Last month Google celebrated its 15th birthday. Within a very short time, this company has become one of the most valued companies in the world with over 50,000 employees and annual revenues over $55 billion (ttm). Google’s membership in my Million Dollar Club is based on revenue per employee of over $1 million. Membership in this club is restricted to a few exceptional companies who achieve this high level of productivity performance.
What is somewhat unique about Google is that their revenue is not directly connected with what they make. Most companies sell what they make but Google gives away most of what it makes for free, and they make very cool things. It is these cool things that attract eyeballs to their websites and provide Google with sell access to eyeballs through advertising. This model has been used before in broadcast TV where program content attracted viewers and viewer ratings drove advertising and advertisement prices. Other users of this model are publishers – like the owners of this online magazine – but none of these other companies have attained Google’s productivity level. Google’s performance is 2 to 4 times better than their competitors and many times that of most companies. Check out a listing of revenue per employee for the top 100 NASDAQ companies and you will see most companies well below Google’s performance level and many near $100K/employee. Be aware that NASDAQ lists over 2700 companies so many companies have uninspired performance.
Maybe what is remarkable isn’t Google’s performance but that so many companies fall so far short of it!
Google has also done an excellent job managing growth, integrating 55,000 people around the world into an effective and functional unit. High growth rates on large populations are very difficult to do well. It is interesting that Google’s operating expense per employee is rather normal for a high technology organization at about $150,000 per employee. This number is consistent with companies achieving half their productivity level and worse which would suggest that Google is paying their employees market wages. Google is hiring talented but otherwise normal people, the same type of people available in the marketplace to other companies.
At this point my mind is drawn to The Deming Institute’s Red Bead Experiment which, thanks to Fluor Hanford, you can see run in detail through several YouTube videos. What Dr. Deming has shown is that the performance of most workers is more a result of the system that they are in than the individual worker themselves. Given this, Google is getting exceptional performance out of normal people.
I attribute Google’s success to leadership which defined the business and its vision, designed a system that produces exceptional results and integrated employees into an effective engine of productivity – a great achievement for a teenager not yet old enough to drive in most states and provinces.
Now back to the remarkable part. Why aren`t most companies more productive? I accept that most companies are not in Google’s market space but even within their own market there is a wide range of performance. At Lytica, I see this every day when we benchmark companies’ electronic component pricing. In the past I was surprised by the spending variation that occurs within companies of comparable size in the same industry, this is no longer the case. I have learned that companies with a focus on cost reduction get better results than those that don’t, and the ones that combine the objectivity of benchmarking with the inevitability of statistics do the best. They understand where the opportunities lie. Those that have created a system for cost reduction get results.
In other words, it is leadership.
By Ken Bradley – Lytica Inc. Founder/Chairman/CTO