How layoffs at Google could affect enterprise cloud services

An investor with a $6 billion stake in Google parent Alphabet is calling for more layoffs at the company, although it has already cut 12,000 jobs.

The managing partner of London-based TCI Capital Fund Management wrote to Alphabet's chief executive, Sundar Pichai, asking him to cut thousands more jobs and to reduce the compensation of its remaining employees.

Alphabet already plans to cut its workforce by 6%, it said on January 20, 2023, a move that will affect staff across the company including in its enterprise cloud computing division.

This is the second time that TCI's managing partner Christopher Hohn has written to Alphabet. In his first letter to Pichai in November he asked the company to take aggressive action to correct rising headcount, employee compensation and operating losses in the company's Other Bets division.

His second letter, written on the day Alphabet announced the layoffs, argued that the company should reduce its cost base further by cutting its workforce back to the 150,000 it employed at the end of 2021. Before the recent round of layoffs it had 187,000 staff.

However, the possibility of further job cuts at Alphabet has sparked concerns it could affect service in such as Google Cloud, one of the company's more profitable and fast-growing businesses. In October 2022, Google Cloud grew 38% year-on-year to reach $6.9 billion in revenue, while Alphabet's overall revenue growth slowed to 6%.

"Further layoffs at Google could impact quality of Google Cloud services," said Hyoun Park, principal analyst at Amalgam Insights. "They have already laid off technical staff from the cloud computing division as well, mostly in India, despite it being a growing business for the company."

Despite its reliance on automation, the sheer scale of Google's cloud infrastructure means that it needs a significant number of workers to keep it running. Companies that radically downsize their data center staff-as Twitter has done recently-will quickly run into problems, Park said: "Cloud takes a lot of people to support, as an enterprise is basically outsourcing its workloads to another organization. So, this is a concern that Google needs to answer, especially since these layoffs are public, which in turn could lead to support issues potentially presenting themselves quickly."

Serving investors, not customers

Park sees layoffs like those at Alphabet, intended to please investors, as a threat to future services offered to enterprises.

"These layoffs, including the ones at Google, seem to be an attempt at appeasing investors rather than simply making the best business decisions from a pure cashflow profit perspective," he said, adding that these layoffs are really changing the bottom line by a few percent.

"It's hard to figure out how these layoffs will change the amount of profit that the company gets by more than a few percent. So, this is not a fundamental shift of profit," he explained.

Further, some of these layoffs would translate to companies doubling down on their core product and reducing the level of innovation, he said.

However, another analyst believes that "the layoffs were a necessary evil."

"The downsizing at Google was healthy for the company as companies should be focused on growing revenue faster than headcount. The company should cut more roles," said Gene Munster, managing partner at consulting firm Deepwater Asset Management.

Munster said he doesn't expect the initial reduction in Alphabet's workforce to affect any of its services, although he wasn't certain about further layoffs at the company.

Alphabet has an attrition rate of 10% and that is likely to come in play reducing the number of total employees at the company in the coming months, he said.

Call for pay cuts

TCI's Hohn has repeatedly urged Alphabet to reduce employee compensation. In his first letter, he criticized Alphabet's median salary of $295,884 for being too high. It's 67% higher than Microsoft's ($176,858) and far above the $117,055 median for 20 of the largest technology companies, according to figures he cited from S&P Global Market Intelligence.

"Management should also take the opportunity to address excessive employee compensation," Hohn wrote in the second letter. Competition for talent in the technology industry has fallen, which should allow Alphabet to cut pay without losing staff, he said.

Much of the employee compensation differential at Alphabet is down to stock options, according to Park.

"Alphabet's higher compensation doesn't necessarily come from base salary but from its offering of stock. That's where that 50 to $100,000 delta exists between Alphabet and most of its peers," he said.

Hohn, in his letter, also alludes to stock-based compensation and urges Pichai to limit such form of compensation to employees.

At Deepwater, Munster agreed with Hohn's assessment, saying Alphabet should reduce employee compensation to bring it close to what its peers are offering currently.