Deciding to Go Digital

It began as change often does, with fear. In February 1999, Rick Schnall was a master-of-the-universe in training. Three years earlier, he had graduated from Harvard Business School and had joined Clayton, Dubilier & Rice, one of the world's preeminent leveraged-buyout firms, as a finance associate. By age 29, he was making a generous six-figure salary as a finance principal, taking equity in CD&R's funds, traveling around the world, and working with executives who had also attained the highest reaches of corporate America.

Schnall's day job was to provide financial investment and management support to new and existing portfolio companies. A veteran of the corporate-finance departments at both Smith Barney and Donaldson, Lufkin & Jenrette even before he went to business school, Schnall helped analyze and price acquisitions, corral financing, and, when the time came, prepare the firm's properties for sale through public offerings.

That was his day job. What kept him up at night was something entirely different: the Internet.

Schnall tracked the explosion of electronic commerce, marveling at the way newly hatched companies were changing the face of the economy. He had close friends working at Yahoo! and America Online, and he knew a half-dozen of his Harvard classmates who were launching their own Net ventures. "I saw what was going on, and I thought there had to be some applications for our portfolio companies," Schnall says. "How could we protect our core businesses so that someone else wouldn't come in and steal them away?"

He had been raising such concerns since joining CD&R. It was not that no one would listen. But the Net represented an almost incomprehensibly different world to the company, which was rooted in old-line industries and block-and-tackle management. As one of the youngest professionals amid a crowd of veteran heavy hitters, Schnall was only slowly acquiring the credibility and influence he needed to push his agenda. So mostly he laid low. Until the Piper Jaffray meeting.

It was a routine get-together with outside investment bankers. But when Schnall casually mentioned his interest in Internet initiatives, one of the visitors asked whether he knew about Instill Corp. Instill, which Piper Jaffray's venture arm had helped bankroll, was an online procurement service for the food-services industry. It linked restaurant buyers with distributors, and food manufacturers with customers. And it was growing rapidly.

Schnall, who had never heard of Instill until then, was shocked. This news gave shape and form -- a competitive name -- to his vague fears: Out there, in the Net ether, someone had brought forth a new business model that directly threatened one of CD&R's biggest investments. "We have to move fast, or we're going to be blown out," he thought. He fidgeted anxiously as the meeting came to a close, then bolted to his office.

And there, he set out to fix Alliant.

Can Bigco Become Netco?

It is the most urgent, most difficult question in business today: How do you move a big, old-line enterprise onto the Net?

The question is urgent because the Internet has so rapidly broken down traditional barriers to entry. Established companies enjoy powerful brands, huge revenue streams, lots of customers -- decisive competitive deterrents in the real world. Yet in industry after industry, in the space of just a few years, Web-based upstarts have come up with new business models to wrest market share from much bigger rivals. Amazon.com in books is the most familiar story. But there's also eToys, E*Trade, and Pets.com. There's good reason for Barnes & Noble, Toys 'R' Us, Merrill Lynch, and Petsmart to rush frantically into the online fray: They're late; they've lost customers, market share, mind share, and market value -- and they risk losing even more.

The question is difficult because established companies don't easily confront revolutionary new technologies. And big companies are simply not built for speed -- at least not for Internet speed. Product cycles in typical manufacturing companies can stretch for years; in Silicon Valley, ventures go from notion to market in a matter of weeks. New Netcos and ".coms" are populated by entrepreneurial risk takers who will accept low pay and ungodly hours in exchange for the thrill of the hunt, a lockbox of options, and the whiff of a big payoff down the line. And they're sustained by venture capitalists, lawyers, and public-relations executives who, for the same thrill, the same lockbox, and the same whiff, are ready and willing to offer aid and support.