Why eBay's Spinoff of PayPal Was a Model of Change Management

Complexity increases the degree of difficulty - and vice versa. To effectively create a new entity from an existing one and have it survive, let alone succeed, requires a combination of talents, skills, values and strategy. Managing that process and the people involved requires turning risk into opportunity. JL

Greg Satell comments in Digital Tonto:

The spinoff of PayPal from eBay involved splitting a Fortune 100 company into two Fortune 100 companies. Separating two highly integrated, data intensive technology operations meant that a decision would have to be made about every person, server, software protocol and database entry in the company.
Every enterprise, no matter how big, successful or skillfully managed, will eventually have to deal with a challenge that represents an existential crisis. In meeting that challenge, every flaw will be exposed and every weakness will be pounced upon by competitors. A crisis is management’s ultimate test.
Last year eBay announced that it would be spinning off PayPal, the payments juggernaut that it acquired in 2002, into a standalone company with no ties to its parent. While the situation was not a crisis in the usual sense, because the goal was to unlock an opportunity rather than to avoid a catastrophe, it was an immense challenge.
Separating two highly integrated, data intensive technology operations meant that a decision would have to be made about every person, server, software protocol and database entry in the combined company.  I talked to PayPal VP Kirsten Wolberg about how they did it and it is a model of crisis management that we all can learn from. Here’s what you should know:
Build The Culture Before The Crisis
As Eric Jackson explained in The PayPal Wars, the initial marriage between PayPal and eBay wasn’t an easy one. As separate companies, they were often in conflict and eBay had at one point acquired another payments company, Billpoint, to thwart the young upstart. Up until the merger, the two companies had been, in large part, rivals.
There were also serious cultural issues. PayPal’s freewheeling, irreverent culture chafed in eBay’s more corporate environment. Many of PayPal’s most talented executives would soon leave the company to join or lead new ventures with such distinctive success that it earned them the nickname, the PayPal Mafia

Ironically, Wolberg told me that the firm’s culture was critical in overcoming the challenges and achieving an effective separation between the two companies. It was the management’s ability to establish credibility in their objectives, pull together and get things done that helped keep the plan on track as they moved forward at blazing speed.
Culture always begins at the top and she credits former eBay CEO John Donahoe for continually reinforcing the firm’s values and make cultural aspects of performance a focus of performance reviews.
So, in a sense, the crisis management process started years before the company ever had to face the challenge of separating the two companies.
Instill A Sense Of Urgency Through Visible Leadership
Crisis management is essentially an exercise in leadership. While the specifics of every situation may vary, the one constant is that standard operating procedures won’t be sufficient to overcome extreme challenges. People need to do unusual things and work together in ways that they are not accustomed to. The mandate to do that can only come from the top.
So at the outset, Donahoe set up a steering committee of senior leaders, including himself, that outlined the guiding principles of separating the operations of the combined company. It was agreed that the spinoff process would not compromise security, employees, customers or the business. Any proposal that would affect any of these areas negatively would be rejected.
At the same time, in order to maximize speed, they felt it was necessary to “clone and go” rather than try to improve operations while they were being separated. In a place like eBay, where continuous improvement is very much a part of the culture, that was a tall order.
Define Areas of Conflict
No matter how well thought out the guiding principles are, there will inevitably be areas where they conflict. In the case of spinning off PayPal, one of these areas was security, which could not be compromised, but was far too complex to “clone and go.” Customers can forgive many things, but a security breach is not one of them.
What’s more, security is different than other functions because it requires very hands-on expertise.  The environment is always evolving and there are no hard and fast rules. Hackers in different areas of the world prefer different methods of attack, which evolve and change over time. Maintaining security requires experts to recognize patterns and shifts in patterns.
While eBay had a world class security team, many of its experts specialized in specific types of threats and their knowledge could not be transferred easily. So the company paired employees to train each other and beefed up on staff.  It was also the one area in which a temporary service agreement was implemented that would stay in place after the spinoff.
In the end, Wolberg told me that she felt security was the one area that had improved as a result of the separation.
Recognize Success Moving Forward
The spinoff of PayPal from eBay was a rare event. It involved splitting a Fortune 100 company into two Fortune 100 companies. To add to the difficulty, because of legal constraints, the parameters could not be altered.  As Wolberg put it, “86% of all projects are not successful and this one had to be.”
Yet she also felt that her company had become better for the experience. “We feel that we’re stronger for overcoming a major challenge and proved once again to ourselves that we could do the impossible,” she told me. Much like the songs of war in Game of Thrones, a successfully navigated crisis can serve as lore for future challenges.
So after the spinoff was successfully completed, with all goals met and timelines achieved, PayPal made a point of honoring its people, through recognition, financial bonuses and a “founders’ party” that both included the original founders from the “PayPal mafia” and also underlined the fact that the present employees are, in effect, founders of the new PayPal.
Nobody, or at least nobody in their right minds, seeks out a crisis. They are exhausting, heart wrenching and fraught with risk. Yet that should not blind us to the fact that a crisis, effectively managed, can also raise the bar and positively impact performance for years to come.