Google parent company Alphabet is working on ways to make individual companies under its brand accountable internally for spending, says a report from The Wall Street Journal, which cites unnamed sources familiar with the matter. The efforts are aimed “to ensure that its more speculative projects are self-sustaining,” says The WSJ.
What Google aims to achieve with it
Alphabet has reportedly come up with a new system under which the “bet” companies such as Google Life Sciences, Google Fiber and Google X will have to pay for using corporate services such as marketing, computing and recruiting, the report said. These changes are a part of Google’s transformation into a conglomerate, which began in August. The changes will not be shown in the company’s financial statements until next year. With such changes, Google aims to make the bet companies more cautious with their spending, the report said.
In October during the earnings call, Chief Financial Officer Ruth Porat told investors, “After a period of big expense build up, there was an appreciation that we needed to manage the cadence of spend.” Since her joining in May, she has been focusing on curbing spending.
No fixed rules
Each conglomerate has its own set of rules for subsidiaries. For instance, Berkshire Hathaway’s subsidiaries in retail, manufacturing, transportation, and insurance are allowed to run independently. Berkshire provides very few services to its companies. In contrast, GE has come up with a 6,000-person “shared services” organization to perform functions such as legal work, finance and sourcing for its businesses.
Under Alphabet’s, bet companies are free to design their own services for recruiting, marketing, etc. They can also choose to make use of Alphabet’s services, but for that they will have to pay the cost internally. Though the companies are allowed to choose Google will want the bet companies to use its computer network as it will likely be more efficient than anything they could create on their own. The amount that the subsidiaries have to pay will depend on the estimates of payments they would have made if they had purchased services elsewhere, the report said.
On Monday, Alphabet shares closed down 0.04% at $776.70. Year to date, the stock is up by over 46% while in the last one month, it is up by almost 10%.
