AI Is Not Why They Are Cutting (Yet)

Back in 2000, the rule of thumb at Microsoft was that each employee needed to average roughly $600K in top-line revenue. Inflation adjusted, that is about $1.1M to $1.2M today. Microsoft was a high-margin software monopoly at peak, so it is not a universal benchmark, but it gives a sense of what disciplined operating leverage looked like even at a company printing money. Over the last decade, and especially during the COVID-era zero-rate and QE environment, many companies responded to dysfunction by hiring around it instead of fixing it. Cheap capital reduced the pressure to make hard operating decisions. Necessity is the mother of invention, but cheap money suppressed that necessity for a long time. Then two things changed at roughly the same time. Rates went from zero to five, and Section 174 of the tax code stopped letting companies expense software developer salaries in the year incurred. The R&D amortization rule from TCJA kicked in for the 2022 tax year, forcing five-year…