It’s quite the fashion to want to learn from what Google does, but because so much of what it does is thoroughly sui generis, true opportunities to adopt some of their management wisdom are fewer and farther between than many breathless business correspondents would like to believe.
Nevertheless.
Every once in awhile we are granted a window, or a keyhole, into how they make high-level managerial decisions, so we have McKinsey’s interview with Patrick Pichette, Google’s CFO.
Pichette’s background is impressive: An alum of McKinsey himself, a Rhodes Scholar with his master’s in philosophy, politics, and economics from Oxford, and today overlord of Google’s $36-billion in cash on hand. Still, he flies coach, rides a “beat-up” bike to work, and answers his own emails. because “it crushes the idea of bureaucracy–and that’s the way it should be.”
The first question up for him? “How do you think about growth?” Now, it’s not helpful that the first words out of his mouth are “If we’re not building a product that at least a billion people will use, we’re wasting our time. How can you be a company that wants to change the world if you don’t have at least a billion people using your stuff?” But the nugget is his talking about how he feeds the winners and holds back on “the ones who aren’t performing the way they should [because] they shift around a lot.”
It starts with quarterly reviews of every core product and engineering area:
- how did it perform in the past 90 days vs. what’s expected for the next 90 days;
- is the trajectory of the product or group gaining or losing momentum?
- and not last, how does its strategic positioning fit in the context of everything else the company is trying to do?
Resource allocations are made accordingly.
But in most companies such allocations “are pretty sticky,” aren’t they?
A: “We don’t have business units. Once a company has business units, managers tend to take ownership of these units’ resources. Managers have a plan, and the natural instinct is to say, “Those resources are mine and I have to fight to keep them.” “
Here’s the first key insight into how Google is different: There are no turf wars. There’s no turf.
The result is that resources can most easily flow to “what’s winning,” with even those in cool or lagging groups at the moment knowing that when their day in the sun comes, their colleagues will give them the capital and talent they need.
How does M&A fit?
“It’s an accelerator.” Acquisitions, in other words, have to fit into a very clear vision of where the company wants to be in a year or so.
Isn’t that exactly as it should be for law firms–with, admittedly, a slightly longer time horizon than a year? If an acquisition isn’t straight in line with the firm’s strategy, why are you wasting your time? And don’t tell me you’re doing it for glory, or empire-building.
Now, capital is not an asset with which law firms are typically well-endowed, but surprisingly Pichette claims that “Google is not a capital-intensive business” either. (This may strike you as incongruous when the firm has also disclosed that it uses enough electricity to power 200,000 homes, but let’s let that pass.)
Rather, what’s intriguing is the way Pichette characterizes what Google needs capital for: To match the company’s “degrees of freedom.” In the digital arena, the “degrees of freedom” are exceptionally wide, and accordingly the capital needed to provide freedom to respond at that scale on that landscape is large. He uses the thinly veiled example of Microsoft acquiring Skype for $8.5-billion and says:
Make the case, for one minute, that it would have been strategic for us to make that acquisition instead. We would have needed more than $8.5 billion because that’s what the acquirer was willing to pay. If the acquisition had been really strategic for us, we would have needed to be able to pounce.
If we could predict the strategic flexibility we’ll need in such an uncertain environment, we could optimize the balance sheet perfectly. But consider the constraints: leverage, dividends, and so on. Then call me the next day and say, “Hey, I need something. I’m inventing X.” But I can’t help–I don’t have the flexibility–and end up giving up what could be the most important asset the company needs in order to change over the next ten years. We believe there’s an opportunity cost of not having that flexibility.
Now, if we were in some other industry we’d probably have a completely different conversation. Your industry is really what drives your degrees of freedom, and because those degrees of freedom are so wide in the digital space, the cost of not having flexibility can be absolutely crucial.
So what can we learn?
- What “degrees of freedom” do you need to run your firm? Do you have the resources available to take advantage of them? (In our case, the resources are primarily going to be talented people.)
- How nimbly can you reallocate resources from one practice area or geography to another? How are you structured to deal with “incumbent pushback?” Could you conceive of shortcircuiting it entirely by doing away with business units? What would you lose in the bargain if you did that?
- Does your balance sheet have a line item entry for “retained earnings?” No? Why not? Every single Fortune 500, I wager, has such an entry. Yes, of course we know the answer is that your partners want all cash paid out at the end of every year–“It’s my money!”–but is that in the firm’s best interest? How would you articulate the need for such an asset to the partnership? Might the response reveal something about who’s really on board for the long run and who’s not?
Finally, are your finance people creative? Are they running “blue sky” scenarios because they’re smart, creative, and ambitious enough to do so?
We’ll close with Pichette characterizing the caliber of talent on his staff:
Google continues to attract and retain immensely high-caliber talent. They’re the top 1 percent of the top 1 percent of the top 1 percent. The bar continues to be incredibly high.
In consequence of that, their expectation is that they’re going to have a job that’s immensely interesting. We naturally attract people who want their financial forecasts to work–and they’re going to work like mad to make sure that this only takes one day of their week. Then they’re going to spend the other four days of the week reinventing the business, doing crazy analyses that are going to be deeply fact based, in order to find key insights.
We naturally attract these people, and because we have them I can close the books in three days. I’m not spending 19 days closing the books. All of my team is saying, “Alright, we’re done. Let’s go back to the cool stuff.”
If I’ve heard it once I’ve heard it five times a day during recruiting season: “Our firm wants the best and the brightest [lawyers].”
Why settle for less in finance?
