What’s causing corporate layoffs and how to prevent them

Layoffs are often framed as a blunt reaction to market downturns or missed revenue targets, but if you’ve ever been inside the room where the decision is made, you know the story is rarely that simple. Cuts are almost always the final chapter of a longer narrative—a narrative that begins with invisible fragility in the way teams are designed, decisions are sequenced, and expectations are managed. When we treat layoffs purely as a financial necessity, we miss the more revealing question: what in the system made them unavoidable?

The most common misconception is that layoffs are an external problem first. Leaders point to macroeconomic shifts, investor pressure, or industry-wide demand drops. These are valid triggers, but they act like a match striking a dry field. The real fuel—the thing that allows the spark to catch—is internal. Often, it’s a pattern of hiring without structural clarity, expanding functions without verifying their alignment, or assuming growth will make complexity easier to handle rather than harder. The organization becomes a bigger version of its early self, with all the same fragilities amplified. When market pressure hits, that fragility has no buffer.

Consider a common growth-stage arc. A company raises a large round, with investor expectations tied to aggressive expansion. Hiring accelerates, sometimes doubling or tripling headcount within a year. The recruitment logic focuses on filling perceived gaps—more engineers for product velocity, more marketing staff for customer acquisition, more managers to handle the new volume of people. On paper, each hire is justified. In reality, the connective tissue between these hires is weak. Role boundaries are unclear, spans of control are inconsistent, and accountability flows through personalities rather than through process. In the moment, this feels like speed. Over time, it’s system debt.

That system debt shows up in subtle ways long before layoffs appear on the horizon. Meetings become more about alignment than execution. Cross-functional projects stall because no one can make a decision without looping in three other teams. Performance reviews reveal entire roles that are only loosely tied to the company’s most critical objectives. Yet, because revenue is still climbing and funding is still in the bank, the friction is tolerated. Leaders mistake momentum for resilience.

The breaking point often comes when the external environment changes. It could be a downturn in the broader economy, a major customer loss, or a funding climate that shifts overnight. Suddenly, the runway looks shorter, and the investor narrative flips from “grow faster” to “extend cash.” At this stage, the operational flaws that were once masked by growth become painfully visible. Leaders see bloated layers of management, duplicated work, and functions that no longer map to near-term priorities. The instinctive response is to cut headcount, but the deeper problem is that the structure was never built to withstand pressure in the first place.

In these moments, founders and executives often rationalize the decision as purely financial: “We had to cut 15% to align with revenue.” That’s accurate at the surface level, but if you ask why that specific 15% existed in the first place, the answer is rarely “market forces.” It’s more often “we scaled roles faster than we scaled clarity,” or “we designed teams for a future we never reached.” Those are design problems, not just budget problems.

Another pattern I see is the over-reliance on what I call “person-based systems.” This happens when the functioning of a team depends heavily on the unique skill set, institutional knowledge, or hustle of specific individuals rather than on well-defined processes. In small teams, this can work; flexibility and personal ownership are strengths. In larger teams, it becomes brittle. When those individuals leave, are reassigned, or can no longer sustain their pace, the function collapses. During a layoff cycle, these brittle functions are easy targets—not because they’re unimportant, but because their value is hard to explain or replicate in a new structure.

Cultural narratives can compound the issue. Startups often equate “culture” with a sense of family or shared mission. That can be a powerful motivator in the early days, but when headcount swells and roles blur, it’s easy for leaders to lean on culture as a substitute for clarity. “We trust everyone to step up” becomes the default operating principle. The problem is that trust, while valuable, doesn’t replace defined priorities or resource alignment. In a downturn, trust doesn’t tell you which projects to pause, which markets to exit, or which layers to flatten. Without that clarity, layoffs can feel arbitrary internally, eroding the very culture leaders thought they were protecting.

Layoffs also tend to reveal the difference between role redundancy and role misalignment. In redundancy, you have two people doing substantially the same work, which is an efficiency problem. In misalignment, you have people in roles that no longer connect to the company’s current direction, even if they’re high performers. Misalignment is harder to talk about because it’s not about capability—it’s about fit. Leaders who avoid having these conversations early end up making them all at once during a restructuring, which is more disruptive and more damaging to morale.

From an organizational design perspective, the trigger for layoffs often starts with how growth plans are translated into hiring plans. If your growth forecast is aggressive, it’s tempting to hire ahead of demand in order to be “ready.” But readiness without validation is risk. You end up building capacity for a level of complexity or volume that might not arrive, and the longer you carry that overhead, the more painful it is to reverse. This is why some of the most stable scale-ups adopt a “validate then expand” approach—scaling systems before scaling people, and hiring in sync with confirmed, not projected, demand.

Another driver is the way decision rights are distributed. In a well-designed organization, authority and accountability sit at the right level for the decision’s impact. In a fragile one, decision rights are scattered or concentrated in ways that slow down action. This creates inefficiencies that require more people to compensate, inflating headcount without improving output. When cuts come, these inefficiencies make it harder to maintain performance with fewer people, because the underlying decision logic is still broken.

If we zoom out, the underlying causes of layoffs tend to cluster in three areas: structural debt from unclear roles and reporting lines, scaling ahead of validated demand, and cultural overreliance on informal systems. Each of these creates a form of fragility that is invisible in good times but brutally exposed in bad times. The external trigger—whether economic slowdown or investor pressure—merely accelerates the reckoning.

For founders and leaders, the preventive work starts long before any discussion of cuts. It means building role clarity that’s explicit and revisited as the company evolves. It means designing reporting structures that match the complexity of the work, not just the seniority of the people. It means setting hiring gates tied to measurable signals of demand, rather than to funding milestones or industry momentum. And it means embedding processes that make the team’s performance less dependent on individual heroics.

It also means having the discipline to run “what if” scenarios when times are good. What if revenue slowed by 30%? Which functions would you consolidate, and which would you protect at all costs? What if you lost your top three clients in the same quarter? Could you still deliver core value? These scenarios are not about pessimism; they’re about resilience. The companies that navigate downturns without mass layoffs are often the ones that already knew their pressure points and had a plan to adapt without cutting too deep, too fast.

When layoffs do become necessary, the way they’re executed matters as much as the decision itself. Poorly communicated cuts create lingering distrust and disengagement among those who remain. Overly drawn-out processes extend the period of uncertainty, which can be just as damaging as the layoffs themselves. Clear criteria, transparent rationale, and a direct connection between the cuts and the company’s revised operating plan help mitigate this. But these are damage-control measures. The real work is in building an organization that doesn’t need to rely on them often.

In my experience advising founders in Southeast Asia and the Gulf, I’ve noticed that regional context shapes the way layoffs are approached. In some markets, regulatory and cultural norms make large-scale cuts highly visible and reputationally costly. Leaders here tend to favor quiet attrition or redeployment, which can soften the immediate impact but also prolong structural inefficiencies. In other markets, at-will employment norms make layoffs faster to execute but risk eroding trust if they’re perceived as opportunistic. Understanding these dynamics is critical—not just for compliance, but for maintaining credibility with employees, customers, and investors.

The hard truth is that corporate layoffs are rarely caused by a single bad quarter. They are the culmination of design decisions, cultural patterns, and structural habits that, over time, make an organization less adaptable. Market shifts may set the timeline, but the groundwork is laid internally, often months or years before the cuts are announced.

For founders, the takeaway is not to fear growth, but to pair it with the same operational clarity you would demand in a crisis. Ask yourself: if we had to operate with 20% fewer people tomorrow, would our critical functions still run? If not, the answer is not to hire more now, but to design better systems that make the existing team more resilient. Growth is only sustainable when the structure can flex under pressure without breaking—and when your people know exactly how they fit into that structure.

Layoffs will always be a tool in the corporate toolkit, but they should be a last resort, not a default lever. By focusing on clarity, alignment, and validated scaling, leaders can reduce the likelihood of ever needing to pull it. Because the most successful companies aren’t the ones that never face downturns—they’re the ones whose systems are built to survive them.