E-Commerce Layoffs: Storm on the Tech Frontier

While there might be more hand-wringing over dot-com layoffs than is truly warranted, e-commerce watchers have as much right to be concerned about recent job-cut trends as anyone in other segments of the high-tech sector.

Data for April released by job placement firm Challenger, Gray & Christmas (CGC) indicated a new monthly record for overall dot-com layoffs, ending a two-month respite and serving as an indicator that tech companies are far from finished with cutting costs by cutting employees.

However, to some extent, dot-com layoffs simply get lots of headlines, stemming from a post-shakeout “I told you so” mentality that loves to wallow in high-tech misery.

The University of Texas estimated that as of last June, nearly 3.1 million people worked in the Internet economy, which means that dot-com layoffs — 93,079 since June 2000, according to CGC — have affected only about 3 percent of the Internet-employed.

Furthermore, according to the U.S. Department of Labor’s Bureau of Labor Statistics, 43 percent of all mass layoff events in March occurred in the manufacturing industry. In contrast, the Labor Department found that 10 percent of all layoff events and initial claims during the month were from retail trade. Those numbers do not even break the retail statistics down further to highlight e-commerce.

In short, within the grand scheme of things, e-commerce is not a major source of unemployment. Within the tech sector, however, it is another story.

All Dried Up

According to CGC chief executive officer John Challenger, e-commerce has taken the brunt of the recent tech industry slide, in large part because of the nature of e-commerce funding. Because e-tailers have in many cases bet current cash flow on future potential, they often have no other course of action to save money besides layoffs.

“If you don’t have money coming in to support costs, you don’t have the revenue to pay your people,” Challenger told the E-Commerce Times. “Other technology sectors have more viable revenue streams.”

Strategic Research Advisors managing director Paul Ritter agreed with Challenger.

“Many of these other high-tech sectors have far more corporate investors involved who realize there’s a strategic reason for being involved in the company,” Ritter said. “Unlike the venture capital investors, who feel they need a big immediate financial payback more so than a strategic payback, corporate investors have better reasons to wait 5 to 10 years for a big payoff — they see it as a more long-term investment option.”

Venture Lost

Higher expectations from venture capitalists also tell e-tailers that unless they generate income from revenues, there is very little chance that they will get new infusions of cash that could help forestall layoffs.

“There is very little interest on the part of the venture capital community in making investments in firms that think they have a new way to sell products via the Internet,” Ritter said. “That era has come and gone.”

However, Ritter did add that “there is still interest in the ‘behind-the-scenes’ type of firms that help make e-commerce more efficient or that help e-commerce become more mainstream for a wide range of companies in different vertical markets.”

Too Quick?

Even e-commerce employers should be wary of a follow-the-herd mentality regarding layoffs as a solution to financial woes.

According to a recent report by the Gartner Group, e-commerce companies may be too quick to draw on job cuts as a solution. Gartner suggested that e-tailers focus first on making changes to information technology (IT) infrastructure, rather than slashing e-commerce programs to improve cash flow.

“There’s always multiple ways to get out of trouble,” Ritter said. “Increasing revenues is the preferred option if it’s possible, but it can’t happen as quickly as some of these companies need it to happen.”

Ritter added, “Layoffs become the de facto answer, but they may not always be the right answer.”