Deciding to Go Digital

There's also an understanding gap, Sviokla argues. "For traditional managers, understanding virtual space is a nontrivial task. The Internet is a rapidly changing technology; we're in the early color-TV days, and most managers are still radio listeners. The skills and approaches to the business are very different. Add to that the need to make decisions much faster, and it's like taking a boat pilot and putting him in the cockpit of a plane. You tell him, 'Practice landing this thing five times, then we're putting you into combat.' "

Diamond's solution: a two-pronged plan. Alliant would proceed internally with the migration of its proprietary purchasing system onto the Web, aiming to launch a beta version within six months. Separately, CD&R would start a new company that would be largely independent of Alliant. Sviokla and Munck called this new venture TheSauce.com.

Recipe for a Startup

On July 19, two months after retaining Diamond, Rogers and Schnall flew to Chicago to hear the consultants' recommendations. Earl Mason joined them. The three immediately liked the idea of an independent startup. For one thing, they agreed with Sviokla and Munck that the Net business would require talent, experience, and culture that Alliant didn't have. They also believed that this was a way for Alliant to lift revenues quickly. As the "corner tenant" on a site that offered restaurateurs value-added services, they thought, Alliant would win crucial first-mover advantage in the independent-account segment.

There also was an investment rationale for launching a separate entity. The venture would require substantial funding for two to three years -- enough to dilute Alliant's earnings significantly. Because CD&R wanted to take Alliant public by mid-2001, it had to build a financial track record that would impress prospective shareholders. Alliant couldn't fund a new business and still make its financial targets.

Over dinner that night, Rogers and Schnall agreed that they would present Diamond's strategy at the CD&R partners' meeting in August. They had considered buying an existing online operation like Instill's, but decided the valuations were too high. (Instill, in any case, says that it didn't want to sell.) Instead, they would ask their partners to seed TheSauce.com with $25 million -- with more money available, if needed. For that, CD&R would take a 50% interest in the venture. Alliant would take about a 20% share in return for the intellectual rights to its Alliant-Link.com system. Diamond, in lieu of cash payment for its services, would get about 12%.

This was not immediately familiar territory for CD&R. Next to its typical $200 million investments, $25 million was chump change. But the firm had never actually started a company before. Its expertise lay in productivity enhancements and financial discipline, not in the screwball world of the Web and venture capital.

On the other hand, Rogers says, the partners had their own moment of Web-based truth. "We have to adapt," he says. "We owe it to our investors to make sure that our portfolio companies are taking advantage of the Internet. With Alliant and TheSauce.com, we're acquiring a new skill set that we can use in the future transformations of other large companies."

Think of it this way. CD&R brings a certain management toolbox to its investments. Its partners calculate that if they increase inventory turns or improve sales velocity -- just as Alliant's Michael Mulhern is doing in Albany -- they can expect a certain return on their funds. Now the Internet is presenting them with the possibility of a powerful new tool for the kit. CD&R can join its transformational expertise and capital with Diamond's digital strategy and technology people, and apply that to other old-line properties with physical assets, brand names, and fulfillment capabilities. In theory, it's a powerful combination -- one that could justify investments CD&R otherwise would not have touched, or that could lift the returns on acquisitions it would have made anyway.

Or so the pitch went when CD&R's partners bought in on a $25 million venture investment on August 10. By a unanimous vote, TheSauce.com was born.

If You Can't Stand the Heat

The plan relies on three linked sites. TheSauce.com, the core site aimed at restaurant owners, is scheduled to debut this month on a small scale in Los Angeles, the city with the nation's highest number of restaurants, with as many as 10 other markets targeted by June 2000. FlyInTheSoup.com, targeted to restaurant workers, was launched in October, and EatingOutLoud.com, the consumer site, is expected to follow by mid-2000.

Sviokla and Munck had been impressed by CD&R's agility: In about 60 days, they had gone from an idea to a $25 million business, with no business plan and no product. CD&R's affirmation and promise of capital, though, still left Diamond the "small" matters of creating a product, a plan, and a company. Over the next two months, the new company and its owners would have to work out governance issues, refine its product-market orientation, and write a formal business plan. All at once.