Google’s recently established parent company, Alphabet, announced late in 2015 that it intends to begin billing its subsidiaries for the business services it provides within the company. This means that Google and the various entities held by Alphabet will have to budget and pay for work done by corporate functions such as finance, human resources, marketing, and technology. This practice, noted by The Wall Street Journal as unusual compared to most corporations, may actually be a great innovation and best practice. Managers of corporate host centers could significantly improve their business environments by implementing a similar model.
Consider, for example, an internal consulting, process improvement, or similar corporate advisory organization. Much like a corporate HR, marketing, or technology department, these organizations are typically specialized and have little to no opportunity to generate revenue on their own. Their P&Ls are purely expense-focused, and their value-add to the larger business is driven by completed projects that increase revenues and/or decrease costs within other business units.
When a business unit calls on a corporate advisory team for assistance, the help is typically provided for “free” in the sense that no expense is charged to the “client” business unit. Furthermore, the business unit managers are not typically obligated to take action based on the opinion or recommendation delivered by their corporate partners.
Clearly, the business landscape where corporate services groups operate is full of inefficiencies, backward incentives, and wasted resources. The situation brings a number of difficult questions to mind:
- How do corporate process improvement, marketing, or HR departments know that their time and resources are being used wisely?
- How do these organizations document the value they add to the organization if their recommendations aren’t always implemented?
- Who is holding business unit managers accountable for using corporate resources wisely?
- What happens if corporate resources are abused?
- Isn’t there a better way to account for the cost and value of corporate services teams?
These questions are common across many medium and large corporations. Has Google parent Alphabet found the answer with its new internal billing initiative?
As it turns out, Alphabet’s innovative idea addresses the vast majority of the difficulties most corporate service groups face. By billing for time and services across P&Ls (without affecting the larger corporation’s financial statements) the financial and resource costs of corporate services are passed through to the business units themselves. As a result, business unit managers have a real investment to be held accountable to, much like the relationship between a traditional management consulting or advertising firm and its client.
In the new, properly incentivized business environment, the behavior of managers and employees is more economical and efficient. Managers “hire” corporate advisory groups to do work for them, presumably after performing a basic cost/benefit analysis or project NPV estimate. Due to the initial financial cost of bringing in outside help, advisors’ recommendations are more likely to be implemented, and are more likely to add value for the corporation. In turn, the more efficient market for corporate services allows traditional cost centers to increase the productivity of their own employees and resources, compounding the value they can deliver to the organization.
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