When managers at Pittsfield, Massachusetts-based KB Toys decided to join the digital revolution, they did what lots of managers at traditional brick-and-mortar companies are doing.

They built an independent organization with a separate name (KBkids.com), staff, compensation, and funding. Then they located it two time zones away. “We decided to make the brick-and-click an independent entity, based on what we perceived were two different cultures,” explains Michael Wagner, chief operating officer and former CFO at KBkids.com, in Denver, Colorado.

By separating the two cultures, Wagner says KB Toys management wasn’t forced to impose traditional retailing constraints on the creativity of its E-tailing business. More important, the distance between the operations meant the new kids on the block didn’t ruffle the feathers of employees working at the parent company. Says Wagner: “There’s no animosity toward the new generation and their different ways — because they’re thousands of miles away.”

Some consultants say putting a little geography between the established and the upstart is a wise move. These days, as traditional manufacturing and service companies move increasingly toward E-business, corporate managers face a balancing act. The launch of an E-commerce business at an old-economy company means managers must oversee dissimilar corporate cultures — often with radically different psychological profiles and work habits.

Encouraging out-of-the-box thinking, managers must still be guided by familiar signposts. “You can have a really creative person in charge of the Internet project,” says Richard Halpenny, CFO at VNU Business Publishing Europe, the $290 million-in-revenues company based in London (part of the Netherlands-based VNU Group). “But you’ve got to put a good financial accountant behind him, who manages business in a traditional way.”

The managing can get complicated, particularly since performance goals for a traditional company and its E-tailing operation often vary dramatically. No one knows this better than finance chiefs. As Frans Blom, vice president of Boston Consulting Group’s (www.bcg.com) E-business division in Amsterdam, notes: “It’s an enormous challenge for the CFO to have to steer on totally different metrics.”

While steering, finance managers must also make sure workers at the traditional and digital operations pull together — especially during the early stages of an E-tail rollout. Mishandled, a dot-com launch can devolve into a nasty turf war, with employees squabbling over titles, resources, and salaries. Add the specter of a spin-off of the dot-com — with potentially lucrative employee stock options — and you’ve got the makings of a John Woo movie.

Some corporate managers, looking to avoid the ugliness, have chosen to dot-com — that is, establish discrete organizations for old and new. Department store giant Wal-Mart, for instance, runs its traditional retailing operation from Bentonville, Arkansas. The company’s E-tailing business is situated in the heart of Silicon Valley — 1,500 miles away. Barnes & Noble also went the separate-but-equal route — so separate that the book retailer spun off its virtual operation. The bookseller may not have had much choice. “Basically, they sutured a dot-com to a brick and mortar, without having thought through the holistic aspects of the business,” offers Mary Pat McCarthy, global vice chair of the information, communication, and entertainment practice at KPMG LLP (www.us.kpmg.com).

Managers at several corporations, however, think the dot-com approach is littered with snares and trap doors. Companies like The Progressive Corporation and Intuit have instead gone the dot-corp route — housing old economy and new economy businesses under one roof, governed by one set of corporate rules, guidelines, and values. Progressive, for example, sells insurance through brick-and-mortar independent agents and over the Net via Progressive.com. “Our philosophy is that we’re an enterprisewide concern, not separate businesses with discrete philosophies,” says Tom Forrester, CFO at the Mayfield, Ohio-based insurer, with $6.12 billion in revenues. “We don’t perceive any differences between traditional business and E-business. It’s all business.”

Even analysts and consultants can’t agree on dot-com versus dot-corp. Some say the cultures that separate the wing-tips from the Birkenstock crowd mandate logistical division and discrete strategies. Others insist a more ecumenical approach is best. One thing is certain: Launching an E-tail operation can lead to a digital divide — no matter the governance. “The key is to think in terms of strategy, and then in terms of structure,” says Julie Meringer, research director at Cambridge, Massachusetts-based Forrester Research (www.forrester.com). “Unfortunately, many companies do it the other way around.”

Down a Rabbit Hole

Getting it wrong can spell disaster. In the rush to sell on the Net, some companies throw dollars at 20-somethings who know a lot about Web-site development but less about supply-chain management. “Toys “R” Us is the classic example of a company that set up a separate dot-com that didn’t have access to the traditional firm’s well-established fulfillment and customer-service practices,” says Meringer. “When Christmas rolled around last year, people who ordered their kids’ presents online didn’t receive them in time.”

To address the company’s infrastructure problems, ToysRUs.com recently hired four senior managers with logistics and finance experience at traditional companies, including Toys “R” Us controller Ray Arthur. Then, in August, the E-tailer went one step further. Managers at ToysRUs.com announced the online merchant was merging its operation with Amazon.com.

Many analysts believe the one company/two systems approach is fraught with peril. “Companies that reside both cultures in one location invite an inevitable clash,” argues Edgardo Pappacena, managing partner of the change-enablement practice at Arthur Andersen (www.arthurandersen.com). “You can’t accept that things will evolve for the good randomly or by themselves. Cultural differences do exist and have to be managed.”

Failure to manage the differences could ultimately suffocate a dotcom. For one thing, senior managers at dotcoms tend to work closely with other department heads. “You won’t find the CIO and the vice president of marketing working together at a traditional, hierarchical company,” insists Pappacena. “Yet in an E-business, you have diverse people collaborating on projects. It takes a different kind of person, a different kind of competency.”

If senior executives at traditional companies need proof of this, one trip to the capital of Wonderland — Silicon Valley — should suffice. “You walk into old warehouses,” KPMG’s McCarthy says, “and see this open environment, with lots of people in their 20s running around in cut-off jeans and tennis shoes, with dogs at their desks.”

You don’t see a whole lot of springer spaniels roaming the halls at US Steel. But E-business culture is more than just office pets and fashion statements. It’s also about speed. The cautious managerial style of land-based corporations can prove to be deadly in the virtual world. “Old-economy companies have a penchant for perfection,” McCarthy points out. “But E-business is inherently about imprecision. If you wait for perfection, you lose.” Due diligence, the cornerstone of good financial control, could prove unduly burdensome. “Take flexibility away, add numerous review processes,” she cautions, “and you may miss the boat.”

Wagner, former KB Toys finance chief and current de facto head of KBkids.com, agrees. “You never know when the next great idea will be born,” he argues. ” You have to be more flexible than in running a traditional business.”

KBkids.com is anything but traditional. The company, a joint venture of KB Toys’ parent Consolidated Stores Corp. and kids E-tailer BrainPlay.com, was launched in June 1999. The management team and IT personnel came from BrainPlay.com. “We have guys here with bleached blond hair and earrings, people who would never work in a traditional retailer,” Wagner concedes. “They’re more interested in growing personally with the company, so they’re driven by ownership options more than salary — the opposite of more-traditional companies.”

Management decided not to try to fit the round peg of E-business culture into a square corporate hole. “We wanted a separate organization running the dotcom,” says Wagner. “An E-tailer requires a more technology-focused staff — younger people trying to grow a business rather than run a business.”

Thus, the delicate task facing Wagner: grafting KB Toys’ old-economy strengths of brand management, supplier relationships, distribution efficiencies, and fiscal accountability onto the dotcom, without weighing it down. “It’s my job to figure out how to make money,” says Wagner, “without hampering creativity or letting it run amok.”

For his part, consultant Pappacena acknowledges that managing discrete cultures can be intimidating for CFOs. “I advise finance managers to think of their dot-com business the way a venture capitalist would,” he points out. “If they take the traditional approach for capital budgeting purposes — looking at the hurdle rate of investment, internal rate of return, or payback period — they may miss an opportunity.”

Indeed, traditional capital budgeting processes tend to weed out the majority of projects. Typically, finance managers only green-light investments that offer the most attractive rates of return. With E-commerce projects, such discernment can veer toward the myopic. Insists Pappacena: “The CFO is one of the few people who is very well-placed to see the big picture.”

Brain Drain Pain

The aerial view has convinced some finance managers that cyber-operations are best kept in-house. Progressive’s Forrester is one. The CFO points out that Progressive, like most data-intensive insurance companies and high-tech businesses, maintains a sizable information-technology operation. In fact, the company had more than 1,000 IT employees prior to launching its dot-com operation in 1995. With so many IT staffers already on board, Forrester says it didn’t make much sense to hive off the E-tailing operation. “The people we attracted to our dot-com weren’t that different from those we already had,” he says. “Frankly, I don’t see a separate culture. So I don’t see a need to manage dotcoms as discrete businesses.”

Managers at Mountain View, California-based Intuit Inc. came to the same conclusion. In October 1997, the financial software vendor rolled out Quicken.com, a site offering a slew of services, from click-and-buy auto insurance to electronic bill presentment and payment. But Greg Santora, CFO and vice president of corporate services, says before the launch, Intuit management debated whether to integrate the dot-com into the company or run it as a stand-alone unit. “We decided that separation — different organizations, rules, compensation schemes, and so on — made no sense,” Santora recalls. “We didn’t want to drain our best talent to a new division at the expense of what was paying the bills — shrink-wrapped software.”

Consequently, Quicken.com is part of Intuit — a dot-corp with one culture. Employee incentive pay is broken into three categories, based on a worker’s individual performance, the accomplishments of the employee’s business unit, and the overall results of Intuit. Senior executives have their bonuses weighted more toward corporate results; lower ranks have theirs based more on personal performance criteria.

There is one drawback to Intuit’s in-house approach, concedes Santora. “Our recruiting to the dot-com has been difficult because people want more of a stand-alone dot-com entity that can offer them more upside risk and potential reward,” says the CFO. “By keeping the company intact, we find it’s harder to attract talent.”

Intuit could move employees from the old company to the E-tail operation. But consultants say such a move can devastate company morale. At the very least, poaching workers from the parent company can stir up resentment from loyal employees left behind — more so if the E-commerce operation may be spun off someday.

To avoid getting ticking packages in their in-boxes, some corporate managers have decided to spread the spin-off wealth around. Says the CFO at one European company that may float its dot-com operation: “We’ve always made it clear that if and when we do an IPO, the key people in both business areas will be rewarded.”

A few consultants advise corporate clients to establish an independent governance structure for their virtual businesses. Says Richard Broyd, chief executive of MAST, the London-based boutique investment bank within the Monitor Group: “We advise firms to structure the Internet division as if it were a separate company, whether or not they plan to float it.” Broyd says the structure helps attract more-experienced staff to the venture. And he believes it makes the chain of command crystal clear.

Such clarity is crucial. Privately, consultants report that vague reporting lines often hamstring E-commerce rollouts, setting off squabbles, disputes, and even employee resignations.

Surf and Turf

Certainly, few corporate initiatives unnerve old-economy employees like a dot-com launch. Contrary to conventional wisdom, not all workers are wowed by the glamour of an E-commerce IPO — nor the lucrative stock options that often go with it. In March, VNU management announced it would float Jobworld, the company’s European IT recruitment Web site. Halpenny says VNU managers never expected the reaction they got from VNU workers.

“We thought employees would be pleased,” recalls Halpenny. “But when the IPO was announced, everyone got nervous. Staff didn’t like the idea of not being under the VNU umbrella.” That lack of employee enthusiasm made management think twice about the spin-off. Suddenly, says Halpenny, it was, “Hang on, should we keep this in-house?”

For his part, MAST’s Broyd believes spinning off a dot-com rarely makes sense. “It’s the lazy way to deal with a new set of managers,” he argues. Forrester Research’s Meringer agrees. “Thinking in terms of two companies with two cultures is wrong,” she says. “The notion of ‘MyDotcom’ and ‘MyBrickandMortar’ is flawed.”

Meringer believes a uniform policy with respect to employee compensation and promotions, sales and service, and systems architecture is a better solution than splitting the oak. “All business is rapidly becoming E-business,” she says. “Frankly, I wouldn’t be surprised if the term ‘brick and mortar’ disappears before the year is out. It’s already passé, as far as I’m concerned.”

Some CFOs at old-line companies seem to share her view. “We’re not a new-economy company defined by a dotcom, but an old-economy company incorporating the benefits of technology and the Internet,” says Stephen Wolfe, CFO and treasurer of The Toro Co., a Minneapolis-based turf management company. Toro recently launched an E-commerce initiative to connect the manufacturer with its distributors and dealers. The rollout will enable the company to send and receive purchase orders, invoices, and product descriptions.

When Toro’s management contemplated launching a full-fledged E-tailing operation, however, the plan raised some hackles. Apparently, some of the company’s retail distributors were not overly thrilled by the prospect of Web-surfers buying Toro’s lawn products directly from the company. Such a setup would have effectively cut them out of the loop. “The worst thing we can do is eliminate our distributors,” notes Wolfe.

Ultimately, Toro management decided to sell a limited selection of the company’s electric and battery lawnmowers, weed trimmers, and other nonservice turf equipment at Garden.com. The arrangement enables Toro to service its customers while keeping loyal distributors happy, as well. “We’ll progress by using new dot-com tools and ideas, but we won’t throw out everything that’s worked for us in the past,” explains Wolfe. “Rather than one culture or the other, I guess you’d say we’re a blend of both.”

Well, not completely. While Toro does have a fairly relaxed dress code, it’s not exactly a mosh pit in Minneapolis. “Khakis and polo shirts are fine here,” explains the Toro CFO. “But we’re really not about to let people wear shorts and sandals.”

Russ Banham, who writes frequently about technology and finance, is a contributing editor at eCFO. Additional reporting by Jennifer Morris of CFO Europe.

Lessons from a Skinflint

While managers at land-based businesses unveil virtual operations — and alienate employees in the process — one company has taken the reverse commute to Dot-corp. In May, executives at Nerve.com, a Web site blending soft-core sex and highbrow literature, launched a print magazine, Nerve. Despite the company’s unusual path, management is facing the same HR issues afflicting managers at other click-and-mortars. “I’ve learned we must manage the two cultures differently,” says CFO Louis Kanganis, a former Wall Street hedge-fund manager.

Although the print magazine’s content is as free-wheeling and sexually graphic as its Web site, it required a more conventional business approach, Kanganis says. Managers at Nerve.com hired staff from the traditional print business to publish the monthly, and many of them are a stark contrast to Web-site employees.

How stark? Well, when 60 Minutes II did a feature on Nerve.com recently, the webzine staff stripped and streaked through the streets of Manhattan. Kanganis and much of the print magazine crew kept their clothes on.

Although managers at the magazine are young — at 35, Kanganis is Nerve.com’s oldest employee — they tend to observe the rules of old-guard business. “Titles and rank have more weight for them than for those in the dot-com world,” Kanganis says. “They like to know who they report to and who reports to them.” Print staffers also prefer cash compensation and salaries — they’re less willing to cut their salary in return for equity in the company. “As CFO,” Kanganis says, “I’ve had to think of compensation structures fitting the two cultures.” —R.B.