The Hybrid and the Mighty

As e-business blossoms, mainstream companies are hard at work grafting online arms onto their traditional frameworks. But the task of nurturing these hybrid structures is confronting senior managers with a series of exotic challenges.

Internal tensions between oldline business units and online newcomers arise over issues ranging from resource allocation to cultural differences to cannibalisation of revenue streams. Other dangers lie in wait on the far side of exploding growth rates and the dotcom practice of stuffing pay packets with stock options.

Guiding the fortunes of these hybrids demands a new set of managerial reflexes, according to the first generation of executives called on to cope with the problem.

Boardroom Blues

For starters, the quickfire pace of Internet commerce is forcing boardrooms to rethink old habits and attitudes. Board meetings at four to six week intervals is a tradition-encrusted practice that doesn't mesh with the demands of managing the new breed of hybrid companies. Nor is there time to polish set-piece boardroom presentations of intricately-detailed business plans.

The whole process is too static and inflexible for the rapid cut-and-thrust of e-commerce, according to David Spence, who has vast experience approaching boardrooms wearing both online and offline hats.

Currently chief executive of telco Access1, Spence was managing director of Australia's first flamboyantly successful dotcom, OzEmail.

Spence moved to MCI Worldcom's UUnet when it bought OzEmail for $530 million, before joinging Access1. He is also non-executive chairman of Access 1, a broadband portal recently launched by former OzEmail partners and owners Sean Howard and Trevor Kennedy. He is also chairman of Internet companies Emitch and Vertical Markets and serves on the board of ChaosMusic.

Before stepping into the online universe, Spence served as general manager of Kerry Packer's Computer Publications and was chief financial officer of Freedom Furniture.

"To set the right direction [for online ventures], directors need continuous input," Spence says. "They can't wait for people to put together a great big file about what is going to happen.

"That doesn't work any more. The board needs to be involved all the time and tick things off on a continuous basis."

It is essential for board members of hybrid companies to be on e-mail, Spence says. Instead of making a small number of large decisions at lengthy intervals, they are being asked to make large numbers of small decisions on short notice.

"It is a question of being on board 24 hours a day, seven days a week wherever you are in the world.

"They have to be prepared to work at the same speed [as the market in which they are competing] and not drag their feet."

The difficulty some boardroom stalwarts experience in acclimatising themselves to this hybrid environment is one reason that established companies struggle with their dotcom offshoots, Spence suggests.

Adding to their woes, these board members will also be expected to keep up with the technologies involved, because there is no time to explain everything to them from scratch at board meetings.

A Question of Scale

The huge contrast between the expansion rates of traditional companies and their dotcom arms is another managerial minefield.

"When growth rates of 150 per cent a year are the expected norm, you've got to scale the business in every direction at once - space, logistics and people," Spence says.

"That level of growth means there isn't time to grow people organically into senior positions. So you have to keep putting people on top of other people, and the whole structural thing of bringing in senior executives becomes a management issue that requires board oversight.

"Upper management must understand scaling issues. It is like duck shooting in that you have got to aim ahead a bit."

If scaling isn't handled correctly, "the management team keeps hitting against too many ceilings; they just get worn out".

If managers continually must devote energy to relocating staff into larger quarters, or dickering for a larger PABX system or doing yet another deal on the company's billing engine, "it eventually becomes too much for them", Spence says.

In a rapidly growing dotcom, executives must know when it makes sense to move from renting a single floor to taking a five-year lease on a small building.

"You need to take bigger and bigger steps, and getting scaling issues right is a skillset all on its own."

Culture Shock

Higher management also needs to juggle the contrasting cultures of traditional companies and their online offspring.

One man who knows all about crossing cultural lines is Steve Vamos, chief executive of leading Australian Internet portal Ninemsn. Vamos spent 14 years with IBM Australia, rising to head its PC division here, before making a cultural jump to the managing director's chair at Apple Computer Asia Pacific.

"When I first joined IBM, I thought I would stay there forever. Leaving was the ultimate sin in the IBM culture," Vamos says. "The Apple culture was a lot more free and easy. It was a small company in the IT industry compared to IBM. It was common to stay and then move on, and Apple's attitude to that was positive."

Today's dotcom-ers are more aligned with the Apple view, Vamos notes.

"The people who joined Ninemsn were coming to a new company at an early stage of its development. They are confident and prepared to take risks. Their view is, if it doesn't work out, there is always somewhere else to go."

The average age of Ninemsn's staffers is late 20s and half are women, a ratio that extends throughout the executive team.

"They are well-educated, intelligent and confident," Vamos says. "They are not here for the company to look after them, but because it serves their professional interests.

"So the pressure is on us to treat them respectfully and share where they are going."

Linked to cultural differences are different attitudes towards costs in oldline and online business units. Established companies place heavy emphasis on cutting costs in order to achieve profits. In the dotcom world, cost blowouts are accepted as a consequence of the pursuit of growth. Newly-listed e-commerce players tend to build large losses into their business plans, which in turn promotes a lax attitude towards costs.

"There is a certain revenue-at-all-costs culture which is very dangerous," Spence says. "But just because losses are built into a business plan doesn't mean they can be ignored."

The aftermath of the April sharemarket shock may start converting dotcom cultures towards the rigorous cost containment philosophy that is a staple of traditional business units.

"Even with high growth rates, you can't afford to take your eye off cutting costs," Spence insists.

"I normally try to use key growth performance indicators such as revenue per employee and revenue per customer to ensure we are not getting less efficient and wasting money as we grow."

Cannibal Country

Then there is the delicate matter of cannibalisation. Many enterprises are tempted to strip budget resources and talented staff away from established divisions to beef up their e-commerce initiatives. Such a resource grab can breed resentment in those sectors of the company being plundered, with no apparent benefits returning to their own bottom lines.

A case in point is the failure of Time-Warner's 1994 Pathfinder initiative. Pathfinder was launched as an online showcase of the media conglomerate's print magazines. It was finally abandoned last year after absorbing $160 million. Analysts blamed the fiasco partly on the failure of managers in Time-Warner's various media properties to co-operate whole-heartedly with the centralised online project, despite support for it at the most senior levels of the organisation.

Time-Warner has since become the ultimate hybrid, thanks to its acquisition in January by America Online (AOL).

Having dotcom-oriented management in the driver's seat marks a role reversal from the Pathfinder initiative. Whether this will lead to more successful outcomes remains an open question.

Dance Steps

The rules which guarantee success for traditional companies attempting to ride the e-commerce whirlwind are still emerging. However, one formula which makes sense to people like Ninemsn's Vamos sets out the process as a three-step dance.

Step One is to spin off the online entity as a separate business. Second, the parent enterprise must allow its online newbie to cannibalise traditional revenue streams. Finally, it should encourage skills transfer and partnerships between the oldline and newline companies.

Vamos says that recipe rings true to his Ninemsn experience to date. A joint venture between Microsoft and Kerry Packer's Internet commerce vehicle ecorp, Ninemsn was set up as a separate corporate structure. The assets and rights transferred to it by Microsoft and ecorp (including ecorp's majority owner, Publishing and Broadcasting Ltd) are spelled out contractually.

Because of that, Ninemsn is immune to being manipulated as if it were just another division of Packer's flagship media property, the Nine Network.

"When I sit down to discuss cross-pollination opportunities [with executives from other Packer entities], I have a strong hand," Vamos says.

"The best strategy is to work with Channel Nine; but the key point is, we are free to cannibalise, because I can compete with anyone, anywhere."

The point is that setting down the rules in black and white avoids friction between established business units and the dotcom newcomer, which can hurt both.

Says UUnet's Spence: "You don't want to slow the thing down with internal issues, so it is important the the rules are clear between the traditional business and the dotcom as to what is possible and what is not.

"The moment you start slowing the dotcom business down, because you have to focus on internal issues rather than building the business, it causes big problems.

"You get a stop/go situation in which people don't know when they can make a decision and when they can't."

Paying a Packet

The question of staff remuneration is another hot potato confronting bricks and clicks companies.

Stock options have been pivotal weapons in the dotcom armoury as they battle to attract top-notch staff in a chronically under-supplied market. The same weapon is available to established companies who decide to take their e-commerce arms to initial public offerings.

But handing out stock options like Jaffas to staff of the dotcom subsidiary may provoke resentment in oldline business units. It can also trigger longer-term hiccups within the online entity.

"There have been examples of companies going to an IPO and employees who exercised their stock options then left," Spence says.

"The options need to be structured so there is the right waiting period before they can be exercised . . . you always need to protect the company."

One way around the problem is to make options proportional to length of employment, so staff who leave prematurely risk losing most of their options package.

Vesting key staff with stock options is a good work incentive as long as share prices keep climbing. But in a bear market, or if interim results cause a slump in share prices, motivation may flag.

Executives on options may also be tempted to focus more on shareholder values than on customer and supplier issues. It raises the possibility of decisions being taken at the executive level with short-term share prices in mind rather than longer-term company growth.

Overall, compensation initiatives are needed to stimulate performance. But the right balance must be struck to prevent them from clouding the long-term vision of the company.

Forward Thinking

Releasing a dotcom unit on an IPO has obvious benefits for corporations looking for funds to carry forward their larger goals. A case in point is Mincom, Australia's largest software developer (1999 revenues: $US216 million).

With profits stalled, Mincom has been seeking a new way forward. In February it hired as chief executive Frank Berger, a US restructuring specialist who founded VCrest Systems, Volkswagen's computer systems company, and later helped sell it off to support Volkswagen's turnaround in North America.

Berger is working on plans to float one or more of Mincom's four vertical business units, with its e-commerce unit LinkOne high on the list. Capital raised through IPOs or equity partnerships would be reinvested to help Mincom grow both organically and by acquisition.

"The end result is to make sure we are known globally as market leaders, so we can get the right price point when we go to an IPO for the whole company," Berger says.

While an IPO will inject fresh funds, senior managers also need to consider the ongoing relationship between the new public company and the parent organisation.

"The right contracts have to be in place to allow [both entities] to work together while at the same time allowing the new business to have flexibility in a competitive marketplace," Vamos says.

"You need to have it in black and white to ensure you have integrity in the marketplace. Certainly, investors and analysts are going to make sure you have the appropriate arms-length transactions formalised between you before they conclude that particular business unit can indeed stand on its own."

A joint venture such as Ninemsn, which has two independent companies as partners, differs from the model of an online business unit within a single company, Vamos points out.

"Approaching it in partnership with another player means there are greater pressures to deal with [the links between online and offline entities] in an arm's-length, business-like fashion than if it was all within one company," he says.

With pundits claiming e-business will generate trillions of dollars over the next few years, there's no doubt a plethora of hybrid models will emerge. The real question is how to manage them in ways which allow both the old and new components to have a chance to thrive.

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