[A Whole Week With an Angry CTO] — How A Tech Services Company Closed Their Big Customer Anyway (Episode: 0523)

 

 

[A Whole Week With an Angry CTO] — How A Tech Services Company Closed Their Big Customer Anyway (Episode: 0523)

May 25, 2017: Gregory Rutchik

Sometimes getting the internal team to agree is more than half the battle

Preface by Gregory/Editor

This is about Takashi, a CEO of a Silicon Valley-based Cloud computer managed services company and his CTO Jiro. The Company has about $3mil of annual revenue with a goal of growing to $8mil in two years.  Everyone’s compensation is tied to that goal. Takashi has a strong number 2 in Jiro, his CTO.  Jiro and Takashi have worked together for 16 years, and are close friends. Earlier this week, Jiro was very angry at Takashi for the business direction things had taken.

I recently dealt with coming between this CEO and the other major internal decision-maker in my client, while trying to advise them on how to close a large customer.  What do you do if your internal team disagrees on how to proceed? How do you help them move forward and close the deal while healing the internal conflict? Is it always clear?  This story is shared from Takashi’s and Jiro’s vantage point.

Enter Takashi

Last quarter, a large customer we were working on finally was ready to hire us.  The only problem was, they (a) wanted us to take more risk over their network’s product development staging area than our standard service level; (b) wanted us to devote extra development resources; and (c) they would NOT tell us exactly what THEIR downstream customers do with the product.  We were pretty sure it was aerospace related.  Knowing our customer’s customer is beyond our NORMAL need to know but this was not a normal deal.  Plus, we need this customer to meet our growth goals.  We’ve invested tons of time proposing and quoting and learning about this customer.  We can do their work but at what risk.

I had sold the client on the following: out of the box service offering plus some customer development work was the right skill level for the customer.  They would have to go to Europe or Asia to compete without skill set and based on their business model, I knew that was a non-starter for them.  Little did I know that that they would impose their own terms late in the game and force my hand.

A Word from Jiro

From my perspective, it was simply a question of resources.

“I cannot have my engineers spend too much time on a customer custom development. That means fewer individual hours doing monitoring and custom maintenance, which is our bread and butter.”

“Our business is set-up to allocate flexible human hours to each customer but we do not have so much wiggle room to add hours for development without a significant quality impact elsewhere.”

  • The customer wanted us to do custom database development;
  • The customer wanted us to “indemnify them” and take on much more risk from damage and infringement type claims;  and
  • The customer wanted us to guarantee the availability of specific engineering staff.
  • In sum, the customer wanted us to act as their custom development team.  That was not our business and everyone but my CTO saw this as a good thing.  

Takashi says:

When I mentioned this at an internal meeting, people sat with hands in their laps, shook their heads, stares went to Jiro and many sat with their mouths open waiting to scream. The common thread was:

“Wait? What?

How have we gotten this far down with such a big customer and consider walking away? How was what they wanted not our ideal client?

Does everyone on the team really seeing this as a good thing?”

The answers were not so simple at first.

Then Jiro added:

“Maybe they are our ideal client.”

Now with intense curiosity, they lean in.

“And Jiro’s concerns?” someone asked

Everyone needed to understand his concerns about staffing and the real concern Jiro had about quality. But I also wanted everyone to understand how this client made us pivot and focus on what was really the key to our business – and in one word — it was MARGIN.  

Let me share what we learned.

How we did it

Offer broader services at the better margin: We gave the customer what they wanted at a price that was our base offering plus a fair estimate of our cost plus 20%.  And we explained it to the customer so they saw our math.  

Staffing tied up:  We offered our staff a choice.  We gave internal staff the chance to float across project categories, gain training and offered the customer on-time and early delivery pricing incentives.

Quality control: We listened to the customer but gave them the choice.  “What was more important,” we asked, “was it the stability of your development environment or price.”   The customer wanted quality and fewer bugs.  

THIS IS WHAT WE DID….

Lesson #1: Margin goals were reviewed

BY PEELING BACK TO THE BASICS OF OUR BUSINESS WE LEARNED WE COULD GET HIGHER MARGINS.

Task: We looked at which service offerings yielded highest margins and least amount of quality/trouble tickets.  We had never been forced to do this before this customer.

Result:  Higher margins.

I can’t stress how important this shift has been for me.

Lesson #2: WHAT GOOD THING ALSO CAME OUT

Yes, it’s absurd to think that we did not give our customer the choice between two prevailing conditions.

Result: Without struggling to cover quality with limited staff, we now have a customer that shares the risk of their own business demands. They do not have to bear the whole risk – that would mean they would just do the work themselves.   Positive outcome for both sides.

Lesson #3: POSITIVE OUTCOME

In order for us to explain how our business worked for our customer in terms of cost and margin, we had to first understand it ourselves.  The process caused our whole team – and not just finance – to understand the margin components and margin impact of every single facet of our business.  

“This was one of the most valuable exercises we have had internally,” Jiro admitted

Result: We developed a broader service offering but more importantly, we gained a clearer understanding of which parts of our offering yield the most margin and at what top line cost.

Every demand from a customer creates an opportunity to test the demand against the basic assumptions of our business model.

How to Increase Margins Without Sacrificing Our Internal Team:

1. Really listen to what is important to the customer

2. Have an honest margin analysis methodology for every facet of your business

3. Develop clear tools to apply customer demands against margin analysis

4.  Give internal staff a seat at the table to discuss the opportunity, the financial and operational impact and whether or not it fits with your existing “ideal client” profile.

###

AFTERWORD BY GREGORY: Are all of your customers a version of your “ideal customer” ? If not, how did you reconcile the prospective customer with your business plan? How would you approach it? Please share your thoughts below…..

Do you believe the compliments given by your opponent?

Yesterday, a Mongolia-based consulting services client shared a common negotiation tactic in the US. The nationality of the speaker only highlights an outsider’s perspective.

At a tense point in the negotiation, the American said:

“I would never want to be on opposite sides of this issue with you,” the American said.
“Yeah why is that?” the Mongolian side asked.

“Because you just seem too fierce, I would worry that it wouldn’t end well for me,” the American said.

Americans often use the “false prop up the other side” approach to appeal to ego. Regardless of the words, it is a false compliment to gain leverage and the speaker does not believe it.

I get this often with opposing counsel who says things like “I really like you”, “you’re so smart” or worse, they call my client or me “pal.

These things ever show up in your world?

It is often said in a genuine tone but the fact that it is a negotiation tactic is surprisingly lost on many.

The Mongolian’s below response summed up how the logic of false compliments falls apart.

“You and I are negotiating a transaction to do business together. We are doing the deal because we cannot do it ourselves. If you are telling me that when the chips are down, you will turn from our business partner into our adversary then this discussion is over.”

Would you like to become a better negotiator? Let me know what types of things you negotiate? Shoot me an email – gregory@rutchik.com

Representative Cases

Are you in:

biotech, software development, device, game and video console and content, book publishing industry (writer side), property and casualty insurance, life insurance, real estate broker and real estate development, automotive, content development, cloud computing, fashion, manufacturing, food and/or food additives?

Some examples of the past and present clients/matters are:

1) Copyright/ Trademark infringement Litigation

a. Online and Web hosting

• Third World v. XHOT99, Inc. US DC CD. Defend web-host in contributory copyright infringement, RICO, trademark infringement claims. Affirmative defenses include DMCA and CDA.

• Jupitermedia (Fulbright Jaworski) v. Jupiter Hosting – US DC Northern District California. Defended web hosting company from injunctive relief trademark infringement and cybersquatting allegations. Successfully opposed motion for preliminary injunction. Published opinion. (Judge Claudia Wilken). Concurrently advised Jupiter Hosting on all of its commercial transactions and subsequently provided assistance regarding its sale to Navisite in 2007.

• DICK DACK LLC. Advise adult porn producer re DMCA and 2257 custodian of record issues. Review of COPPA and general business advisor.

b. Movie

• Rivera v. Does, US DC SDNY. Obtained TRO, seizure by US Marshall and preliminary injunction on behalf of filmmaker of “ENRIQUILLO” (Story of discovery of Dominican Republic) against cameraman and investor who purloined film. (Judge Kimba Woods)

• Brush Media v. Boujaklian. (2002 WL 1906620 (N.D. Cal.) US DC ND. Adult DVD movie producer. Successfully prevented copyright infringement action through motion to dismiss for lack of subject matter jurisdiction. (Judge Eliza Laporte)

• Eslinger-Galligani adv. Domingo Gutierrez. Advise movie production company on acquisition of life story rights, drafting options and partnership agreement.

c. Video Game

• Sudoku Developer adv. Danger Technologies. Advised on-line sudoku game re licensing agreement with mobile phone developer and mobile phone platform.

• Doe v. Investor. Advised on-line game/personal map developer re licensing agreement risk and litigation strategy re venture investor.

• Eidos acquisition of Crystal Dynamics. Conducted IP audit on behalf of Eidos and negotiation of various commercial agreements related to acquisition of Crystal Dynamics by Eidos including domain names, game titles, content and software.

• Beeck v. Cinemaware, US DC NDCA. Represented video game development team re claims of copyright infringement, breach of licensing agreement and non-payment of royalties.

d. Computer Accessory

• Grixxxx Technology adv. Apple, Inc. Re-negotiation of Made for Ipod agreement and litigation strategy re anti-trust and breach of contract claims

• Disruptive Technology adv. Apple, Inc. Re-negotiation of Made for Ipod agreement and related commercial agreements.

• Acme Studio v. Acme Made. US DC Northern District. Defended computer laptop and accessory manufacture, owner of acmemade.com from allegations of trademark infringement and cyber squatting.

e. Dance

• Creative Station adv. Apple Seeds. US DC SDNY Advise “teach kids to dance” school re copyright litigation and commercial agreements related to licensee

f. Wireless

• General Magic adv. Consolidated Freightways. Advised Apple, Inc. spin-off re commercial licensing of its hand-held device.

• AD USA v. Automan. US DC Pennsylvania. Obtained preliminary and permanent injunction on behalf of handheld computer manufacturer in automotive industry. Resulted in significant financial settlement on behalf of client.

g. Sculptural Works

• Ohtake adv. Sculpturesite Gallery. Defended allegations of breach of contract related to sale of kinetic sculpture.

• Rader v. Sutter. US DC ND. Prosecuted TRO and pursuit of preliminary injunction in copyright infringement claim on behalf of cemetery monument design company. Case proceeded through death threat allegations, expedited discovery and an appeal to the 9th Circuit for relief. (Judge Susan Ilston)

h. Software

• PC Tools v. Contour/Elle Mae, Inc. AAA San Francisco. Successfully brought copyright infringement claim on behalf of mortgage industry software developer. Resulted in six-figure settlement in client’s favor.

• Workshare v. Litera Corp. US DC ND. Successfully defended document management software co against injunctive relief action for copyright infringement.

2) Patent and Trade Secret litigation

• Patentee v. L-3 Corp. US DC Georgia. Defended owner of multiple power utility sites from allegations of patent infringement over payment process method.

• Datapark v. GMG Systems, Inc. San Francisco District Court. Successfully prosecuted misappropriation of trade secrets related to parking garage computer equipment through three defense firms. Resulted in six-figure settlement for client.

II. Fraud litigation

• Sisters v. Brother in Family Partnership. Defended and advised brother/general partner in breach of fiduciary duty suit in LA Superior court alleging misuse of partnership funds, self-dealing.

• Shareholders v. NiftyNet, Inc. US DC ND. Successfully brought derivative action against former President of Delaware corp. on behalf of shareholder/director alleging fraud, corporate waste. Resulted in redemption of shares and a significant financial settlement for client (Judge Charles Breyer)

• Does v. Real Estate co, Inc., and President/director – San Francisco Superior Court. Defense of the President of commercial leasing agency in five separate actions alleging fraud and negligent supervision allegations by investors in multi-unit properties.

• Insurance brokerage v. Former partner– San Francisco Superior Court. Pursued computer fraud and abuse and trade secret misappropriation against former partner of general insurance broker. Resulted in financial settlement.


3) Online Torts

• CPA v. Yelp and anonymous poster. Advised CPA firm re: pursuit of claim against anonymous user on Yelp re: negative services. Consideration of privileges and “opinion” defense. Obtained a retraction by user to be less offensive.

• Jane Doe v. Armando Aguilar, LA Sup. Ct. Prosecute case alleging false light, invasion of privacy, and intentional infliction of emotional distress re: release and publication of sex tape and online harassment.

III. Anti-trust litigation

• Weinberg v. Ingenix. US DC, Connecticut. Participating plaintiffs’ counsel in class action claim of price fixing and unfair trade practices against Cigna, Wellpoint and Aetna.

IV. Outside General Counsel

• Galligani-Eslinger Productions. Outside general counsel to reality television and motion picture production company.

Recommending Retirement Investments?

Is your “financial advisor” subject to the new Department of Labor Conflict of Interest in Retirement Plans and Fiduciary rules?

Have you asked them the following questions:

Do you consider yourself a fiduciary?

  • If not, why not?
  • Are you willing to act as a fiduciary with a duty to act solely on my behalf?
  • Are you willing to disclose to me any conflicts of interest that may interfere with your acting solely on my behalf?
  • Are you willing to put this commitment in writing?

How are you compensated?

  • Do you earn fees or commissions based on the number of products that I buy or the size of my investment?
  • Will you earn a higher fee or other type of compensation if I invest in certain products you recommend or will you receive fees for services related to specific investment products?
  • Will you provide a list of the fees and commissions you receive either directly from me or from other sources in writing?

Are you a licensed or registered investment adviser?

  • Are you registered with the State, U.S. Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), or the Certified Financial Planner Board of Standards, Inc. (CFP Board)?
  • For how long? What is your experience?
  • Who supervises you, or, are you a sole practitioner?
  • If a sole practitioner, do you have professional liability insurance?
  • Have you (or your firm) ever been disciplined? For what?

 

I can help you determine whether YOUR “financial advisor” is your fiduciary?

And if you suspect that your financial advisor is not acting in your best interest, or have been harmed by a recommendation that they have made, let’s discuss what might be done to help you.

Call me at 310-570-2399 or email me at gregory[@]rutchik.com

 

Background

Background

After college Gregory was a financial analyst in Tokyo for two years where he learned to speak and read Japanese. He was one of the youngest foreigners to sit for the Japanese language equivalent to the Series 7 securities exam.  Although Gregory chose Temple Law School in Philadelphia, the Dean Robert Reinstein had helped Temple University develop a campus in Tokyo and Gregory began to collaborate with the Dean on a Temple Law Japan program, now in its 15th year. Under Dean Reinstein’s tutelage, Gregory write an analysis of the role of rice in Japanese politics. 

Gregory has practiced law in various environments. 

After returning from his Fulbright in Tokyo in the Fall of 1993, Gregory was invited to publish some of his findings in a work entitled Japanese Research Projects and Intellectual Property Rights (US Commerce Department, 1996).  In 1993, Gregory formed the Arts and Technology Group® in New York City to combine work with clients in the arts (namely film), software and information technology. Gregory’s earliest work was as a litigator. Gregory worked with the Volunteer Lawyers for the Arts in New York City representing independent songwriters, film producers and arts entities. One of his first cases resulted in obtaining a temporary restraining order and injunctive relief on behalf of a Dominican Republic film maker seeking to screen her version of Columbus’ discovery of the New World. Judge Kimba Wood resided. 

From 1994, Gregory continued his practice as an associate with Ostrolenk, Faber, Gerb and Soffen in New York City, a firm celebrating it’s 80th year anniversary with a focus on patent, trademark and copyright litigation. Gregory’s practice there focused on the learning to prosecute semi-conductor patents and trademarks, and on copyright litigation. In addition to learning the basics of trademark application work, drafting patents and marketing the firm to Japanese and Korean technology companies, Gregory was permitted to continue to work on behalf of the film maker.  Rutchik successfully leveraged the temporary restraining order into a seizure order and permanent injunction for my client.

Gregory also began leveraged his relationships in Japan’s government and his experiences in US trade to work on US-Japan trade disputes. In 1991, after an internship at the USTR’s office of Japan and China, Gregory was hired to represent Allied Stamp, a US wholly-owned subsidiary of the Blue Chip Stamp Company in Japan to assist to ease the effects of a Japanese anti-trust law that prohibited the sale of “buy-one get one free” type promotions in small retail shopping districts. The client was gracious enough to have Gregory work directly with Senator Don Nickles, members of DOJ’s Anti-trust group and Gregory continued to communicate with his former superiors at USTR.   Gregory’s job was to meet with many of the Japanese government regulators he had gotten to know during his Fulbright year, to meet stake holders in retail including woman’s rights groups and consumer groups, and to forge relationships in industry with the hopes of lessening any objections to the proposed changes.  The result was that this non-trade barrier was included in side talks between the US and Japan and eventually led to an easing of these barriers.  Read more here.  Additional engagements followed. 

In the Winter of 1997, Gregory moved to California, took the California bar and joined the Information Technology Practice Group of Cooley Godward LLP in Palo Alto, California, to work on software and information technology clients. Gregory’s focus there was on drafting, negotiating and advising on licensing, distribution, development, spinouts and other agreements. Gregory then joined two Cooley Godward clients as assistant general counsel – noosh.com a web based procurement entity and at Loudcloud, an infrastructure managed services company.

The Arts and Technology Law Group reformed in San Francisco and ultimately became a partnership with the firm of Richard J. Idell.   

Education
Gregory received a J.D. in 1992 from the Beasley School of Law, Temple University, Philadelphia, Pennsylvania where he was a member of the Dean’s List. Gregory received a B.A. in American Studies from Skidmore College, Saratoga Springs, New York, in 1987.

Gregory was a Fulbright Fellow at the University of Tokyo, Graduate School of Law from 1992 – 1993. Gregory’s focus was the Licensing of technology by Japanese information technology companies. Gregory has traveled throughout the world, lived in Tokyo for four years after college and law school and speak fluent Japanese. He is also conversant in French.

In 2005, Gregory received his LLM in Taxation from Golden Gate University School of Law.