Management à la Google
By GARY HAMEL
April 26, 2006; Page A16
Once again, Google’s on a tear. Last week its stock price rose 9%, buoyed by a 60% jump in first-quarter profits and a 79% gain in revenues. Yet Google is still down 7% off its all-time high. Presumably, many of the investors who drove its shares down by nearly 30% during the first quarter remain doubtful about its ability to keep on delivering eye-popping growth in revenue and earnings. A little skepticism is a healthy thing.
Rockets follow a parabolic curve. While it’s possible to ramp up a great business faster than ever before (thanks to plentiful capital, the wonders of outsourcing, and the Web’s global reach), the more quickly a company grows, the sooner it fulfills the promise of its original business model, hits its peak, and begins the slide into senescence. For example, during the first 20 years of its existence, Dell grew its top line faster than any company before it. Yet Dell may now be coming down the backside of its strategy parabola. As its price advantage has eroded, growth has slowed and Dell’s share price has taken a beating. As the world speeds up, young companies are at risk from the corporate equivalent of progeria — the disease that dramatically accelerates the aging process in children.
The ultimate test of any management team is not how fast it can grow its company in the short-term, but how consistently it can grow it over the long-term. In a world where change is relentless and seditious, this demands a capacity for rapid strategic adaptation. In recent years we have witnessed adaptation failures by incumbents across a wide variety of
industries: airlines, pharmaceuticals, automobiles, newspapers, and recorded music. In many cases, companies haven’t been changing as fast as the world around them. What the laggards have failed to grasp is that what matters most today is not a company’s competitive advantage at a point in time, but its evolutionary advantage over time. Google gets this.
While Google’s growth will inevitably slow, there’s a good chance that its revenues will arc upward for years. Why? Because its novel management system seems to have been designed to guard against the risk factors that so often erode an organization’s evolutionary potential:
•Evolutionary risk factor #1: A narrow or orthodox business definition that limits the scope of innovation. Google’s response: An expansive sense of purpose.
Executives often make the mistake of falling in love with a winsome business model. While fidelity is a virtue in marriage, it’s a handicap in business. Google wants to grow its online ad business into the distant future, but its self-conception stretches far beyond its current revenue model. It is driven by an open-ended mission to organize the world’s knowledge or, as one VP put it, raise the world’s IQ. This vision animates a restless search for new opportunities.
•Evolutionary risk factor #2: A hierarchical organization that over-weights the views of those who have a stake in perpetuating the status quo. Google’s response: An organization that is flat, transparent, and non-hierarchical.
When power is concentrated at the top, a tradition-bound executive team can hold a company’s capacity to change hostage to its own ability to adapt.
That’s why it so usually takes a financial meltdown and leadership change to set a company on a new course. It is noteworthy that neither Larry Page nor Sergei Brin, Google’s founders, has proclaimed himself "chief software architect," the badge Bill Gates wears at Microsoft. Rather than assume they’re infallible seers with a divine right to dictate Google’s next strategy and the one after that, Messrs. Page and Brin have created a Darwinian environment in which every idea must compete on its merits, not on the grandeur of its sponsor’s title.
Google has invested heavily in building a highly transparent organization that makes it easy to share ideas, poll peers, recruit volunteers, and build natural constituencies for change. Every project team, and there are hundreds, maintains a Web site that is continuously monitored for peer feedback. In this way, unorthodox ideas have the chance to accumulate peer support — or not — before they get pummeled by the higher-ups. It also helps that Google is organized like the Internet itself: tightly connected, flat and meritocratic. Half of its employees — all those involved in product development — work in pint-sized teams, with an average of three or four engineers per team. Product managers typically have 50+ direct reports, making it hard for supervisors to micromanage. Critically, control is more peer-to-peer than manager-to-minion.
•Evolutionary risk factor #3: A tendency to overinvest in "what is" at the expense of "what could be." Google’s response: A company-wide rule that allows developers to devote 20% of their time to any project they choose.
In most companies there are rigidities that perpetuate historical patterns of resource allocation. Managers eager to defend their power horde capital and talent even when those could be better used elsewhere. A dearth of new strategic options means that legacy projects get over-resourced while the future goes begging.
Google understands that even as it’s ramping up today’s business model, it has to be buying options on the future by creating a lot of little "Googlettes." Says CEO Eric Schmidt, "Our goal is to get more at bats per unit of time and effort than anyone else in the world." Evolution demands a lot of new experiments; but experimentation takes time and money, scarce commodities when every hour of time and every dollar of capital have already been allocated to some "mission critical" project. That’s why every Google developer can spend up to 20% of his time working on off-budget, out-of-scope projects. This time is more than a perk; it’s Google’s seed corn for the future. The payoff? In one recent period, more than half of Google’s newly launched products could trace their origins to a 20% project.
•Evolutionary risk factor #4: Creeping mediocrity. Google’s response:
Keep the bozos out and reward people who make a difference.
Elitism may be out of fashion, but Google is famously elitist when it comes to hiring. It understands that companies begin to slide into mediocrity when they start to hire mediocre people. A-level people want to work with A-level people. B-level people are threatened by class-A talent. So if you let a B-lister in the door, he or she will hire equally unremarkable colleagues. As the ranks of the mediocre expand, it becomes harder to attract and retain the exceptional. The process of dumbing down becomes irreversible.
Google’s grueling hiring process, akin to a Mensa test, values nonconformity nearly as highly as genius. Preference is given to candidates who have weird avocations and out-of-the-ordinary experiences. It’s one thing to hire ambitious brainiacs, and another to keep them. The Founders’
Awards, an annual multimillion dollar payout to teams who’ve made outsize contributions to Google’s growth, is one key retention mechanism The goal:
to ensure that internal entrepreneurs have no incentive to take their best ideas somewhere else.
Only time will tell whether Google has succeeded in building an evolutionary advantage. But consider: Since it’s founding, it has repeatedly morphed its business model. Google 1.0 was a search engine that crawled the Web but generated little revenue; which led to Google 2.0, a company that sold its search capacity to AOL/Netscape, Yahoo and other major portals; which gave way to Google 3.0, an Internet contrarian that rejected banner ads and instead sold simple text ads linked to search results; which spawned Google 4.0, an increasingly global entity that found a way to insert relevant ads into any and all Web content, dramatically enlarging the online ad business; which mutated into Google 5.0, an innovation factory that produces a torrent of new Web-based services, including Gmail, Google Desktop, and Google Base. More than likely, 6.0 is around the corner.
Of course Google may ultimately fall victim to hubris and imperial overstretch as it takes on Microsoft, Yahoo, eBay, the occasional telecom giant and pretty much everyone else in cyberspace. Or like Microsoft, it may simply become like every other big company as it grows. But that’s not the way I’d bet. Google seems to have grasped the new century’s most important business lesson: The capacity to evolve is the most important advantage of all.
Mr. Hamel, visiting professor at London Business School, is director of the Woodside Institute.