Alphabet, the Google parent, is set to have their corporate services paid for by subsidiaries. It has stated that accountability on spending has to come from ‘bet’ companies. The move is designed, as such, to make the internal Alphabet departments, which are currently very disparate, more accountable on how their money is spent. In so doing, it aims to ensure speculative projects within the company will become self-sustaining.
‘Bet’ companies within Alphabet include such things as Google Life Sciences, Google Fiber and Google X.
Alphabet wants to ensure that more speculative companies are self-sustaining and therefore is making them more accountable for spending. These “bet” companies, including Google Fiber, Google X, and Google Life Sciences, will now be charged for using corporate tools such as recruiting, marketing, and computing. Alphabet hopes that these efforts will help the entire company slow its spending down.
Since the launch of Alphabet, it seems that Google is trying to become a true conglomerate. This started in August 2015, but the financial statements will only show its effects in 2016. Executives hope that the bet companies within Alphabet will be able to become more accountable for the costs they incur. It is likely, therefore, that some caution on spending is being required within the global giant.
In fact, there are two specific goals within the reorganization. Larry Page, who is the Chief Executive of Alphabet, wants to make sure new technologies receive a boost in spending. This will enable Alphabet to get involved in health care, communications and transportation. Secondly, however, they want to make sure that the world knows that their spending is done in a responsible manner. This was also explained by Ruth Porat, the Chief Financial Officer for Alphabet, in an earnings call in October 2015.
After a period of big expense build up, there was an appreciation that we needed to manage the cadence of spend.
Porat, who joined Alphabet in May, has been working very hard to curb spending and is known for her efforts to increase transparency and accountability alike.
Unfortunately, financial management within global conglomerates is inconsistent. Consider, for instance, the conglomerate Berkshire Hathaway Inc. They focus on manufacturing, retail, transportation and insurance. Berkshire Hathaway Inc. enables almost all its subsidiaries to run independently. Very few centralized services are actually provided by Berkshire Hathaway Inc. itself.
This is in stark contrast to another conglomerate, General Electric Co. Over the past few years, they have created a ‘shared services’ organization employing some 6,000 individuals. These shared services look at areas such as legal work, finance and sourcing and they do so for all the General Electric Co. subsidiaries, which include light bulbs, medical scanners, locomotives, power turbines and jet engines, to name but a few.
As such, there is no rule to say that Alphabet should manage their finances and shared services in a certain way. However, it seems that they have decided on a specific new system and they will be sticking to it. Under this system, each subsidiary will have far greater freedom. If they so choose, they can develop their own marketing and recruitment services, for instance. Alternatively, they can decide to use the shared services provided by Alphabet, but they will need to budget for that cost out of their own revenue.
One subsidiary that is very enthusiastic about this new system and is already using it to their advantage is Tony Fadell’s Nest.
Tony Fadell’s Nest may be the clearest beneficiary of the new corporate structure. Since selling his connected-device startup to Google nearly two years ago, the former Apple exec has reiterated, again and again, that his company — and its data — operates independently from the search behemoth. Alphabet gives him good cover.
Nest was one of Alphabet’s biggest acquisitions and the investment needs to pay off. Nest has already experienced significant growth, particularly in the number of members of staff employed within it. Revenue growth, however, is questionable to say the least, although this may be because financial statements have not been released yet. Alphabet remains confident that Nest, the smart home of the future, is a lucrative project and that the new system will ensure its finances are up to date and open.
Looking at the the recruiting operation for Google, as an other example, it can be seen that there are hundreds of members of specialized recruiters on board. They are needed to deal with the millions of applications they receive each year. Within the same operation, an internal transfer system is also managed. If a bet company is trying to grow and therefore needs more staff, it could be very important for them to make use of this service. Naturally, they can also choose to create a recruiting team of their own, recruiting either within Alphabet or even outside of it. Choosing to do so may be cheaper, but it also means that they cannot access the internal transfer network, which is generally where the real talent lies.
It is believed that Alphabet will expect all its bet companies to stick with the same computer network system. This makes sense, as Alphabet is far more efficient at that than what any bet company would be able to come up with themselves. Insider sources have said that bet companies will be charged for the computer network system, however, and that the price will be an estimate of what the bet company would pay if they were to purchase a computer network service elsewhere.
Accountability and transparency are hot topics for Alphabet. They want to make sure each business individually can be audited. This will enable them to either separate the bet company from Alphabet, or to create a spin off. In the long term, the goal is clearly for Alphabet to be a parent of a large family of companies, each of which is individually efficient. In so doing, they expect that entrepreneurs can create faster growth.
Returning to Nest, it is clear to see why Alphabet wants to use this as an example. The company, while reliant on Alphabet, is also highly independent. Its computer service, for instance, does not come from Google but rather from Amazon.com Inc., which is actually a rival. Looking at other elements of Alphabet, like Sidewalk Labs and Google Life Sciences, it seems that they are also pushing towards greater independence. And this is exactly what Alphabet is looking for.
We are very much thinking they will continue to grow and be independent entities.