When music streaming platform Spotify’s (SPOT:NYSE) announcement of a return to profitability was immediately followed by plans for further job cuts – its share price jumped more than 7%.

There’s nothing investors like more than hearing an executive team has their fingers wrapped tightly around a company’s’ purse strings.

Costs have become a major issue over the past year and even as inflation cools businesses are having to get used to the new economic landscape where money is expensive and wages a significantly bigger burden.

Year to date Spotify’s share price is up almost 150% as the company reined in spend on controversial and less than prolific podcast creators like Harry and Meghan, bumped up prices and still managed a significant growth in subscriber numbers.

In a letter to employees, Spotify’s chief executive, Daniel Ek said that ‘substantial action to right-size our costs was the best option to accomplish our objectives’ which include reaching a billion users by 2030.

But 17% is a sizeable chunk of Spotify’s workforce and comes off the back of two separate culls earlier in the year, which must prompt questions about whether the company can maintain performance with such a reduction in headcount.

Attracting users to service requires creating unmissable content and delivering a consistent user experience, any slippage would result in audiences defecting to competitors more than happy to add to their own numbers.

SPOTIFY IS NOT ALONE

Spotify is far from alone in its predicament. Many tech companies rushed to build up their employee base during the pandemic and are now having to reassess as the economic backdrop becomes more uncertain and growth slows significantly.

According to layoffs.fyi the website that tracks tech job cuts, tech companies globally laid off 165,000 employees in 2022.

That number has jumped to over 255,000 tech workers being let go in 2023 to date, once you factor in the latest Spotify cuts. BT (BT.A) announced in May it was turning to AI to replace some of its 55,000 workers it plans to axe by the end of the decade, others like Meta told investors they’d simply got the sums wrong and had hired too many people too quickly without a clear business need.

Always controversial, Twitter boss Elon Musk said during an interview at the Wall Street Journal’s CEO Council in May that he felt many companies could and should go much further seeing ‘potential for significant cuts at other companies without affecting their productivity, in fact increasing their productivity’.

IS IT THE RIGHT MOVE?

Many analysts have delivered similar commentary on the changing jobs picture but considering the current trajectory for Musk’s social media platform, following a massive reduction in headcount, there will be many taking what he has to say with a liberal pinch of salt.

The efficacy of that sort of stance is questioned in JP Guthrie’s paper entitled Dumb and Dumber, the impact of downsizing on firm performance as moderated by industry conditions.

It raises questions about the impact of cuts on the productivity of those left behind and finds there can be subsequent decreases in profitability following downsizing.

Morale is crucial especially for companies like Spotify with an eye on continued growth. Then there’s the conundrum that if the company does achieve that growth and it then needs to add to its headcount, can it find employees with the same level of skills to replace those it let go?

Training and skills are often quoted as two of the things needed for an economy to grow and training takes time and money if it’s done correctly.

THE VALUE OF STAFF

Investors aren’t wrong to want profitability, they aren’t wrong to be worried about costs, but they should also concentrate on outlook and ambition and bosses need to consider the value of staff beyond that of items on a spreadsheet that need to be minimised in order to deliver an upbeat message on an earnings call.

And of course, there’s also the question about where those skilled workers might end up, because if it’s in the employ of a competitor the repercussions could be felt for years.

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