When Google announced its reorganization under the Alphabet moniker this week, I was reminded of a somewhat popular business strategy called open-book management. There's certainly some upside to Google's Alphabet effort. But there are some big risks as well.
For those who missed the news: Google has reorganized. A holding company called Alphabet is the newly formed parent. Google -- and many sister companies -- will live under the parent's roof. The Google business will include all the big, revenue-generating brands you know -- search, YouTube, etc. The other to-be-named businesses will include various startup and moonshot initiatives -- things like Calico (HealthTech to fight age-related disease), Fiber (broadband access), Nest (smart home and IoT products) and more.
Sharing the Data...
Google and Alphabet CFO Ruth Porat has vowed to make sure Google is far more open and transparent when working with Wall Street. In theory, that means Alphabet will actually report profits and losses for each business in its portfolio.
That sounds great. Shareholders and employees, in theory, will finally know exactly how much Google is pumping into sister businesses -- along with the resulting revenues (if any) and the red or black ink for each effort. Moreover, the really big R&D efforts -- the moonshot efforts that can potentially change the world -- could involve huge sums of money, potentially scaring would-be rivals out of the market before they dare to counter Google.
So far, so good. At least for Google investors. It all sounds a bit like the open-book management style phrase that's been around since the early 1990s. Generally speaking open-book management ensures that every employee understands the business's metrics for success, as well as the business's performance against those goals. Moreover, the business shares financial information and critical data with employees. (Care to learn more? Check out the Open Book Management Conference, set for Sept. 9-11.)
Google predicts its Alphabet reorganization will have other benefits. Specifically, each business unit will be more nimble -- making decisions and innovating far more rapidly without the hassles of a big central corporate structure.
Now, the Downside
Overall, many pundits and Wall Street watchers have praised the Alphabet strategy. But I suspect all that cheering will gradually lead to a more balanced conversation -- especially as potential downside issues begin to emerge. Among the potential challenges:
- Business units and employees will have a clearer vision of how much money Alphabet is investing into each project. That can lead to resentment for projects that don't quite get the funding and talent headcount they want.
- Wall Street analysts and investors many complain about Alphabet business units that are a drain on near-term profits. While the Alphabet team wants to invest for the long-haul, Wall Street wants consistent earnings growth every quarter.
- While each business unit, in theory, can move more quickly without big corporate red tape, there's also upside to a more traditional centralized approach. Shared services -- corporate IT, marketing, finance, etc. -- often provide economies of scale. The business units will need to strike the right balance between running off on their own while also leveraging Alphabet's central talent and services.
- Google Envy: At the end of the day, the Google unit remains the cash cow. And the Google Unit employees could really resent the need to drive their own sales higher in order to fund projects in other business units. Imagine having to work harder and harder just to send more an more of your unit's money over to a money-losing cause down the hall. Painful.
Many of those potential downside challenges, by the way, can also surface in a more formalized Open Book Management approach. To improve chances for success, the two most critical steps often involve (A) consistent and open communications and (B) consistent, gradual course corrections.
Big Results or Failed Experiment?
Five years from now, I wonder what we'll be writing and reading about...
- A giant called Alphabet that spawned multiple successes like Google?
- Or an aging search engine called Google, still generating plenty of cash but scrapping the corporate Alphabet moniker and shutting down dozens of side businesses that didn't meet expectations?
Decentralized management isn't for everyone. Neither is open book management. Both have upsides. Both have challenges. Careful what you ask for.
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