Understanding Google’s Alphabet


The news of Google becoming Alphabet has elicited reactions more vociferous than Marge and Homer’s split-up, Superman losing his iconic undies or the Red Wedding. Many are attributing it to Larry Page and Sergey Brin’s desire to focus on larger game-changing “moonshots” and free themselves up from day to day operations. As awesome as it sounds that the two original Jedi have set off on another world changing adventure, this is unlikely to be the triggering reason. The founders have been said to be hands-off when it comes to routine operations and Sundar Pichai has been at the helm of most of Google’s core offering for a while now.

So what does Google… I mean Alphabet (this is going to take some getting used to) stand to gain form this move? More importantly, what are the challenges they must prepare for?

The benefits

From Kingdom to Empire
With a market cap approaching half a trillion dollars and more than 57,000 employees worldwide, Google growth has been phenomenal to say the least. More importantly their horizons are not close to depleted. With the pursuit of “moonshots” and a bullish market, they are very much in conquest mode. As with all Kingdoms having grown past a critical threshold, an Empire must emerge. Territories must be marked out and competent leaders must be empowered to rule with less frequent oversight. It was never a question of “why” but a question of “when”.

Apart from rising difficulty for a single leader to manage an overstretched Kingdom, there is also issue of inducting and retaining senior talent and newly acquired companies. The reality is that one Kingdom isn’t enough for the egos of several rulers/entrepreneurs. Fitting the founders of multi-billion dollar acquisitions in the middle of Google hierarchy would be a sensitive discussion. Imagine a Tesla acquisition by Google; what Google title would be acceptable for the likes of Elon Musk without rocking the boat? Plus, with the aggressive rate of acquisitions managing firm cultures becomes hard under one umbrella and varied groups need to be given room to culturally differ. The new structure allows for several Kingdoms to coexist with egos intact and passions untarnished.

Essentially, in terms that everyone understands: Larry and Sergey will move to King’s Landing, our universally liked Sundar has become Warden of the North while Marrisa Myers waits patiently across the bay for her dragons to grow.

*Note to Sundar: Please refuse all invitations to visit “King’s Landing”.

Fewer Shadows
All products differ in their contribution to Google’s value. Some bring home the bacon, some contribute to Google’s omnipresence and wow-factor, some promise to keep Google relevant in the future while others show a glimmer of fundamentally changing the course of mankind while giving Google a quantum leap.

Whatever the pecking order of these may be in the eyes of Google’s key stakeholders, the fact is that comparisons will always be made. Some products and teams will always live under the shadow of their more favored sibling in terms of spotlight granted, leadership attention, resources allocated and influence. While regular portfolio reviews will and should not be avoided under the Alphabet regime, reducing the frequency and ensuring it doesn’t happen on a daily basis could prove a healthy environment for the younger products to thrive.

Compartmentalized Risks
For one, Investment analysts and bank are rejoicing. Can you Imagine having the come up with the Weighted Average Cost of Capital of an enterprise which is partly into advertising, partly into manufacturing mechanical horses and partly into elixir-of-life R&D? But more practically, this allows for a clearer assessment of risk of the underlying business and makes financing fairer within business units. Previously, debt that could be raises by the more stable, lower risk side of Google would theoretically be disadvantaged (both on rates and principle amount advanced) by their association to the riskier moonshots that they have little to do with operationally.

It also provides each business unit additional insulation from the operating and reputation risk other business units. As Google’s disruptive ventures step on more toes and face legal and tactical competitive adversity, the operations and brand of the core products need not get dragged through the mud.

Focused Mandates
Larry Page himself states in his memo that “greater focus” was a key rationale to creating a new holding structure. The benefits will be felt by senior management as their goals and objectives can be more focused, most so for the leadership of core-Google. Google as a core company now has a clearer understanding of the market and product genre they are playing for and it can galvanize its entire being to propel in that direction. It no longer needs to be distracted on a regular basis by the question “are we missing something else?”. There’s are other entities in the family which constantly think about that now.

Clearer Financial Accountability
Whereas managerial accounting probably gave Google a good estimate of this even before, it could become murky when dealing with shared resources, management time commitment etc. The separation of books will be able to make more accurate financial decisions.

Challenges

Entrepreneurship at risk
While more focused mandates clearly have their benefits, the other edge of this sword is one Alphabet needs to watch out for. Previously a Product Manager at Google Hangouts could get up and say he has a cool idea for a robotic dog which he wants to make happen at Google. Google is famed for fostering passion projects and making generous allowances for it. However, should the new streamlined-focus approach be enforced, there would be added scrutiny on whether that’s within their jurisdiction or another Alphabet company. Granted, there is no way Google scraps these entrepreneurship initiatives and it will make all efforts create an adequate collaboration model between sister companies, but Alphabet will need to find the right balance or risk confusing its staff on which of the conflicting rules takes priority (i.e. do what you want or follow your focus area).

Brand dilution risks
While commentators and analysts have been saying a lot about this being a talent retention move, there is equal reason to worry about the talent situation at Google/Alphabet. When someone assessed Google before, they saw a company which was doing multiple amazing things. You joined an organization where anything was possible. Now they would be joining a company where anything is possible, but within limits. There would obviously be collaboration and resource movement within sister companies but with an added layer of friction. Even if ever so slightly, these thoughts will creep into the minds of candidates as they start analyzing whether its better to get involved in Google where the core products are or would growth be more aggressive at a moonshot company or would professional clout be most closer at the corporate HQ at Alphabet? What brand would work best on my resume? These questions are bound to lead to some level of brand cannibalization within the brands.

Even more dangerous is the loss of brand synergies across products if non-Google names start to rise at alphabet; the omnipresence factor would suffer for sure.

Red tape 2.0
Another kink that will need to be ironed out at some point is spooling with HQ. While the split will help speed operations of Alphabet companies in many aspects due to increased autonomy, certain types of activities could get more cumbersome. For instance, M&A activity is likely to have some teething issues. Google has made over 180 acquisitions till date to fuel its tech and operations across virtually all divisions. Now there will be a scenario where several semi-independent entities will be conducting M&A activities of their own in parallel and potentially vying for the same capital pool.

The level of collaboration and support between portfolio companies will also depend largely on the KPIs reset. If they are too focused on each leader’s own portfolio company then the incentive to support another Alphabet entity would be dampened.

Competition
While Google is currently one of the strongest and most prestigious organizations in the world, such an ostensibly major change will create some ripples internally and with other stakeholders. No one believes that a change of name will put the fate of Google in a drastic situation. However, if the confidence in their vision and brand perception even drops a few mere points, it makes for an opportune moment for competition to strike. It may come in the form of enticing slightly confused talent or a series of parody ad campaigns.

Perhaps those dragons are big enough after all…

__________________________________________________

Sameer Noorani is the Founder of Roomvine and Hoodere, a management consultant and a McKinsey alumnus. Follow him on twitter @sameernoorani

Show your support

Clapping shows how much you appreciated Sameer Noorani’s story.