[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…..