Google caused a stir in the news and on social media this week, when it revealed it will become a wholly owned subsidiary of a new parent company, Alphabet.

The reason behind Alphabet is to diversify Google’s interests. The Google we know has expanded into self-driving cars, drone delivery, and health sciences. Alphabet allows Google to narrow it’s focus, becoming a strictly web-based platform.

All the media buzz aside, Google has undertaken an organisational restructure. Alphabet is a top hat for Google, allowing its other subsidiaries to exist independently as well as in conjunction with Google.

Why add a top hat?

An organisational restructure such as Alphabet is not a massive move for Google. Their current CEO is still in charge, just a step up in the hierarchy. The biggest changes to Google will happen over time now the top hat entity is in place.

There are many reasons an organisation would want to add a ‘top hat’ to their structure. A top hat lets subsidiaries maintain a sense of identity, larger businesses become more agile, and can even work around tax.

Here are the succession planning, managerial, talent, and merger and acquisitions challenges faced with a top had org structure:

Succession planning in top hat organisations

Alphabet was created to diversify Google’s entities. Google has purchased many organisations over the years, most of which have been absorbed into Google post-purchase.

The biggest threat with succession planning is that employees will feel locked into their subsidiaries. Employees may feel that creating subsidiaries blocks off horizontal movement in the larger organisation.

Concerns about succession planning with a holding company can be alleviated by explaining the nature of the restructure. Many retail chains are owned by a larger holding company, making skills between the subsidiaries transferrable.

This becomes more difficult when holdings are as diverse as Alphabet’s portfolio. The benefit to Alphabet’s diverse range of holdings is the lines between subsidiaries are more defined. No one from their medical department will accidentally end up in charge of Google’s main search algorithm.

Employees should be happy that creating a top hat organisation adds a few extra layers to the organisation that they can climb up over time.

Managerial flexibility

Creating a top hat company impacts the highest level of employees. An existing executive is usually promoted up to the CEO of the top hat organisation and someone else takes their place in the subsidiary.

When asked what will happen when a top hat organisation is created, you can tell employees, ‘not much.’ Managers can operate the same as before the top hat was created. Top hat organisations actually give managers more flexibility, as they’re no longer bogged down by process from other departments.

The impact of a top hat organisation is more apparent during an acquisition. The new company is added as a subsidiary of the top hat organisation and little else needs to happen. Well-run organisations will let subsidiaries continue as they were, with a representative from the top hat organisation visiting the subsidiary occasionally to see how things are going.

This was the case when Pixar was bought by Steve Jobs. Steve was Pixar’s CEO and Ed Catmull its Managing Director. Steve only visited Pixar once a year and let the company do their thing as they worked on animation. The main times Steve became involved with Pixar was when they were developing strategy to establish a deal with Disney.

Zappos is another example of a subsidiary with management flexibility. Zappos is owned by Amazon, but doesn’t operate in the same way. Whilst you were hearing of Amazon employees working 100 hours in a gruelling workplace, Zappos employees were relaxing in a trailer park campus with cafes and Alpacas.

Operating as a subsidiary of Amazon gave Zappos the flexibility to establish their own culture, free of the negative press surrounding Amazon.

Mergers and acquisitions

Merged organisations can still appear separate through the creation of a top hat holding company. The strategy of top hat organisations is effective when companies in the same industries acquire each other. Not only do the organisations appear separate to consumers, but the power distribution of the organisations also appears separate to the leadership teams.

Acquired organisations can still appear independent after being purchased, though. Maintaining independence through a top hat organisation allows the smaller company to operate as it had before, without interference from the larger organisation.

Volkswagen owns many smaller, niche car companies. Companies such as Audi and Lamborghini are both owned by Volkswagen, but the top hat structure allows them to function independently. Lamborghini and Audi can then trade technology an infrastructure due to the relationships established through the partnerships from the top hat structure.

Contrast this to Volkswagen’s partnership with Suzuki. Volkswagen bought a major share in Suzuki, who did not want to be absorbed into the larger organisation. The partnership ultimately failed due to cultural differences and power struggles.

Suzuki would have been more willing to cooperate if Volkswagen took more of a top hat organisation approach. Suzuki should have been left to their own devices, trading resources with Volkswagen’s other entities.

Talent

Large companies move slow, they lack innovation, and the idea of change is handled with fear. These facts are why so many people are drawn to the fast-paced lifestyle of the startup culture. A top hat org structure gives employees the startup culture with the resources and job security of a larger enterprise.

This best-of-both-worlds approach will appeal to top talent. The next generation of great workers don’t have to worry about taking a risk on a smaller company, nor do they have to worry about being stifled by excessive processes.

Having a top hat holding company also makes it easier for Google to acquire new businesses. This can inspire emerging talent to do their best to be acquired by Alphabet. Smaller businesses would then be able to expand without applying for funding.

A top hat organisation allows start ups and larger organisations to expand faster, reducing the headaches associated with enterprise. It allows innovation and encourages smaller businesses to stand out and be noticed with the hope of acquisition.

Is a top hat worth the re-org?

A top hat on your organisation is worth considering if your organisation has multiple entities, you’re looking to expand into other sectors, and your manager is okay with having another person above them.

The most important part of a top hat organisational restructure is talent. The current CEO usually becomes the CEO of the top hat organisation, meaning someone must take their place in the subsidiary. A top hat restructure can work without a hitch as long as you have your succession planning organised.

If you’ve been tasked with the heavy task of modelling a top-hat style organisation structure, you’ll need the right tools to create your own Alphabet. You can use org.manager to establish the new hierarchy and decide who is going to take the top spot.

Want more information? Check out our free restructure guide with best practices for managing a successful restructure.