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Google Parent to Ask Subsidiaries to Pay for Corporate Services

11/23/2015 | 08:36pm US/Eastern

Google parent Alphabet Inc. is moving to make its disparate parts more accountable internally for spending, according to people familiar with the matter, in an effort to ensure that its more speculative projects are self-sustaining.

Under the new system, "bet" companies such as Google X, Google Fiber and Google Life Sciences will be charged for using corporate services such as computing, recruiting and marketing, the people familiar with the matter said.

The changes are part of Google's transformation into a conglomerate, which took effect in August but won't be reflected in financial statements until next year. The people familiar with the matter said executives hope to make the bet companies more accountable for their costs, which may lead to more caution on spending.

The reorganization has two goals. Alphabet Chief Executive Larry Page wants to boost spending on new technologies that will take the company into areas such as transportation, communications and health care. At the same time, Mr. Page and other executives want to assure Wall Street that Alphabet is spending responsibly.

"After a period of big expense build up, there was an appreciation that we needed to manage the cadence of spend," Chief Financial Officer Ruth Porat told investors in an October earnings call. Ms. Porat has been instrumental in efforts to curb spending since joining the company in May.

There is little consistency in how other conglomerates handle such issues. Subsidiaries of Berkshire Hathaway Inc., in businesses such as insurance, transportation, retail and manufacturing, largely run independently. Berkshire itself provides very limited centralized services.

By contrast, General Electric Co. in recent years has built a 6,000-person "shared services" organization to handle functions like sourcing, finance and legal work across businesses such as jet engines, power turbines, locomotives, medical scanners and lightbulbs.

Under Alphabet's new system, leaders of the bet companies will have more freedom to develop their own services in areas like recruiting and marketing. The companies will still be able to tap Alphabet's services, but they will have to bear the cost internally.

Google's recruiting operation, for example, employs hundreds of recruiters and handles millions of job applications a year. It also manages an internal-transfer system. For bet companies looking to expand and hire, access to this service may be important. If companies choose to use their own recruiting team and try to hire from elsewhere at Alphabet, they won't get access to the internal-transfer network, according to one of the people familiar with the plan.

Alphabet may want the bet companies to use its computer network, because it is likely more efficient than anything the companies could create on their own, one of the people said. Alphabet will charge bet companies based on an estimate of what they would pay to buy the service elsewhere.

Another goal is to create financial statements that can be audited for each business, making it easier for them to be spun off or separated from Alphabet in the future, one of the people said.

Long term, Alphabet hopes to be a family of companies that offers efficient, centralized services to help entrepreneurs grow businesses faster, another person familiar with Google's thinking said.

Some bet companies have established considerable independence. For example, Nest, which makes Internet-connected home devices, has its own legal and marketing teams and rents computer services from Google rival Amazon.com Inc. Other new businesses, such as Google Life Sciences, the self-driving car project and Sidewalk Labs, a municipal communications effort, have been hiring aggressively with long-term goals of becoming independent. "We are very much thinking they will continue to grow and be independent entities," Ms. Porat said in October.

Write to Alistair Barr at alistair.barr@wsj.com

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