Deciding to Go Digital

Alliant, in fact, already has an online purchasing system. That system, called Alliant-Link Direct, today handles orders that account for 40% of revenues. It is a powerful resource -- yet it is a proprietary system, one that requires Alliant to install dedicated PCs and software at each customer site. The expense is justifiable for large regional and national accounts -- but it makes little sense for independent restaurants.

Earl L. Mason understands that a Web-based ordering system can address those shortcomings. He also comprehends the risks of standing still. He became Alliant's CEO in May after resigning as CFO of Compaq Computer, just before the Compaq board of directors deposed CEO Eckhard Pfeiffer. "The discussion at Compaq was always about not switching distribution so fast that you lost the existing customer base," Mason says now. "But you can't afford to get stuck in the middle. You go ahead and make the move. You don't worry about cannibalization. You change in the way the market wants you to change."

Buy It and Fix It

The offices of CD&R are exactly what you'd expect of a big-league LBO firm: Dark wood, blond carpeting, hushed voices, and an 18th-floor view of Manhattan's Park Avenue. These are the trappings of an investment partnership that, in its 21-year existence, has bought 29 companies, sold 18 of them, and realized a 45% average internal rate of return on those 18.

Like other LBO firms, CD&R raises big pools of money from big investors -- its most recent fund totaled $3.5 billion -- against which it borrows to buy businesses, with the expectation that it will sell these businesses at a profit within two to eight years. Unlike most of its rivals, though, CD&R takes a more active role in managing the companies it buys. The spectacular returns on its funds come not only from financial maneuvering, but also from operating partners' efforts to make their companies more profitable.

CD&R follows a formula. It buys "carve-outs" -- businesses hidden deep in bigger corporations that are starved for resources and management attention. It figures out beforehand how performance can be improved and offers a price that will allow its fund investors at least a 30% net rate of return if the plan works. When the deal is done, the operating partners push ahead aggressively. They drive for new sales initiatives and creative distribution strategies. They work to shorten product-development cycles and to boost manufacturing productivity. They hone working capital and, not incidentally, cut costs.

Jim Rogers, 49, is the prototypical CD&R operating partner -- a proven big-company guy. For 26 years, he toiled at the General Electric Co., eventually running one of its biggest businesses and landing on the shortlist of possible successors to CEO Jack Welch. But in October 1998, after his Industrial Control Systems unit deflated, Rogers realized that his run for the roses was over. His next move: signing on as one of 12 partners at CD&R.

Rogers took over as chairman of Alliant, serving as CEO until he hired Mason. CD&R had already made progress toward its goal of taking Alliant public by 2001. It had encouraged the distributor to make seven acquisitions and had developed strategies to attract national accounts. And in December 1998, Rogers oversaw a broad restructuring plan that implemented several hard-hitting productivity initiatives designed to reduce overhead.

But Schnall's February alert changed the game -- and Rogers recognized immediately what was at stake. Instill's threat was genuine. Just six years old, it already claimed 7,500 accounts nationwide -- a small but not insignificant piece of a universe of 750,000 U.S. food-service operators. Although it didn't operate warehouses or run trucks, Instill's operation reflected a keen understanding of the food-service value chain: The company that controlled the front-end purchasing system also controlled the customer relationship. Instill's strategic locations, wedged between distributors and their customers, gave it first crack at selling value-added services that distributors otherwise might deliver.

More worrisome to CD&R was the risk that Instill might someday offer restaurateurs the ability to compare distributors' prices online, essentially commoditizing -- disintermediating -- the entire channel. Other startups, such as PurchasePro.com Inc. and Ariba Inc., were eyeing the same turf. What's more, Sysco already had converted 5,000 of its biggest accounts to a Web-based order system.

At root, Net technology was imminent enough and powerful enough to disrupt Alliant's profitability and, in the process, CD&R's return on investment. On the other hand, there was the possibility of an immediate payback if Alliant acted quickly. Online order entry, Rogers reckoned, could save Alliant as much as five cents on every dollar in revenue in some segments -- part of that from reduced sales costs and part from lower back-office transactions. "You can view the Internet as a threat, or as an opportunity, or as both," he says. "There's the threat that if we don't do anything, we could be disintermediated by an Internet company that does something. But we also view it as an opportunity to improve internal productivity."

Rogers and Schnall knew they needed a short-term strategy to meet the looming online competition. They also sensed the opportunity for something bigger, a way to use the Net to transform the food-service business -- but they didn't know what that was. They needed help, and they needed it fast. So they went shopping for consultants. And they came up with Diamond.