Chapter 9: The Fall, April 1, 2000 - June 30, 2000 - Episode 7Listen to podcast
“I have an idea,” says Dom. “I think Donna’s right, but I have an idea.”
Larry is staring straight ahead and doesn’t appear to hear anyone.
“What’s your idea, Dom?” asks Donna when no one else responds.
“I think we need a new product. If we had a new product, we could sell it to the old customers.”
“That would help,” says Frank.
“How the fuck we gonna do that?” asks Larry. “Dom, you can’t even stay on schedule for the upgrades we need to the product we got. Frank, you can’t sell one product; how’re you gonna sell two? Are you gonna tell me you need more salesmen like Dom’s about to tell me, ‘No problem, Lar. I can do two products. Just need some more developers.’ What’re you guys smoking? We gotta execute on what we’ve got on our plate, that’s all.”
Donna looks at Dom and smiles for the first time in the meeting. “That does make some sense, Dom. You been going to business school mornings when we think you’re sleeping late? It’s not rocket science to try to get some more money out of the customers we’ve already got.”
“If we have to have a shitty quarter,” says Larry, thoughtfully, “then it would be good to have something new to announce. Something to keep the Street’s faith in us. Dom, how long’ll a new product take?”
“Depends what it is. I mean we don’t know what it is. How am I gonna tell you how long it’s gonna take? Then, if I’m wrong, you shit all over me. Maybe we should do some work, put together some ideas, test them out on customers, then have another meeting and decide what the product is. Then I’ll give you an estimate.”
“I think you HAVE been sneaking out going to business school in the mornings,” says Larry. “Something is making your head soft. I don’t expect that business school bullshit from you. You think this is a case study? Neat little binder says ‘Decisions made at hackoff.com’; has all the relevant facts nicely laid out; we study it; we role play; we do a fucking regression analysis on all this nice data we just happen to have; we have lots of meetings; then we make a scientific decision and we get an A in the course unless our spreadsheets aren’t pretty enough.
“The real world doesn’t work that way. We’re in this meeting here now with all the data we have and none of the data we don’t have. We don’t know what’s relevant and what’s not. Our portfolio value’s going down. We know it’ll come up again but we don’t know when. Frank doesn’t know why his salesmen aren’t selling anything. Aaron doesn’t know how much more the fucking lawyers are gonna cost us or who’s gonna sue our asses next. Donna doesn’t know who’s gonna pay their bills and how much the next D&O insurance premium is gonna be. You don’t know when the enhancements to the product we got’re gonna be done. And you wanna do a new product?”
“But, Lar,” says Dom, “that’s why I wanna take some time. That’s why we gotta study this. Define the product. Maybe get some estimates from Frank of what he can sell. Talk to the customers…”
“There’s no time,” says Larry. “It’s almost the end of the quarter. In this meeting we gotta figure out how to get positive operating earnings for the quarter and — if there’s gonna be a new product for me to announce — what it is.”
“Larry,” says Donna. “I don’t think you hear us. There aren’t going to be positive earnings for the quarter, not with what Frank is projecting for sales.”
“All the more reason to have a new product to announce. But I’m not giving up on the earnings. As much as I hate the idea, we’re gonna run another fucking sale like we did last quarter. Frank, you tell anyone it’s a sale this time and I personally cut your nuts off.”
“Got it, boss. Same extra incentives for the sales people?”
“No,” says Larry. “Something different.”
“You want me to get you some suggestions on that?” asks Frank.
“No. I know what I want to do on that. Lowest three salespeople on percentage of quota are fired.”
“Smartest thing anyone’s said all day,” says Donna.
“I think this may have unintended consequences,” says Frank. “I don’t advise it.”
“Your discretion,” says Larry. “You can fire more if you want to.”
“Or fewer?” asks Frank.
“Which part of ‘more’ don’t you understand?”
“What if they all make quota?” asks Frank. “Wouldn’t be right to fire them then.”
“If they all make quota; we sell nineteen mil; we don’t have a problem. Then you don’t have to fire anyone. You just said we’re on track for fifteen mil. That means they don’t all make quota.”
“I think ... we should adjust some of the quotas,” says Frank slowly. “Doesn’t motivate people to go after a number they can’t make.”
“The ones who can’t make their numbers get fired,” Larry repeats. “At least the low three. You could easily talk me into more. Next subject: hiring freeze. No one new gets hired. Start looking at low performers everywhere; they get fired.”
“We have to give them warning,” says Aaron. “We can’t just fire people for cause with no warning or we’ll spend even more on lawsuits. I suggest a layoff. Not our fault we didn’t know we wouldn’t be selling as much. It’s okay to lay people off so long as it’s not discriminatory. Easiest we start with the people with the least seniority.”
“No,” says Larry.
“No what?” asks Aaron.
“No fucking way,” says Larry. “I already said this isn’t AT&T; we don’t get rid of good people while we’ve still got bad people. I don’t care if it’s a layoff or firing so long as we get rid of the people who aren’t performing. Some of them have been here a long time like the guy Dom let go. Why can’t we have a nondiscriminatory firing of the worst performing people? It’s not age. Not color. Not sexual-fucking-orientation. It’s whether they do their job well or not.”
“We have no documentation,” says Aaron. “People have been too busy to do performance reviews, so we haven’t documented who we thought wasn’t doing a good job. And, since we didn’t do the reviews, we haven’t warned people either, so we can’t fire them for cause unless they’re stealing or something.”
“How did Dom get rid of the guy retired at his desk?”
“We bought him off with three months severance and an extended period on his options,” says Donna. “We could do that with more people if we have to.”
“That’s not gonna help this quarter,” says Larry.
“Nothing you do with people’s going to help this quarter. It’s almost over. Might help by fourth quarter if we get started right away.”
“Why doesn’t it help the third quarter?”
“If we move quickly,” says Donna, “we pay severance. Even if we move slowly, we pay severance, just less. Got to expense the severance, all of it, in the quarter we incur the obligation, not when we pay out the money. If you fire someone today and give them six months severance, you expense the whole six months right now in the second quarter.”
“Jesus,” says Larry. “Okay. Don’t fire anyone else with severance this quarter. But everyone’s gotta start reviewing so we can get rid of people who aren’t pulling their weight next quarter without paying blackmail.”
“That’s not a bad idea, Lar,” says Donna. “We shoulda been doing it all along but gotta start sometime. Street might not mind a big lump of severance next quarter. Makes clear expenses are going to be lower going forward. But they aren’t going to like THIS quarter, that’s for damn sure.”
“I don’t see the Street liking us shrinking,” says Larry. “They bought us because we grow. I don’t want to start on the reviewing until after this quarter is over. I want everybody full speed on making it the best quarter it can be. We gotta pull it out. Time enough to start the reviewing next quarter — July 1, especially if we don’t pull out an operating profit.”
“Not going to be a good quarter, Larry.”
“I’m not giving up. I really don’t want to report a down quarter or negative earnings from operations. The stock’ll crater.”
“I AM realistic. People have to work harder. Make things happen. If I wasn’t realistic I wouldn’t have okayed the fucking end-of-quarter sale. Okay: next subject. New product. Dom, you figure it out yet?”
“I’ve been thinking,” says Dom. “While you were talking about all that other stuff, I’ve been thinking…”
“We can tell,” says Donna.
“What do you mean?”
“You were a thousand miles away. Didn’t say anything about the hiring freeze. Didn’t hear when we talked about the guy you let go. You were somewhere else. What did you bring back?”
“So,” says Dom, “we’ve been selling software.”
“Yeah,” says Larry, “that’s what we do. Now you want us to sell hot dogs or dope or something?”
“So I think we can get more recurring revenue if we sell service. At Microsoft we were always trying to—”
“I don’t want to hear about fucking Microsoft again,” says Larry. “This is hackoff…”
Dom shows no irritation. “Okay, I think we ought to sell a service based on our software. We want to get recurring revenue and people are used to paying only once for software — maybe buying an upgrade sometime in the future— but we’ve said upgrades’ll be free.”
“What, exactly, would this service be?” Larry asks.
“Monitoring sites against hacker attacks. Giving them real-time instead of just passive protection the way we do today. We set up a network control center — a NOC — and we monitor what happens to our customers’ firewalls and at the boundaries of their networks. If something is happening, we respond in real-time. We even counter-attack the attackers — shut them down.”
“Can we do that?” Donna asks.
“Sure. It’s like a war game only it’s real. We used to hack against each other at Caltech all the time. This has been going on ever since computers could communicate.”
“I sort of like it,” says Larry.
“I think you boys just want to play computer games. I’m not convinced. How much’ll it cost us to develop? How much can we charge for it? Will Frank’s guys be able to sell it any better than they sell what we have now?”
“Hey, I can’t answer all that,” Dom objects. “I just thought of this.”
“I have another question,” says Eve Gross, opening her mouth for the first time at this meeting. “How do we position this versus our current product? I mean, we’ve been telling people that we ARE protecting them. Now we say they need more protection.”
“I don’t think that’s a big problem,” says Larry. “We are protecting them better than anyone else — especially antihack — can. But the world is getting more and more dangerous so we’re stepping up the level of protection.”
“But,” says Eve, “we say that our customers who deploy our software correctly have never suffered from a serious breach. So what evidence is there that more is needed? Are we now going to say that they are in danger even if they have our software?”
“I think we should be okay as long as we make the point that we are protecting them better than antihack is.”
“I still think it de-positions our existing software product,” says Eve.
“That may not be so bad,” says Donna. “We’re not making enough money from it. We’re committed to free upgrades forever. At least we can get new income from our customers with this. Maybe we don’t offer an equity deal on this at all. Use it to beef up cash.”
“Can’t do that,” says Aaron, “unless we give all the equity back to the equity customers. Way it is now, we’re committed to offer them any new hackoff products on an equity basis. Since this is a service and not software, I don’t think there’s any question that it’s a new product and not an enhancement or upgrade that they’re entitled to free. But we still have to give them an equity option. There’s even stuff in our contract with them which says how much equity based on what they gave us initially and the ratio of cash price of the new product to the old.”
“Do we get to step up the equity for those guys whose value has fallen out of bed?” asks Donna.
“Don’t think so,” says Aaron. “We didn’t want it to work the other way so they could step down when the price goes up.”
“We should give the equity back, then,” says Donna. “Otherwise the ones with worthless stock buy for equity and the ones with good stock buy for cash. We lose either way.”
“No fucking way,” says Larry. “That’s not what we’re about. Maybe I can buy this new war game product Dom’s dreaming up. Best idea he’s had in a while. But we’re not changing our strategy as far as acquiring customer equity. That’s what differentiates us from those clowns at antihack.”
“That’s not all that differentiates us,” says Dom loudly. “You’re all hung up on the financial stuff and forgetting the technology. We have a better product.”
“You would say that,” says Frank. “It isn’t easy to make that point in the marketplace.”
“That’s because you and your guys don’t know a hacker from a handball,” says Dom. “You don’t understand technology, so you can’t design solutions for customers. You can’t even speak intelligently about why our customers are safe and antihack’s are at risk. That’s why we’re not selling shit. All you and your guys know how to do is give stuff away. I—”
“That’s enough, Dom,” says Larry. “We know we have better technology. We also have a better business model. You’re going to demonstrate this better technology by delivering a managed service within six months. When the stock market goes back up, people will know that our equity strategy is much better than pure cash. Meanwhile we get some repeat sales...”
“I’m not sure…” says Frank.
“I’m not sure either,” says Donna. “I’m not sure we should be spending cash on a new product. I’m not sure we should sell this service to anybody for equity. So far, it doesn’t matter if we take equity from someone with no cash because we have no significant incremental cost when we give out another copy of the software — except for the commissionsAnd you know what I think about that. If we’re selling a service, we spend money on people every month to deliver the service; and we don’t get in any cash from these guys who are paying us in equity. This is much more risky…”
“Bots’ll provide most of the service,” says Dom. “Sure we have people in a NOC, you can take their picture and it looks good, but basically they’re waiting for the red lights to flash, which won’t happen very often. The bots are watching and, the way we’re designing this, they run mainly on the customers’ machines so we don’t have to buy much new hardware even when we get lots of managed service customers.”
“Larry’s gonna say I sound like I’m still in B-School,” says Donna. “But I think we don’t know enough to make this decision. I think we’ve got facts we need to study and then we decide. I respect you Dom: I know you’re good. I know our software is better. But times have changed and we’ve got to think about this before we commit.”
“You’re right, Donna,” says Larry. “You do sound like you did in B- School. I thought you unlearned that bullshit about knowing all the facts—”
“I didn’t say we need to know ALL the facts. I said there’s more we need to know before we turn from a software company to a service company. There’s more we’ve gotta think about in terms of how we get paid as a service company.”
“Time for thinking is over,” says Larry. “We got to talk some more about how we make this quarter come out okay, but meanwhile we’re doing this managed service. Dom, we need a real schedule. Need to know what doesn’t get done if you’re doing this.”
“I can get you the schedule. Nothing’s got to slip if I can get some more people.”
“No more people. We have a hiring freeze. And this project isn’t gonna make us any money for a quarter or two. Can’t take more of a hit on the expense side to do it. So you gotta not do something else you were gonna do. What is it?”
“There’s some stuff I can cut,” says Dom. “We can delay the Triple-H stuff…”
“See?” says Frank. “See? Stuff we’re already using as a selling point, now we’re not gonna have it. What do you think that does to sales?”
“Frank, stop whining,” says Larry. “Yeah, Dom, fine. Delay the Three-H stuff.”
“I can fill my vacancies, right?” asks Dom.
“Which part of ‘hiring freeze’ don’t you understand?” asks Larry.
“I’m not asking for new hires. Just replacements. You want this out, I gotta have people.”
“You want to do this, you do it with the people you have.”
“Fine,” says Dom. “But it’s gonna take longer.”
“Can’t take past six months.”
“You don’t even know what ‘it’ is yet. You just made the whole product up. Make sure there isn’t more ‘it’ than’ll take six months with the people you’ve got. We need this on time.”
“This is insane,” says Donna. “This isn’t the way to plan. Good thing no one can hear us.”
“Look,” says Larry, “it’s time to play You Bet Your Life. I think this is the right thing to do.” He takes his pistol off the table, spins the cylinder, holds it to his head, and pulls the trigger. As usual, there is an empty click. No one looks as if they expected anything else.
“So,” says Larry, “that’s settled. “We get new revenue from existing customers with a new service product. Good long-term strategy. Short-term, we have a hiring freeze. Clamp down on expenses. Run another end-of-quarter sale. Eve, any ads or shows you can cut back on?”
“Nothing that’ll help this quarter,” says Eve. “Everything’s already locked in. Not much I can cut from next quarter either. We don’t do much during the summer. Maybe a show and a couple of ads in September I could pull, but we’ll pay for that later in lost sales opportunities if I do.”
“Be prepared to cut; keep commitments down,” says Larry. “Next quarter’ll be tight, too. I’m never sure how much real business the ads bring in and I know how much it’s gonna hurt the stock if we are not operating-income positive. Frank, you gonna make fewer sales if we run fewer ads? You getting leads you can follow up on?”
“Very hard to tell, boss. Lot of leads are wannabes, waste our time. I think the money might be better put into sales incentives.”
Ignoring Frank’s suggestion, Larry turns to Eve. “Eve, Not sure we’ll cut ads but we gotta make sure the short term comes out right. Be prepared to cut in September.”
“I’ve got to know soon if we’re going to do that. Otherwise we’re locked in.”
“I got it. I’ll make sure we get back to you. Donna, what do we need in cuts if sales come in at 17.5 mil?”
“Larry, you can’t get there from here,” says Donna. “I don’t know how to make that plainer. You don’t want to hear it but it’s true. You’ll be lucky to get sales above sixteen mil anyway.”
“I think we want a smaller group to discuss this,” says Aaron.
Larry starts to disagree, stops and thinks, then says: “Meeting adjourned. Frank, you have a long, long way to go. Get on it. Dom, I want a REALISTIC schedule. Don’t make the product fat. Design it so we can deliver it in six months. Everyone, there is a hiring freeze. Eve, you need to think hard about positioning the service; that should be exciting. But remember, we may have to cut September ads and trade shows. Donna, Aaron, please stay.”