For three decades now, Google has been putting innovation before profitability. That time is now coming to an end, and it’s not because of any innovation-killing virus, but merely the introduction of financial discipline by one of the most powerful women in business.
Meet Ruth Porat, the woman who helped stop the Great Recession from getting even worse. She is also one of Morgan Stanley’s most trusted ex-employees, but today she is the force behind Google’s new era of cost-conscious innovation.
Compared to the challenges she faced as an advisor to the U.S. Secretary of the Treasury Henry M. Paulson during the Great Recession, Google’s problems might seem miniscule. But Porat attacks them with the same vigor she showed when helping save Freddie Mac and Fannie May during the housing crisis.
When she first joined Google in May, 2015, she was given the daunting task of restructuring Google into what is now the parent company, Alphabet Inc., and its divisions. Two months after she started with Google she presented her first earnings report for the company. The kind of visibility she gave investors into the inner workings at Google immediately gave the company tangible results in the form of a $60 billion increase in market capitalization.
Since she took over the Chief Financial Officer job at Google the stock is up by 40%, a strong validation that Porat is taking the search engine giant in the right direction. So she’s definitely worth the $70 million-a-year pay package that came with the job.
What is She Doing at Google that they’re Losing so many Executives?
Porat is merely bringing fiscal discipline into a corporate culture that was famed for its “don’t really care as long as it’s innovative” attitude. That attitude was costing the company hundreds of millions of dollars. In the last three months reported by Google, they lost $859 million against revenues of $185 million from their Other Bets division. Being separated from Google’s core businesses like search, Android and YouTube, Other Bets is now under pressure to ease their spending.
This fiscal discipline is not the same as cost-cutting in an emergency, mind you. Google still makes about $7 billion in free cash flow every three months, so they’re not penny-pinching. However, Porat’s mandate from Alphabet Chairman Eric Schmidt is to make sure that the company is spending on the right things; the things that are most likely to be winners.
It is significant, then, that Google Fiber – one of the Other Bets – has cut back on its staff by about 50%. Fiber internet is expensive business, and spending hundreds of millions of dollars laying fiber optic cables is not the business that the new Alphabet wants to be in. However, the fact that Fiber will soon be starting a two-year test on wireless high-speed internet shows that the parent company still considers this to be a viable bet.
But some senior Google executives haven’t been taking the change very well. Tony Fadell, for example, left the Nest program that he co-founded shortly after telling a reporter from Information that “the fiscal-discipline era has now descended upon everything.” Fadell is still an adviser to Alphabet, but it shows the gist of why several other executives have also left the company. The self-driving car project, for example, lost three senior executives, and the founder of Google’s venture arm, Bill Maris, is now gone as well. There is even talk of a major shakeup happening at Google X, the company’s research lab that is headed by the legendary Astro Teller and housed the famous Google Brain project.
Where will Ruth Porat take Alphabet?
Fiscal discipline is a critical component of any successful business. Just because you have a lot of money – like Alphabet does – it doesn’t mean that you keep spending on “moonshot” projects that have a low probability of success.
What Porat is doing is merely boiling everything down to hard numbers and making each division more accountable to the company as a whole. For example, she billed one of the Other Bets division $500,000 for the use of corporate PR services for a year.
That kind of culture-shift is definitely going to ruffle a lot of feathers, but it will make Alphabet inherently more accountable to the shareholders as well as fans who hang on every new development from Google. So far, nothing of significance has come out of Other Bets apart from the DeepMind project for data center efficiency, but now we should be able to start seeing some tangible results from some of the brightest minds in technology.
And a lot of that can be credited to the entry of Ruth Porat into the picture. A woman who has broken into the hallows corridors of finance and technology is not to be taken lightly.
As Alphabet CEO Eric Schmidt candidly advised himself when Ruth Porat spoke eloquently about Google at the World Economic Forum:
“Just shut up and listen to Ruth.”
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