Google Takes Stricter Approach to Costs

Jul 14, 2015

As growth slows, staff additions ease and the firm looks for ways to be more efficient

Google Inc. is slowing down as it grows up.

With revenue growth ebbing, profit margins shrinking and shares flat, Google is curbing hiring and seeking ways to run its sprawling empire more efficiently, according to recruiters, venture capitalists and others familiar with the matter.

New Chief Financial Officer Ruth Porat, who joined the company in late May, is active in the effort. Ms. Porat, who reduced expenses and reallocated capital while CFO of Morgan Stanley, is involved in an internal audit examining costs, revenue and accounting systems, according to one of the people. She is looking to make her mark on what has become a more stable but more complex company, another person said.

Google will offer an update on its expenses on Thursday, when it reports second-quarter financial results after regular trading hours and Ms. Porat is expected to speak during a conference call with Google analysts for the first time. The company declined to comment for this article.

The clearest sign of the new attitude: Google added 1,819 employees in the first quarter, bringing its total to 55,419. That was the smallest increase since the final quarter of 2013; last year, Google added an average of 2,435 employees per quarter.

For many years, Google teams assumed they could add staff each year. Now, Google executives are selecting which groups can hire, based on the company’s strategic priorities. Since late last year, many Google teams have had to submit plans describing how additional employees will produce specific business objectives, such as increased revenue or more users.

For example, Google last year capped hiring at the struggling Google+ social-media division, while the Nest connected-home unit was given more leeway to grow, according to people familiar with the changes.

In one ad-marketing group, new hires are tied to generating revenue, said a person who recently left the group. This person said it was more difficult to get hiring plans approved for 2015 than 2014 because of the changes.

Ali Behnam of technology-recruiting firm Riviera Partners said fewer job candidates are receiving offers from Google, and he sees the company involved in fewer competitive hiring situations than in years past.

“They are larger and they have to watch their costs more,” he said. The company is still aggressive about retaining employees, often offering more equity, he added.

Some employees cite other examples of increased frugality, albeit at a workplace that is luxurious compared with most others. Travel, supplies and events all require more justification or approvals than in the past, according to two people familiar with the changes.

Google is a long way from cutting jobs and the company is still growing. But the scrutiny on expenses is a significant change for a company that long favored expansion and experimentation over bottom-line concerns.

“Google is taking the foot off the gas,” said Carlos Kirjner, an analyst at Bernstein Research. “I don’t think the company has fundamentally changed its philosophy or approach. It has just adjusted.”

The shift comes as Google evolves from an upstart Internet-search provider into a complex, harder-to-manage company. Historically, rapid revenue growth reduced the need to manage expenses so closely. But growth is slowing, while expenses kept climbing.

Google revenue grew 19% in 2014, down from 21% in 2013, 22% in 2012 and 29% in 2011. But operating expenses grew 31% last year, according to S&P Capital IQ; spending on research and development soared 38%.

The result: operating-profit margin declined to 32%, from 38% in 2011, according to Goldman Sachs.

At the same time, Google has branched into new fields, from delivering Internet access from high-altitude balloons to its own wireless service and self-driving cars. Many of these projects aren’t generating significant revenue yet, intensifying investor questions about Google’s spending.

“We do not know if the investments that Google is making are 1) the right investments and 2) if the spend is efficient,” Goldman analysts wrote in a recent note to investors.

Investors have sent Google shares down 3% over the past year, while shares of rivals Apple Inc. and Facebook Inc.rose more than 30%.

Google executives have tried to calm such concerns in recent months.

In a meeting during early December with top shareholders, Chief Executive Larry Page said Google understands the need to balance long-term investments against the risk that a weak stock price will dent employee morale and hurt recruiting and employee retention. The message, according to a person who attended, was that Google will be more disciplined after acquisitions last year increased head count without a similar increase in revenue.

Mr. Page said he looks to Berkshire Hathaway Inc.,the insurance-focused conglomerate run by billionaire Warren Buffett, as a model for how to run a large, complex company, according to people who were at the meeting. Mr. Buffett has a cadre of CEOs running operating companies and doles out capital from the holding company to these businesses based on their performance each year.

In January, Google’s then-CFO Patrick Pichette told investors the company would show “discipline and the willingness to throttle back when we reach the limits of what we believe we can manageably absorb.” Mr. Pichette cited Google’s decision to end sales of the initial version of its Glass Internet-connected eyewear, as an example of its discipline.

Source: The Wall Street Journal