GOOGLE has been a verb in the Oxford English Dictionary since 2006, has a market cap in the region of $445bn (£393bn) and deals with a hundred billion searches every month. But in the years since the search engine launched, Apple – that other tech giant – has brought the iPod, iPhone and iPad to market. Google’s own attempts at disruptive technology – or so-called ‘moonshot’ projects – have failed to deliver the same level of financial returns as its search engine business.
In an attempt to spur innovation within its disparate ventures, Google announced in August that it would restructure and rebrand itself as Alphabet, a new holding company which will oversee eight businesses, including a “slimmed-down” version of the search engine Google.
Google, known for its nap pods and multi-coloured bicycles, is going conventional. In a surprise blog post made public after the stock markets had closed, Larry Page and Sergey Brin, Google’s co-founders, revealed the business is to radically restructure itself and embrace a conglomerate model akin to Warren Buffett’s Berkshire Hathaway.
Stifel analyst Scott Devitt went so far as to label Google the “Berkshire Hathaway of the Internet” in a note to clients. And Google’s new structure supports the decentralised structure so favoured by Buffett, while capital allocation will also be dealt with from on high.
Indeed, Page had earlier told a group of shareholders that he saw Buffett’s multinational conglomerate holding company as a business model to aspire to. In his letter announcing the restructure, Page wrote that his and Brin’s job will be to “rigorously handle capital allocation” and, like Buffett’s independent business units, they will be run by “a strong CEO”, with Page and Brin “in service to them as needed”.
“This new structure will allow us to keep tremendous focus on the extraordinary opportunities we have inside of Google,” Page said in the blog post, adding that the business would grow its investment arms, Ventures and Capital, as part of the new structure.
And investors, concerned over how the founders have used the search engine cash-cow to fuel riskier bets on things ranging from developing robots, self-driving cars and studying life sciences, welcomed the news as Wall Street sent its shares up by 6% on the announcement.
However, not everyone is convinced that the Buffett analogy holds up – he is first and foremost a stock picker whose independent businesses are all expected to deliver medium-term profits – or that the re-organisation will change the basic problem Google is facing.
“Innumerable acquisitions made by the company over the years and its bold ventures to new industries have so far failed to create commercial success at the scale of its search advertising business. Google is commercially still a one-trick pony,” says Dr Aleksi Aaltonen, assistant professor at Warwick Business School.
“The holding company structure may help Google to create more successful products. This can happen, for instance, if increased investor pressure imposes a healthy short-term perspective to product development or by simply allowing separate business units to operate more independently towards commercial success. At the same time, the holding company structure raises the question would different businesses be better off as independent companies. The new structure makes it easier both to sell off assets that won’t start making profit in a foreseeable future and to spin off ventures that don’t belong to the family.”
Something to prove
Whether or not the new structure will spur the innovation Google’s founders hope for, one thing is clear: newly installed CFO Ruth Porat will be key in driving the organisational change required if the project is to succeed. Porat, a veteran of Wall Street who spent nearly 30 years at Morgan Stanley, most recently as CFO, will bring a level of financial discipline not hitherto seen at the business, investors hope.
“This perception of a real, hard-nosed woman who has something to prove – I think that inspires confidence,” Gene Munster, an analyst with Piper Jaffray, told Bloomberg at the time of the company’s second-quarter results.
That was before the restructure was announced. Under the new umbrella, Porat will be chief financial officer of both Google and Alphabet and will be the only executive with a foot in both camps.
“The CFO has a key role to play in understanding what the business is trying to do, what it is going to cost, what tools and funding are in place to support that, and how it is going to be measured and assessed,” says David Bailey, director, CFO practice at executive headhunters Norman Broadbent.
Anna Bateson – an Institute of Directors course leader for leading strategic change who runs her own consultancy, Cutting Through the Grey? – posits that Porat will have to “serve two masters”.
“Porat will need to look at the metrics that work within the streamlined Google and what will be reported up to Alphabet, which ought to be looking at things that give the business a durable competitive advantage,” she explains.
That will come down to metrics on how to retain talented and innovative individuals within the business. A task Bateson suggests could prove challenging for CFOs when leading a change management programme. She says there will be “tensions” between managing investor and employee expectations. Adopting a conglomerate model with a series of autonomous business arms might sound convincing to investors, but it could prove difficult for employees left behind in the core, cash-generative business which is being used to subsidise creativity in other parts of the group.
“They will have to work very hard to preserve collaboration across those boundaries and not become incredibly competitive,” Bateson says, and points to GlaxoSmithKline, which decided to increase creativity in its drug pipeline by allocating resources based on how convincing the business cases were.
“As an unintended consequence, leaders fought very hard, but not on a basis of the drug discovery’s likelihood of success but on the leaders’ negotiation skills. The money didn’t follow the science,” she explains.
All of this highlights the CFO’s more empathetic role in managing organisation-wide change. Indeed, change management programmes often include a level of cost-cutting and job losses. But, John Lunn, partner at change management consultants, Moorhouse, doesn’t think CFOs necessarily need to enter the “soft” space of HR, but adds that numbers can’t be the only focus.
“There has to be an awareness and empathy as to what it takes to successfully deliver change and part of that is also how to handle risk. Anyone can put in place a mechanism to avoid mistakes being made, but the problem with that is you just lock down change and lose that agility,” he explains.
Although CFOs are so often the arbiters of cost-cutting programmes (often branded under the more cuddly auspices of change management), the reality is that cost reductions are often just the precursor to more radical, growth-oriented organisational change.
Tony Chanmugam, the CFO responsible for cutting £4.7bn from BT’s balance sheet in four years between 2008 and 2012, earned himself a fearsome reputation as an axe man. During his six years as CFO, he has slashed capital expenditure, dramatically reduced BT’s cost base and, within months of taking the role, cut 15,000 jobs. But while Chanmugam was focused on cost reduction, BT was working out what to do with the money that had been secured. What it did was make some sizeable bets that will have yet to deliver on the balance sheet, which sounds not that dissimilar from Google’s investment bets.
“It might take a long time for BT’s strategy to be realised but it has already demonstrated a return in terms of a shift of the operating model,” Lunn says.
A typical FTSE 100 CFO will be more focused on the growth than slashing costs, but successful change management comes down to a combination of both.
“Cost cutting is finite and you can only go so far. There has got to be reason for trying to be cost effective and if the reason is just to save money, that’s a limitation,” says Bailey at Norman Broadbent. “If the reason is to better serve your customers and return shareholder value then you’re on to something compelling and a bit different.”
CFOs can often forge a stellar career on the back of being a turnaround expert in organisation change, but more important is having experience as a steward, strategist and business partner.
Bailey explains: “The day job is the stewardship element of control and that means it’s pretty difficult to get a plc CFO role if you haven’t done some sort of control element in your career. The second element is strategy and that might be strategy for growth or survival, but it’s about having had a track record in strategic, rather than tactical change. And then business partnering – that’s about taking stewardship and strategy and how they work in a delivery environment.”
Tone from the top
Ultimately, CFOs running change management programmes will be judged on their ability to deliver that change efficiently and effectively. That can include “crunchy” commercial metrics and a “wonderful return on investment”. But, according to the IoD’s Bateson, “the thing that preserves value in your business is going to be the creation of a tone from the top”.
And, if you’re trying to preserve innovation, one of the biggest problems is the way in which the CFO judges performance. Indeed, in the case of Google, reporting is going to be on financial metrics.
“Page is talking about rigorous capital allocation and metrics on business efficiency and effectiveness, and segmentation reporting and compensation based on results. He wants to make sure they are executing well. All of their words drive the fact that they focusing on the financial areas of a balanced business scorecard,” says Bateson.
However, metrics need not be purely financial. Lunn at Moorhouse points to the example of BA. When it acquired BMI, the benefits case of that was partly based on the fact that BMI had a landing slot at Heathrow. But BA got a number of other benefits out of that acquisition – its customer base, operational efficiency and the way it reorganised itself
“What BA was doing was part of the creation of IAG and a holding model, which meant it could add Iberia and Aer Lingus. What happened on that BMI deal is that BA was specific at the beginning of that change about what the outcomes would be – some were financial; others weren’t. It ran the change programme against those outcomes,” says Lunn.
According to Lunn, BA decided what it was trying to do on each of the new businesses it was trying to set up. “It defined some lower-level outcomes. Some might be a bit subjective but it had them defined and had that as the measuring focus through the lifecycle of the change programme and beyond.” BA is still measuring those outcomes – sometimes in a proxy way – years after the programme finished.
Like Porat, who is serving two masters, CFOs must understand they will be judged both internally and externally. Externally the judgement is more likely going to be black and white – based on things like shareholder value, the share price, the ROI.
“That’s fairly binary: what are analysts writing about you, how did you communicate that change? That’s a big part. Internally and from other stakeholders, the judgement will be more holistic and be about whether the CFO has created a clear and compelling vision of how finance department supports the evolving needs of the business,” explains Bailey.
“If you’re not running your department in a way that is geared up to support that – well, that’s not optimal. You need to have created a vision.” ?