Google’s CFO on growth, capital structure, and leadership
Patrick Pichette describes the attitudes and behavior that Google hopes will keep it growing like a start-up.
AUGUST 2011 • James Manyika
When it comes to playing the classic role of the no-nonsense chief financial officer, Patrick Pichette has his own personal interpretation. Google’s CFO may oversee $36 billion in cash reserves at one of the world’s most recognized companies, but he still flies coach class, rides a beat-up bicycle to work, and responds directly to e-mails from fellow “Googlers” every day. “It takes a little more time,” he says. “But it crushes the idea of bureaucracy—and that’s the way it should be.”
An alumnus of Bell Canada and McKinsey and a Rhodes Scholar with a master’s degree in philosophy, politics, and economics from Oxford University, Pichette is no less direct about the business side of things. He calls acquisitions an “accelerator” for growth and scoffs at the idea of business units because they force people into “ownership” positions that hinder creative flexibility. Pichette is also a passionate advocate of sustaining Google’s start-up culture—even as the company now generates $30 billion a year in revenue.
Clad in a rugby shirt and jeans in his office at Google’s Mountain View, California, headquarters, he recently sat down with McKinsey’s James Manyika to lay out some of his thinking on growth, strategy, and the financial side of Google’s business.
The Quarterly: How do you think about growth?
Patrick Pichette: As [Google executive chairman Eric Schmidt] once said, “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?” The corollary of that is if you have a product that a billion people want, he’ll also say, “Give me a billion users, I’ll show you how to monetize.” And, by the way, computer science is the key linchpin to actually delivering that. Once you understand those three things, Google’s initiatives completely make sense: Android, Chrome, Chrome OS, Google Wallet, and of course search.1
The challenge is in the planning. How do I feed the winners and hold back on the ones who aren’t performing the way they should? They shift a lot.
The Quarterly: How do you do that?
Patrick Pichette: We have a quarterly review process that examines every core product area and every core engineering area against three beacons. First, what did it do in the last 90 days and what will it do in the next 90 days. Because in those 180 days, there’s a lot to deliver—for example, in the amount of code that has to ship out and the number of users and whether it’s going viral or not. We track these things continuously, but it’s worth taking a look at—in some cases weekly, in some cases monthly, but at least every 90 days, given where we are.
The second beacon is what’s your trajectory? Do the financial models and operating metrics for a couple of years out suggest a trajectory that is gaining or losing momentum? In some cases, are you going to need more capital expenditures because you’ll need more data? If you have a fantastic success, then you need more capacity—Google Instant, for example, sometimes generates answers to user queries before they’ve finished typing. That requires a lot of computing power.
Then the third beacon is what’s your strategic positioning in the context of a fast-changing landscape? If a competitor buys another company, what does that mean? Or if we ourselves decide to move on something this quarter, what does that mean for everything else that we have?
These beacons are very tactical and short term, with financial and operational metrics always running, and always viewed in the context of a shifting strategic landscape. For example, if we thought product growth would be X but now it’s three-quarters of X, we retune our resources accordingly. So if we had planned to hire a sales force of 200 in the expectation that a product would be ready to ship, we might delay hiring them for an additional 90 days to give engineering time to run through all the testing. And we have those kinds of conversations in most areas of the company every quarter. It takes about a week, a week and a half—and if we need to, we shift resources.
The Quarterly: In many companies, those allocation decisions are pretty sticky, and reallocating that quickly is hard to do. What makes it happen here?
Patrick Pichette: 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.”
At Google, we’re more relaxed. We trust each other. When we sit down to do these allocation reviews, we’re all one team with our Google hats on, and the question is what’s winning. In that context, it’s so much easier. People will say, “The guys next door are really on fire. They should get the next 15 engineers.”
That kind of mind-set gives people the confidence that when they’re on fire and things are going great for them, they’ll get the capital and engineers they need, too. In a fast-moving environment, that’s the way it should be.
The Quarterly: Coming back to your perspectives on growth, how does M&A fit in?
Patrick Pichette: The best way to portray M&A is as an accelerator. The reason we purchased On2,2 for example, was to get a video codec to enable more innovation from developers straight into HTML5 for Chrome. A video codec makes it possible to open-source applications from any developer because it gives developers another standard to develop on. Codecs matter because enabling the ecosystem around products like Android, for example, gives users and developers an incentive to push related innovations.
So for M&A, the mind-set is to comb the world constantly, given our agenda of development. If we find a piece that fits what we’re going to do in 8 to 12 months—for example, we have a team of 6 and we know we need a team of 15—then M&A is an accelerator because it fits into a very clear plan of what we’re trying to achieve.
You’ll find that the vast majority of the acquisitions that we do are in fact those types of acquisitions. Yes, on occasion we will do small investments in really innovative spaces, but they’re really small. That’s not where I spend my time. There’s no need for me to spend my time on projects that are really experimental, like cars that drive themselves.
The Quarterly: So how do you think about projects in their early stages, before the business model is clear—how do you prepare for these large, hopefully growing markets?
Patrick Pichette: In a way, though, we do know these business models—and what we know is independent of how that knowledge is monetized. Take Android, for example. What we know is that anyone with a smartphone searches a ton more than somebody without a smartphone. When they search, they also get ads on which we make money. I don’t even need a sales force. I just need people to adopt the Android standard. Now I’ve got this multiplication of devices out there in the world, and the minute that users are accustomed to getting directions, they use Google Maps. They do searches; they get an answer, and they just press click to call. Search and search advertising, which are the bread and butter of the company, allow us to bring forward what would have been a glacial pace of adoption for many services, with just a few hundred engineers—not 10,000—and no capital, because these services are running on the capital base. Just on that basis, we already have a home run.
The great thing about Google is that it’s not a capital-intensive business. We don’t have to make a bet of $19 billion that is plunked somewhere and then wait and see what happens. That’s the beauty of innovation; you can do trial and error so many times or launch and iterate or release in beta. If something sticks, then you keep it going.
The Quarterly: On that point, to what extent do considerations about capital structure factor into your thinking?
Patrick Pichette: Capital structure matters a lot, and degrees of freedom matter immensely. The debate that I hear a lot is do you have too much cash? Do you not have enough cash? My answer is always the same: look at how much change has occurred in the digital space in just the last 48 months—48 months ago, who knew about Netflix or Facebook? Look at the degrees of freedom needed to continue to lead in this space. Yes, there are rumors of bubbles, but setting those aside, there’s a company that we all know very well that bought another company that we know very well for $8.5 billion a few days ago. Not $150 million, but $8.5 billion. 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.
The Quarterly: So how does that factor into the way you think about investor relations? What’s your philosophy about what and how to communicate with investors?
Patrick Pichette: One of the most important documents in the history of Google is the original founders’ letter. It’s a seminal document because [Google cofounders Larry Page and Sergey Brin] and Eric are still here—and the fundamental premise that actually led the company to success has not changed. These are visionary and incredibly smart men. They see the future in a way that you and I have a tough time seeing. They see the world with their own time frames, and they are willing to invest at that pace. Think of Android. Android was a very small project five years ago. Larry and Sergey said, “Yes, that’s going to work.” But read the press articles four years ago; everyone was asking, “What is that? Another distraction from Google.” Yet look at the resounding success.
It’s really about finding the right audience and the right investors. It’s important to have investors match your risk profile and your company philosophy. So a short-term hedge fund manager using a formula that says, “If trigger X happens then I do Y”—that’s probably not a good match for us. But thoughtful, long-term investors who are actually patient because they believe the digital economy is going to change? Those investors have already been served very well, and it’s a good match.
The Quarterly: Is the right investor in this case somebody who buys into growth or a particular kind of growth? You could argue that many other growth profiles don’t look like yours. So unless your investors focus on growth driven by disruptions and innovations, they probably should go elsewhere.
Patrick Pichette: Absolutely, but there is already a proven foundation. Many people argue that search and search monetization are yesterday’s story. But if you talk to Google engineers, our view of the world is that search is completely nascent. Think about where we’ve been: five years ago, to do a search you typed one word; you hardly dared type two. Then you looked at the results, and maybe typed another word. Today, you type in whole sentences, like “How do I get from this place to that place in 40 minutes?” And if you don’t get a good answer, you wonder what’s going on with Google today. People have that much faith in Google to get it right.
Today, every day, 15 percent of the queries we get at Google are completely new—we’ve never seen them before. Imagine that we could give the perfect answer for each one. How much would a person pay for the perfect answer? These are the degrees of freedom available to Google to continue to innovate—and we haven’t even talked about local searches that people do on their phones.
As an investor with us, you already have all the growth opportunities of what has been a proven model with a ton of upside because there’s still so much innovation to come. Then you have all the potential of our other investment areas, like cloud computing. You’re buying two stories in one, but it’s definitely a growth story.
The Quarterly: Let’s shift gears a little bit. Given everything you’ve just described, how do you think about the people you hire in finance—their capabilities, their profiles, their backgrounds?
Patrick Pichette: I think there are two elements to the answer. The first one is that 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.”
The Quarterly: You mentioned offline earlier that part of your role is to serve as a custodian of the culture. Part of that, of course, is the talent you are bringing in. How else is finance the custodian of the culture?
Patrick Pichette: The tone at the top matters. I spend a lot of time with Googlers—and I get tons of questions. People write me directly, and they know I’m going to answer back directly. This is not a finance issue—all 25,000 of them are like, “Hi, I’m Sam. I’m in the sales office in Dublin and I’ve got a question for you.” That’s the way the company should be. That’s what makes Google special. It takes a little more time on my side, but it crushes the concept of bureaucracy.
When I fly in North America, I fly economy, like everybody. I bike to work—and my bike is sufficiently beat-up that I don’t even have a lock for it. Nobody is going to steal my bike. That’s what a start-up would do. That’s what we do. If you live these examples at the top, you don’t have to feel like the police. People just know.
About the Author
James Manyika is a director of the McKinsey Global Institute and a partner in McKinsey’s San Francisco office.
Notes
1 In addition to the company’s well-known search function, Google initiatives include the Android smartphone software, the Chrome Web browser, the Chrome OS (operating system), and the Google Wallet online-payments system.
2 In February 2010.
Source: www.mckinseyquarterly.com
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