Introduction: The Pursuit of Cost Reduction
Cost reduction is one of the obsessions of any management team. The reality is that in the vast majority of organizations, there is a great room for improvement, and the same company can boost its profits simply by optimizing its management and processes. Let’s talk about cost cutting in tech companies.
The Common Pitfall: Cost Cutting in Tech Companies
There is a quite common strategy in the world of software that accumulates failure after failure and yet continues to be repeated. It involves replacing senior software engineers and programmers with others with lower salaries, either because they are more junior or because they reside in a country where the salary range is lower. Who has not seen this cost cutting approach in tech companies?
The Strategy: Replacing Senior Engineers with Lower-Salaried Alternatives
The plan on paper is simple: lay off a large number of senior engineers, hire the same number or more new engineers with lower salaries, a learning curve of approximately 6 months, resulting in optimized costs, cost cutting goal achieved! There are variations of this strategy, such as a period of overlap between the new hires and the original engineers for knowledge transfer.
Variations and Implementation Challenges
In sectors with low quality requirements, short delivery times, or products with little complexity, it can undoubtedly work. The problem is that these scenarios are not the norm, despite appearing so in many cases. Typically, the situation is that the company in question, dedicated to the software world, has no assets such as warehouses, machinery, vehicles, etc. Its only wealth is its employees, i.e., without these employees, there is no company.
Viability in Certain Sectors: Quality, Delivery, and Complexity
Software engineering is not as simple as it may seem, and learning curves are not months but years. A new hire will take years to reach the level of the senior engineer dismissed, if they ever achieve it. EBITDA will skyrocket for a few years, but it will become increasingly difficult to acquire new customers and retain current ones. The engineers hired will typically leave the company unless their salaries are raised (thus returning to the initial situation), and even if they were to stay and reach a good level, the 3-4 years during which a mass of programmers without sufficient knowledge has been manipulating the product have turned it into an unmanageable monster. Any modification entails a titanic effort and risk. The number of bugs is very high, and resolving them is expensive since the code is not structured (does the term “spaghetti code” ring a bell?), with hundreds or thousands of small patches that make it even more unstable. Of course, we’re not even going to talk about evolving to new technologies or conversions, even though they are a requirement for any product that wants to survive in the long term in the software world. Let me also mention that in this temporal thread, it is quite common to make very high offers to former employees who were laid off to try to solve the situation.
The True Wealth of Tech Companies: Employees Over Assets
Simply adding any functionality will be very expensive, fixing the existing one practically impossible, and following the latest trends a utopia. The trickle of customers leaving will turn into a stream. After a period of 3-4 years with spectacular financial numbers, the risk of starting to fall into the abyss is very high.
The Complexity of Software Engineering and Learning Curves
The optimization manual for tech companies undoubtedly includes this chapter on cutting personnel expenses, but the number of companies that actually benefit from it is very small. A strategic goal of a software company should always be to retain talent, and in this sector, the engineering or R&D department is particularly delicate. Don’t be fooled, there is no better way to cut engineering costs than to have an outstanding team.