Tech Firms should go by Price's Law if Layoffs are a must

Staff reduction calls are easier to take if half the work is done by the square root of all those on a project

The site Layoffs.fyi  tracks the number of layoffs across industry. The site is administered by Roger Lee, founder of HumanInterest, a San Francisco-based startup which focuses on employee retirement solutions for the US. Layoffs.fyi offers a comprehensive list of tech firms that have been laying employees off since covid-19.

Given the sheer number of tech sector layoffs that have been announced over the last few months, I thought it would be more useful for me to go to this site to understand overall numbers and trends rather than compile them by myself. I found that 380 tech firms have laid off approximately 109,000 employees in the 50 days since the start of this year. This is in addition to the 1,045 tech firms that laid off around 161,000 last year. If we were to continue to see the same rate of layoffs through the rest of 2023, the tech sector is on track to layoff about 800,000 people this year, or about 500% of last year’s layoffs!

So what of the unfortunate 270,000 whom Layoffs.fyi has been able to track? I wondered if perhaps these firms had been methodical while deciding whom to lay off or whether they had just done so willy-nilly, just as they no doubt hired them when covid seemed to indicate that unbridled growth in all things tech was here to stay. Today, I will dwell on two methods useful for managers who are retrenching their staff.

The first is General Electric (GE)’s ‘Rank and Yank’ firing policy, which was a performance evaluation system that required managers to rank their employees from top to bottom based on their performance. The employees who fell in the bottom decile (i.e. the lowest 10%) were then fired or forced to leave the company. While the policy was praised for promoting competitiveness and high-performance, it was also criticized for its nasty effects on employee morale and job security. Many employees were demotivated and stressed, knowing that their job security depended on their ranking. The policy also led to employees competing against each other instead of collaborating. GE itself yanked the policy in the mid 2000s, citing a need for better teamwork and collaboration.

But what is far more interesting and caught my eye than the mundane (and often patently unfair) ranking of employees before firing them is Price’s Law (or more accurately, Price’s Square Root Law) named after the British physicist Derek Price. Price lived from 1922 to 1983, and in addition to being a physicist, was a keen historian of science and an information scientist.

Price made a unique observation about his peers, who he noticed were making very small contributions to their field, which came to be called ‘Price’s Law’. Simply put, Price’s Law states that 50% of all work will be done by the square root of the total number of people who take part in the work. Let me make this patent with a couple of simple examples: If you have four workers on a project, then two of them (square root of four) do half the work. This is okay, but by the time you have 100 workers on a project, Price’s Law posits that 50% of the work will be done by 10 of them, as the square root of 100 is 10.

Price’s Law specifically applies to creative work. Meaning the creation of something ‘new’, like new products, ideas, software, music compositions, artwork, writing and the like. I would add the selling of management consulting projects to this list. It is a creative art like no other.

While this is not a mathematical truism or scientific fact and a closely related law called Lotka’s Law is considered more accurate, it is nonetheless an astute observation of the state of affairs inside large firms. As a company grows, incompetence grows exponentially and competence grows linearly. Sound familiar? Price’s Law also scales.

Using that information, let us take the case of tech company X that has 200,000 employees. In this instance, 50% of the work output (let’s say sales in this instance) will be produced by 447 employees. The room for rationalization is vast, if one were to reallocate half the work that is being done by the remaining 199,500 or so. With this method adopted for layoffs, imagine the scope of restructuring that could be undertaken by the management!

Yes, of course I am being extreme in order to make a point, but then again, there is truth in jest. One interpretation of Price’s Law is that there are certain individuals who possess a level of talent, skill or expertise that far surpasses that of most other people in their field. These are the individuals we refer to as ‘superstars’ or ‘top performers’. Managers who are aware of this quasi-statistical distribution of success can work to improve the productivity of their charges and increase their team’s chances of becoming top performers.

Brainlid.org, a blog run by Mark Eriksen, also muses on Price’s Law . Eriksen is a specialist in Elixir, a programming language. According to Brainlid, when a company of 10,000 people has poor performance over a couple quarters, the 100 odd talented people who have other employment options leave. They are the ones doing half the work. And when another round of layoffs comes, the next set of top performers leaves. This puts the company into a death spiral, says Brainlid.

The first two months of this year have been rough for tech employees. Let’s see where it all ends up.

Siddharth Pai has led over $20 billion in technology transactions. He is the founder of Siana Capital, a venture fund management company focused on deep science and tech in India. These are opinion pieces; the opinions expressed are the author's own and do not represent any entity.

This article first appeared in print in Mint and online at www.livemint.com

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