Google (GOOG) continues its transformation away from the “Don’t be evil” search engine company that defined cool and pushed innovation. The latest move? Killing the famous 20 percent time program that lets employees spend one day a week working on pet projects.
As the company continues its march toward $1000, it’s looking less and less like the Google of old. Google used to stand above the pack by how openly it embraced innovation, but it seems to be going in the direction of other tech industry giants as news emerges that it’s effectively winding down that 20 percent time program.
Research and development is a cornerstone of the technology industry. You simply don’t have innovation if you don’t spend the money to develop new products. However, this decade has increasingly seen tech giants turn down the R&D spending tap, favoring a strategy of litigation and incremental product improvements.
This is a topic we’ve touched on before, particularly with Apple (AAPL). The company spent 8% of revenue on R&D at the time that it began its transformation from PC maker to consumer electronics giant with category-defining products like the iPod and iPhone. Today, Apple’s R&D has dropped to the 2% range and it’s now spending more on litigation than innovation.
Meanwhile, Apple shares struggle to meet levels set last year as investors wait for the company to release something new beyond incremental upgrades to its existing products.
According to the New York Times, Google joined Apple in spending more on lawyers than R&D in 2011, but this was a bit misleading in terms of Google. Through its 20 percent program, on top of the officially designated R&D spending, Google’s employees were contributing an enormous amount of additional innovation that was largely off the books.
As pointed out in Quartz, the 20 percent program has paid off for Google with successful products like Gmail, Google Talk and AdSense — a product credited with now accounting for 25% of the company’s annual revenue — starting out as personal projects that Google staffers worked on one day a week. It was even spiked out in Google’s 2004 IPO letter, where it was states: “We encourage our employees, in addition to their regular projects, to spend 20% of their time working on what they think will most benefit Google. This empowers them to be more creative and innovative. Many of our significant advances have happened in this manner.”
So why kill it?
First, let’s clarify “kill.” According to the reports that have been surfacing, the program isn’t officially dead, but it’s clearly winding down. Business Insider says personal projects must be approved by managers who are in turn measured based on their team’s productivity in completing core assignments.
This makes it unlikely that managers will approve a personal project on 20 percent time, and a Google staffer who does get one approved needs to be as productive on their primary assignment as coworkers who devote all of their time to main tasks. In other words, 20 percent time is effectively on its way out.
Why? Because Google has transformed from a startup culture to an established company that’s answerable to investors.
That “Don’t be evil” mantra and 20 percent time served Google well, but the company is a technology industry giant, with designs on becoming the dominant player. Even after massive layoffs at its Motorola division, Google still has just under 45,000 full-time employees. You simply can’t run a business and expect investors to buy into it when 45,000 people are essentially unaccounted for one day a week.
Accountability to investors isn’t the only concern. As Google formalizes its strategy, there’s a bigger risk that staffers would spend that 20 percent time developing projects that run counter to corporate vision. Instead, having projects approved by management, maintain the image of Google as innovator while driving toward strategic goals. Potential winners can be spotted and have more resources thrown at them earlier, while dead-ends can be quickly weeded out.
Since taking control of the company he cofounded, Larry Page has killed off Google Labs (in the name of pursuing greater focus), eliminated products that didn’t fit its business model and continued efforts to diversify his company. The company’s new headquarters — which will come in at 1.1 million square feet — will provide a visual reminder of the company’s importance. As Google has grown, it has outgrown the way it used to be run.
When 20 percent time has formally gone the way of Google Labs, the company will continue to spend money on R&D but it will do so in a more traditional method: Visibly, with a select few doing the innovating through Google X, while the bulk of its employees work exclusively on their core assignments.
The key questions for Google investors are whether this transformation to a more traditional business model will culminate with R&D expenditures slowing to a relative trickle (a la Apple). Is there a risk that “ordinary” staffers will look to more challenging roles at startups that they feel value personal innovation? Will potential game-changers fail to come to fruition because the initial idea pool from which Google X projects are selected has become so much smaller?
If so, future Project Glass and Chromecasts may be a long time coming as the company churns out annual improvements on its Nexus 7 Tablet, Google+ and tweaks its search engine.
As of this writing Brad Moon didn’t own a position in any stocks mentioned here.
