotion: too much focus on presentation, appearance and looking good instead of doing good. A common symptom is to give praise where praise is not due and celebrate prematurely while the problems are still alive and kicking. I’m not saying don’t praise or celebrate. It’s good to keep the spirit up but pretending that the problems don’t exist doesn’t solve them.

• Fake products: as an ex-Googler cites: "This is a poster piece for some executives to implement while job hunting for another role so they can go be a CEO somewhere”. Follow

  David Pereira
  ‘s work who is on a mission to fight fake products.

• Focusing on symptoms instead of root cause: often superficial measures are taken and boosted by media (traditional or social media). It feels good and helps marketing in a shallow world. The root causes are often undetected or ignored while giving birth to new problems, keeping everyone busy.

• Broken ownership: Any of the archetypes of broken ownership. Monkey with a gun is common but all others are as common.

It just happens that the financial crisis makes these symptoms get more attention.

Scarcity breeds clarity. It’s what drives focus and creativity. —Sundar Pichai

If your company is struggling with any of these symptoms, it’s a matter of time before the bad news hits (either layoffs or the collapse of the company).

I have previously written about my own experience working at a company that felt stressed.

In systems engineering, we try to assess risks and mitigate them. What can you do as an individual to reduce the impact on your own livelihood? That’s the topic of the follow up post.

This post took about 9 hours of my private time to research, draft, edit, and illustrate. My monetization strategy is to give away most of the content for free because I believe it helps the community. For those who spare a few bucks to support the time and energy I put into this, the following section is a token of appreciation. A paid subscription also gives you access to my WIP book Reliability Engineering Mindset. Right now, you can get 20% off via this link.