InformationWeek

December 13, 1999

E-Transformation
The Fast Track To Becoming An E-Business
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Illustration by James O'Brien Few industry sectors are being watched as closely during this holiday season as toy retailers, with Christmas 1999 viewed as make-or-break time for dozens of E-commerce sites. Last spring, executives at Consolidated Stores Inc. in Columbus, Ohio, parent company of the KB Toys retail chain, knew that would be the case. They also knew that their KBToys.com Web site wasn't going to cut it in the fierce competition to be the leading online Santa Claus come December. "Our site was new, it was very limited, and not very advanced," says Consolidated Stores CFO Michael Potter. "We could not move fast enough by ourselves. Businesses have to recognize what they're good at. We were not an online business with an Internet management team."

Instead, Consolidated Stores found one in BrainPlay.com, a Denver startup selling primarily children's games on the Web. BrainPlay sold the business in exchange for a 20% stake in a joint venture with Consolidated called KBKids.com Inc.; the companies combined their Web sites into a single site with that name. Consolidated Stores invested $80 million in the venture, a "clicks-and-mortar" combination that employs 120 people.

"We knew how to build a great Web site, but they had a 70-year-old brand with stores in every state," says BrainPlay founder and KBKids.com CEO Srikant Srinivasan. "That's something we could not have built."

One of the partnership's first moves was a massive technology upgrade to power the site. BrainPlay had been running on a Microsoft SQL Server database and homegrown, proprietary transaction processing applications running on Berkeley Systems Design Unix. KBKids.com replaced that with an Oracle8 database and Smith-Gardner Inc.'s WebOrder catalog and back-office processing software running on Sun Solaris; the hardware includes Sun's 4500 and 6500 servers. Warehousing is handled at third-party fulfillment house Hanover Direct's 750,000-square-foot facility in Roanoke, Va.

chart Company executives say they have a winning combination in the mix of Consolidated's scale and BrainPlay's Web-specific expertise. "We have more Pokémon cards than any other online retailer, and we couldn't have done that without KBToys' $2 billion worth of buying power," says Srinivasan.

But it's not just size that matters. Large companies must also bring the correct mind-set into partnerships with Web startups. "All brick-and-mortar companies are not alike," adds Srinivasan. "They've given KBKids.com the right degree of autonomy along with strong levels of strategic and financial commitment. Typically, those two don't usually go together."

While Merrill Lynch scrambles to catch up with competitors in online trading, it's forged ahead of the pack on other E-business fronts. The financial-services company was the first to disclose, earlier this year, that it would offer a hosted, aggregated procurement service via the Web to its small and midsize business customers. Merrill Lynch did so through a joint-venture partnership with Works.com; it also bought an undisclosed stake in the company for $10 million.

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Merrill Lynch is rolling out the system on a pilot basis in seven branch offices in the United States. About 130 of Merrill Lynch's in-house financial consultants are offering the system to their business customers; the eventual companywide rollout will include 15,000 consultants. The company offers online procurement of office products through a Merrill Lynch-branded system that integrates with the customer's Merrill Lynch cash-management account, because in many small businesses, the CFO also handles the purchasing function.

The partnership with Works.com is working well, but Merrill vice chairman Steffens says it's not without its hitches. "We're probably a little more bureaucratic than they would like, with legacy systems that they'd like us to change faster," says Steffens. "And there's always the challenge of how a large organization can work with a smaller one without overwhelming it."

One way Merrill Lynch ensures that is not to insist on exclusivity--even when taking an investment stake in the partner. "They have a business to run, and we just have a relatively small portion of ownership," Steffens says of Works.com. "If they succeed in their business, we'll be able to provide a better product for our clients."

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