How Google hired a CEO, and why it saved the company

Two Stanford students built the best search engine in the world and nearly ran it into a wall. The investors made them hire an outsider. This is what he found, what he changed, and what any owner can take from it.

1. The mess (1998 to 2001)

Larry Page and Sergey Brin started Google in September 1998 in a garage in Menlo Park. The product was brilliant. Search results were far better than anything else on the web, and users told their friends.

The company behind it was loose. Spending happened on instinct. There was no CFO and no budget anyone could point to. The founders were engineers and thought like engineers: if a process got in the way of building, the process went.

The day they fired the managers

In July 2001 Larry decided that project managers were a layer of people telling engineers what to do, and that this slowed Google down. So he removed them. Engineers would report straight to the head of engineering.

That left about 130 engineers reporting to one VP, Wayne Rosing. Nobody can manage 130 people. Projects lost direction. Engineers had no one to ask for decisions, career advice or help with a blocked task. Within months it was clear the experiment had failed, and managers came back.

2. The ultimatum (1999 to 2001)

In June 1999 Google raised $25 million from two of Silicon Valley's top venture firms: Kleiner Perkins, led by John Doerr, and Sequoia Capital, led by Michael Moritz.

The money came with a condition. The founders had to hire an experienced CEO to run the company. Doerr and Moritz had seen many founder-led start-ups grow fast and then collapse because nobody was running operations.

Larry and Sergey agreed on paper and then stalled. Over almost two years they met and rejected dozens of candidates. Each one was too corporate, too slow, or not technical enough. Moritz grew frustrated enough to threaten to pull Sequoia's investment.

3. The outsider (2001 to 2011)

Eric Schmidt was 46. He held a PhD in computer science, so the founders respected him as an engineer. He had been CTO of Sun Microsystems and then CEO of Novell, a struggling software company he had to steady.

That mix mattered. He could talk technology with Larry and Sergey, and he already knew what goes wrong when a company grows faster than its systems.

He joined as chairman in March 2001 and became CEO in August 2001. The deal at the top was simple. Larry ran products. Sergey ran special projects and technology. Schmidt ran the company: operations, finance, sales, hiring, legal and the board.

4. What the outside CEO changed

Managers came back

Every team got a manager with clear ownership. Engineers still had room to build, but someone was now accountable for each piece of work and each person's growth.

Finance became a real function

George Reyes joined as CFO in 2002. Google got monthly reporting, proper controls and audited accounts. Without that, the August 2004 IPO could not have happened. It raised $1.67 billion and valued Google at about $23 billion.

Budgets with a rule

Schmidt set a simple way to split resources:

A sales machine

Search was free. Ads paid for everything. Schmidt backed Omid Kordestani to build the ad sales team, and turned AdWords into the engine behind almost all of Google's revenue.

Clear roles at the top

The three men ran Google as a trio. Founders on vision and product. CEO on operations, people, money and the board. Each knew where his job started and stopped, so decisions stopped getting stuck.

5. The 2008 cost cuts

When the financial crisis hit in 2008, Schmidt did what an experienced operator does. He cut before the numbers forced him to.

• Contractors: thousands of temporary and contract workers were let go.
• Staff roles: about 300 recruiting and sales roles were removed in early 2009, Google's first real layoffs.
• Products: weak projects were shut down, including Lively, Google Notebook and Dodgeball.
• Spending: perks and hiring slowed, and capital spending was pulled back.

Revenue still grew in both 2008 and 2009, and Google stayed profitable through the worst downturn in decades.

6. The numbers, 2001 to 2011

7. Hiring your own outside CEO: 7 steps

1. Admit the gap. If you sign every cheque, approve every hire and settle every staff fight, the company has outgrown you as an operator.
2. Split the jobs on paper. Write what you keep (vision, product, key clients) and what the CEO owns (operations, budgets, people, reporting).
3. Hire someone who has run bigger. Schmidt had run Novell. Look for a person who has already managed the size you want to become.
4. They must earn your team's respect. Schmidt's engineering PhD made the founders listen. Pick someone your key people will follow.
5. Directors set the condition and the date. Put it in the shareholders' agreement or board minutes. Without pressure, founders stall, just like Google's did.
6. Give real authority over managers. All managers report to the CEO. You stop going around them.
7. Judge on numbers. Budget versus actual every month. Cost per unit. Profit. The CEO reports to the board, not to your mood.

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