When Google (GOOG) co-founder Larry Page replaces Eric Schmidt as CEO, he'll have a host of things to worry about: ad revenues, growth, Facebook, privacy concerns and just how to get the company's rebel groove back, among others. But first on his agenda will have to be reversing the flow of top employees out the door: Talent turnover is dragging the search giant down.

It might be hard for a Silicon Valley outsider to imagine, but lots of Google's most talented employees just hate working there, and the reason isn't as simple as one might think. In fact, Google's problem is a bit counterintuitive. After all, Google lets its people spend 20% of their time on projects that interest them. This sounds wonderful in theory -- and it's a practice that, for example, is cited as the way that 3M (MMM) invented its ubiquitous Post-It Notes.

But this practice also means that thousands of highly talented engineers work long hours on projects that never end up among Google's services, and if they do, they often don't turn into money-makers. In short, Google has more ideas than it can use. This can make people frustrated, and they leave -- often for Facebook, which is growing much faster and is now the first-choice employer for Silicon Valley talent.

Google needs a leader who can help it recover its status as the place to be. That may be an impossible challenge -- certainly it's one that Schmidt has proven ill-suited to handle. Unfortunately, Page -- who appears to be a cerebral man whose gifts lie in developing algorithms -- will need to demonstrate amazing people skills to pull it off. Unless he can develop a way to motivate the talent so it won't go to Facebook, Google's longer-term growth may be capped.

Google's Good, Not Great Value Quotient

I came to the conclusion that talent drain was Google's biggest problem last November. That's when I was working with students at Babson College to develop Google's Value Quotient (VQ): a 24-factor score that measures of how well companies follows seven principles -- including motivating people, innovation, and others -- which I developed for my book, Value Leadership.

Google's VQ -- based on my research and a somewhat subjective scoring -- earned 369 out of a maximum 420 points: 88%. That's good, but not great. Southwest Airlines' (LUV), for example, scored a 95%. And the reason that Google falls short is the way it manages people: Part of my struggle last November as we examined Google was to find any evidence that it promotes its talented people.

Here's a summary of how I arrived at Google's score of 369 (Google's score/maximum possible score):

  • Value human relationships: 51/60. Google does a mediocre job of rewarding talented people -- it seems to stack up talent without tapping fully its potential. However, it generally does well in implementing its "Don't Be Evil" philosophy;
  • Foster teamwork: 45/60. While Google employees work in small teams, teamwork is not rewarded;
  • Experiment frugally: 57/60. While Google has many great people coming up with good ideas, only Android has made a significant dent in creating a new service line beyond search;
  • Fulfill your commitments: 56/60. While Google has a code of ethics and accounts conservatively, it has slipped up in its China policy and with copyright issues -- such as GoogleBooks;
  • Fight complacency: 48/60. Google's acquisition strategy is mixed -- At $1.65 billion, it may have overpaid in 2006, but if YouTube really generated $1 billion in 2010 revenues, Google will probably get a good payback on its investment, and its growth philosophy is strong;
  • Win through multiple means: 56/60. Google maintains its dominance of search, but it hasn't succeeded in the social networking sphere; and
  • Give to your community: 56/60. Google.org makes many good investments, and local advertising contributed $54 billion to local communities in 2009.
Why do I think Google needs to improve the way it manages people. Here are three examples:

  • Detail-obsessed bureaucracy slows down product development. According to Wired, a lead visual design engineer posted a Goodbye Google blog because the detail-obsessed management was so focused on gathering data to justify minute design decisions that he was unable to deal with his frustration.
  • Low pay, inefficient hiring process, disappointing work environment. According to TechCrunch's reprint of a 2008 Google human resources private group, several employees complained of taking pay cuts to come to Google from places such as Microsoft (MSFT). There are also complaints about a very long hiring process and the disappointment at the gap between Google's reputation as nirvana for employees and its more ordinary bureaucratic reality.
  • Wasting the product of 20% self-driven time. Another comment from TechCrunch makes the point that Google people work extremely long hours on their self-directed projects and experience tremendous frustration when their work doesn't make it into Google services offered to customers.
To be fair, these comments may be sour grapes from disaffected employees -- but there's little doubt that Google is losing talented people. As The New York Times reports, that talent exodus is a critical problem for Google. The loss of Sheryl Sandberg to Facebook is one prominent example.

It will be hard for Page to do much about it, though. Talent wants to work for the hottest company, and while Google continues to dominate the world of search advertising, it has lost the battle for Silicon Valley primacy and, like Microsoft (MSFT) which was once king of the hill, might not ever get it back. Nor is it hard to envision the day when another company will replace the post-IPO Facebook as the place to be.

That doesn't mean that Google is a bad company, just that it's no longer able to translate all the good ideas its talented people develop into big, profitable growth opportunities.

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