Google Parent to Ask Subsidiaries to Pay for Corporate Services
November 23 2015 - 7:50PM
Dow Jones News
Google parent Alphabet Inc. is moving to make its disparate
parts more accountable internally for spending, according to people
familiar with the matter, in an effort to ensure that its more
speculative projects are self-sustaining.
Under the new system, "bet" companies such as Google X, Google
Fiber and Google Life Sciences will be charged for using corporate
services such as computing, recruiting and marketing, the people
familiar with the matter said.
The changes are part of Google's transformation into a
conglomerate, which took effect in August but won't be reflected in
financial statements until next year. The people familiar with the
matter said executives hope to make the bet companies more
accountable for their costs, which may lead to more caution on
spending.
The reorganization has two goals. Alphabet Chief Executive Larry
Page wants to boost spending on new technologies that will take the
company into areas such as transportation, communications and
health care. At the same time, Mr. Page and other executives want
to assure Wall Street that Alphabet is spending responsibly.
"After a period of big expense build up, there was an
appreciation that we needed to manage the cadence of spend," Chief
Financial Officer Ruth Porat told investors in an October earnings
call. Ms. Porat has been instrumental in efforts to curb spending
since joining the company in May.
There is little consistency in how other conglomerates handle
such issues. Subsidiaries of Berkshire Hathaway Inc., in businesses
such as insurance, transportation, retail and manufacturing,
largely run independently. Berkshire itself provides very limited
centralized services.
By contrast, General Electric Co. in recent years has built a
6,000-person "shared services" organization to handle functions
like sourcing, finance and legal work across businesses such as jet
engines, power turbines, locomotives, medical scanners and
lightbulbs.
Under Alphabet's new system, leaders of the bet companies will
have more freedom to develop their own services in areas like
recruiting and marketing. The companies will still be able to tap
Alphabet's services, but they will have to bear the cost
internally.
Google's recruiting operation, for example, employs hundreds of
recruiters and handles millions of job applications a year. It also
manages an internal-transfer system. For bet companies looking to
expand and hire, access to this service may be important. If
companies choose to use their own recruiting team and try to hire
from elsewhere at Alphabet, they won't get access to the
internal-transfer network, according to one of the people familiar
with the plan.
Alphabet may want the bet companies to use its computer network,
because it is likely more efficient than anything the companies
could create on their own, one of the people said. Alphabet will
charge bet companies based on an estimate of what they would pay to
buy the service elsewhere.
Another goal is to create financial statements that can be
audited for each business, making it easier for them to be spun off
or separated from Alphabet in the future, one of the people
said.
Long term, Alphabet hopes to be a family of companies that
offers efficient, centralized services to help entrepreneurs grow
businesses faster, another person familiar with Google's thinking
said.
Some bet companies have established considerable independence.
For example, Nest, which makes Internet-connected home devices, has
its own legal and marketing teams and rents computer services from
Google rival Amazon.com Inc. Other new businesses, such as Google
Life Sciences, the self-driving car project and Sidewalk Labs, a
municipal communications effort, have been hiring aggressively with
long-term goals of becoming independent. "We are very much thinking
they will continue to grow and be independent entities," Ms. Porat
said in October.
Write to Alistair Barr at alistair.barr@wsj.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires
(END) Dow Jones Newswires
November 23, 2015 20:35 ET (01:35 GMT)
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