The brutal metric companies are using to show their AI bets are justified

• Jack Dorsey's announced that Block was cutting about 40% of its staff. It could be a sign of what's to come.
• Some workplace observers say they see leaders conducting layoffs to signal that AI investments are paying off.
• There is a chance that companies could cut too deeply, risking the loss of critical skills.

AI can do a lot. Showing it's paying off is another matter.

As companies pour billions into AI, Wall Street is seeking evidence that those bets are worthwhile — and many CEOs are feeling the pressure.

In response, some are offering a simple proof point: They need fewer workers to get the job done.

The most recent example of a CEO cutting workers en masse while talking up AI's transformative power is Block cofounder and CEO Jack Dorsey. On Thursday, he announced plans to lay off about 40% of the company's workforce, shrinking it from more than 10,000 employees to fewer than 6,000. He said the move comes even as the company remains healthy and profits continue to rise.

Investors cheered the move, sending the company's shares up more than 16% on Friday.

Block isn't alone in tying cuts to AI. A number of companies, including Salesforce, HP, and IBM, have identified gains from the technology as a reason for needing fewer workers.

Measuring productivity

In the absence of standardized metrics demonstrating AI productivity, job cuts are becoming an easily digestible signal to investors.

The cheapest way for a CEO to boost a company's stock price — and to signal readiness to capitalize on the AI boom — is to conduct a "noisy round of layoffs," Michael Blank, assistant professor of finance at the Stanford Graduate School of Business, told Business Insider.

Doing so, he said, can indicate that a company's integration of AI has progressed to the point where it's past experimentation and that its employees can now get more done with less coworker support.

Blank said that weakness in the labor market means it would likely also be easier for an employer to rehire for roles that a company finds out aren't as easy to replace with AI as it had hoped.

It's often otherwise difficult for companies to clearly articulate how they're getting benefits from AI, Gary Cohn, the former director of the National Economic Council, told CNBC on Friday.

"The one KPI that they can tell you is 'We've cut heads,'" he said.

"We've sort of made the world synonymous with, 'I'm using AI, therefore I need less heads.' I ultimately don't think that's the truth," Cohn said.

That doesn't mean every company has actually remade their operations thoroughly enough for automation to fully replace their workers, of course. Some observers are skeptical that massive job cuts are purely the result of an AI windfall.

"Block must have uncovered a secret sauce, perhaps within the software development process, to claim all of these jobs are AI-related," Jason Schloetzer, a business administration professor at Georgetown's McDonough School of Business, recently told Business Insider's Sarah E. Needleman.

"From the dozens of executives across industries that I've spoken with about AI deployment, they certainly aren't seeing these types of gains outside of the software development process," he said.

Block didn't respond to Business Insider's request for comment about whether the layoffs were, at least in part, intended to demonstrate fiscal discipline to Wall Street.

During Block's earnings call on Thursday, Dorsey said the company is a leader in efforts to use AI to produce efficiency gains — a posture he expects "all companies will eventually" adopt.

An AI expansion?

There can be good reason for slimming down company ranks. Alexandra Mousavizadeh, cofounder and co-CEO of Evident, which tracks AI use in the financial sector, said that if a company is carrying too much "weight" — too many engineers, for example — it can make sense to build with a leaner team.

"Transformation does not necessarily need huge volumes of people, but it needs the right people," she told Business Insider.

At the same time, Mousavizadeh cautioned, companies sometimes need to cut costs for other reasons — and AI can become a convenient rationale.

Ultimately, she said, few companies have fundamentally remade their workflows to the point where they can run with minimal supervision. Most organizations that are ramping up their AI deployment "are, in fact, hiring rather than firing," Mousavizadeh said.

Jeff Fettes is also seeing this. He's the CEO of Laivly, a company that uses AI agents to support customer service work for Fortune 500 companies.

Fettes said that for some customers who have made AI work, the result isn't fewer jobs. In some cases, it's the opposite: Clients that have used AI to boost sales, for example, often want to expand those teams, he said.

"Why wouldn't you invest in more salespeople now? Because AI is helping them to deliver at scale in a way that they weren't before," Fettes said.

The risk of cutting too deeply

Companies contemplating layoffs in the name of AI — or simply because competitors are doing so — should tread carefully, said Wayne Cascio, a distinguished professor of management emeritus at the University of Colorado Denver who has studied corporate downsizing.

He told Business Insider that companies frequently cut too deeply — and too quickly — only to realize later that they've eliminated critical skills and institutional knowledge.

"Then what happens is companies wind up hiring back many of the very people that they laid off," Cascio said.

That can result in companies needing former employees to return as consultants or full-time workers.

Cascio noted that a typical corporate downsizing trims about 10% of the workforce. Anything above 25% qualifies as "extreme," he said.

Dorsey is cutting almost half his workforce, Cascio said. "That's double-extreme."

Do you have a story to share about AI's effect on your career? Contact this reporter at tparadis@businessinsider.com.