Alright – so today we’ve got the honor of introducing you to Dino Lucarelli, CPA. We think you’ll enjoy our conversation, we’ve shared it below.

Hi Dino, thanks for joining us today. Was there an experience or lesson you learned at a previous job that’s benefited your career afterwards?

Business opportunities are hiding in plain sight.

What does this mean? This speaks to the reality that in our daily work, significant breakthroughs in innovation or operational improvements in our business stare us down as we, ignoring the obvious, operate in a world of repetition,.

Examples abound,

Example 1: 55 days
I was CFO in a public company that sold computers and networking services. Annual revenues were about $900,000,000. Customer payment terms were 30 days. When I arrived on the scene, our average collection period was 55 days. That means the average customer paid their invoice 25 days late. We had a pleasant, experienced Accounts Receivable manager. Her team consisted of 10 clerical assistants whose job included processing new credit applications, applying payments to customer accounts, making account adjustments for billing errors, and , yes, following up on past due accounts. That last part, following up on past due accounts, was the least fun part of the job. The Accounts Payable job can be a thankless endeavor in most organizations. Paying the bills can be monotonous, and rarely does one receive a ‘thank you’ for doing that job. In fact, ironically, these are the people who make things work in a company. These are the people who can make or break a customer relationship by either performing well, or performing poorly. But they are almost always overlooked and taken for granted. And none of our accounts receivable staff had undergone any sort of professional training to develop the skills and, yes, guile, to persuade a late paying customer to pay on time. At the heart of any problem lies a solution based on the human element. People do things for people. People want to be appreciated by other people. So we identified the largest customers and developed a program for outbound connection to the accounts payable people in these companies. This entailed, often times, having our Accounts Receivable people get on a plane and visit the Accounts Payable manager and staff of their customers. The premise was to have our people visit, take the Accounts Payable people out to lunch or dinner, and ‘problem solve’, to understand how our company could make it easier for the accounts payable staff to pay on time. Did that entail a different type of invoice, perhaps with more detail, or billing on a different cycle, or sending an email immediately following issuance of an invoice alerting out A/p team to watch for our invoice, perhaps lost in a sea of other invoices? More important than devising tactical solutions was the process of making a personal connection to the person who had the ability to pay the bill in 30 days instead of 55 days. To put a face and a name to that invoice. To give the Accounts Payable person a personal stake in being on time. We established a $250,000 budget for the travel and entertainment costs of this program. Our Accounts receivable team enjoyed the opportunities to get out of the office, meet some new people, and improve their collection work. Within about a year the average collection period dropped to 36 days.

What did this mean financially? Annual revenues of $900,000,000 breaks down to sales of about $2.5 million per day. So when we reduced the days of sales outstanding to 36, we essentially generated incremental cash to the company of $47 million (19 days times $2.5 million). And so long as we maintained this 36-day collection period, this represented a permanent pickup in cash. At the time we had a line of credit of about $100 million, bearing interest at 8% annually. When we applied this cash pickup of $47 million against our line of credit, we generated annual interest savings of $3.8 million, vs. our annual travel and entertainment budget of $250,000, a return on investment of 1500%. Nothing about this entire process required an advanced degree or some specialized expertise in collection management. What this did entail, was a basic understanding of why people do the things they do, and a willingness to problem solve through people who want and deserve a bit of recognition and appreciation. Hiding in plain sight.

Example 2: Big room, a lot of tables
In the mid 1980’s I was an internal auditor for a large department store company. In those days, proprietary store credit cards represented almost 50% of the sales. I visited the office where customer payments on store credit cards were processed. Envision a room about 150 feet long and 50 feet wide, with tables crowded together, on top of which sit trays of envelopes containing payments from the post office awaiting processing by the 4 clerks. Hiding in plain sight. This retailer generated revenues of about $1 billion annually. When I inquired about how it would take to process all of these payments, I was advised that they were about 8 days behind on a regular basis in applying payments, due to this obvious volume. So I ran the math….about half of the total revenues were on store credit cards, so the revenues from cards was about $500 million. That breaks down to about $1.4 million per day. And we were consistently holding 8 days worth of payments in this dark, dank room in the bowels of this old building with 4 overworked clerks nose to the grindstone, earning about $20,000 annually. The answer to my query about why not hire more people was that the budget did not allow for such. So I ran the math. Catching up on 8 days of payments at $1.4 million per day amounts to a cash pickup of $11.2 million in cash that could be used to pay down our line of credit. $11.4 million at 6% equated to interest savings of $672,000 in interest savings annually. This simple math made the decision to hire more people in that room a ‘no-brainer’. Hiding in plain sight

Example 3: Timing is Everything
I was called in assist to a struggling, unprofitable retailer. This retailer sourced the majority of its product, mostly apparel, from the Pacific rim countries. The premise was that the cheap labor made this an easy decision. We could have a pair of blue jeans manufactured for a dollar. But when considering import duties, freight costs broker fees, and other add-on’s , that pair of jeans might bear a landed cost of $11. We would sell that pair of jeans for $20. Problem was, our retailer was running about $4 billion in revenues, but was competing with much larger retailers for scheduling of factory time for overseas production. Because of our lower volume, our production was typically relegated to the end of the line, so to speak, in terms of scheduling our product.
This means that virtually every season, (Spring /Easter, Summer, Back to School, Christmas) we were 2 to 4 weeks behind other retailers in terms of getting our seasonal product on the shelf. This caused significant lag in revenues, and created significant end-of-season markdowns to get rid of product that would have to be sold at pennies on the dollar. Even worse, regularly merchandise would be taken off the shelves and simply discarded because it did not sell and the shelves had to be replenished with next season’s merchandise. The unthinkable solution was to move our production stateside, using American factories, to enable significant acceleration of product availability. The old guard of retail buyers scoffed at the notion of paying an extra $2 for a pair of jeans produced domestically vs overseas, but we forged ahead anyway and relocated the bulk of our orders to American factories. We began to beat our competition to the shelf with new seasonal merchandise. Sales soared, and same store sales, a key retail performance indicator, increased season after season. Profits likewise jumped, and the company emerged as a high performer. The answer to lagging revenues, poor profitability, leftover merchandise at end of season, was hiding in plain sight.

Example 4: Asking Why
My first job out of college was as a cost analyst at a soap company. One aspect of my job was to set standard costs for certain components of soap. The two primary ingredients of soap are tallow (processed animal fat) and coconut oil. Both of these are listed as commodities and prices published daily in the Wall Street Journal and other news outlets. Each month I would review a report of purchases of these two components. We received perhaps 15 shipments of both on average each month. What I noticed with tallow is that prices would vary from one shipment to the next. Around this time tallow was running from 22 cents to 28 cents per pound. As a commodity, prices would fluctuate, often from day to day, so a small change did not seem particularly anomalous. For several months I made certain assumptions, that variation of shipment costing 24 cents a pound on March 4 vs. a shipment costing 27 cents on March 5 was due to commodity market fluctuation. And for those two days the spot price in the WSJ might show 25 cents. As weeks passed my curiosity overtook my complacency, so I ventured into our purchasing office to gain an understanding of this market. I was interested to learn that our purchasing department was careful to maintain at least two sources of tallow, due to the necessity of never having a supply problem should one producer run short of supply. I was further educated that more than one grade of tallow exists. The primary differentiator in various grades of tallow has to do with the boiling point: higher is better, and more expensive. So our purchasing department was purposeful in buying two different grades, the mixture of which would provide the level of quality that our production and quality inspectors required.
This made perfect sense to my 21-year-old self…..almost.

I knew we had a chemistry lab in another part of our complex, and our chemist, Lee, was a proper and stern woman. Always wearing he freshly starched white lab coat, she cut an imposing figure with her precise manner of speaking and purposeful stride. I had met her on rare occasion, but had never engaged with her, because she was a high level executive and I was an entry level accountant. Yet my curiosity called out to me. I entered her lab and was surprised with the warm greeting she offered. My inquiry was about what protocols, if any, existed to test tallow shipments. To my astonishment, she pointed to the back wall of her lab wherein were filed perhaps 500 books, all of the same binding, much like a set of encyclopedias. She explained that each tallow shipment, by vendor, was in fact tested for the boiling point, going back more than 20 years.

This being 1981, I had not yet heard of a personal computer. So, using a manual random number generator, I selected 200 shipments from vendor A (the lower cost supplier) and 200 shipments from vendor B (the higher cost supplier). I remembered from statistics class, which every business major is required to take, about something called the “Chi Squared test of Sample Means”. I remembered thinking this was interesting but completely irrelevant to me when I was in school. This test would presume to compare two sets of data and determine if the two sets are statistically different from each other. For my test, I compared the boiling points of the two suppliers products, and determined, surprisingly, that no significant difference existed. So when I calculated the cost difference of supplier a vs. supplier B, I estimated that supplier number 2 had charged us about $4 million a year for a premium product that was not in fact, premium product. For more than 20 years this overcharge had been hiding in plain sight.

Example 4: Walk Around and Ask Questions
The soap factory whose costs I tracked seemed to have consistent cost overruns. My boss, the plant controller, was responsible to explain these variances. I would read his monthly reports with great interest, to learn from his experience and to understand our manufacturing process is better. Unfortunately, routinely his report would cite numbers and production statistics, but would always end with a statement similar to quote manufacturing variances totaled 90,000 for the month, which will be explained next month. Except I went back 24 months and each time a notation of this ilk was made but never was the variance explained in the following month. While this was not my assignment, I felt that this was not an insurmountable challenge. So I ventured out to the factory floor to watch and see what might come to my attention. Almost immediately I noticed at the end of the production line a number of skids stacked 4 foot high with soap boxes with bright red tags attached I inquired of the production manager about the red tags and was told these were rejected based on quality issues. The quality problem was largely due to lack of foam or suds or whatever characteristic causes soap to be soapy. We had standards that needed to be met and these tagged skids did not meet such standards. So these quality rejects would routinely be shown as scrap and the cost associated would be reported as part of the monthly report. So working from the end of the line to the front of the line I inquired about the inputs 2 the manufacturing process. What I learned is that soap is approximately 80% animal fat and 20% coconut oil. Coconut oil is the component that causes suds or soapiness, so to speak, we had standards that cited the 80/20 mixture. But when I observed the meters that were set to release the individual components of tallow and coconut oil into the production mix, I was able to discern that the tallow meter was set to 78% and the coconut oil meter was set to 22%. Coconut oil was about 50% more expensive than tallow. I was informed that in order to meet the quality standard, which obviously many baches did not, the factory management had reset the meters off-standard, which caused significant cost overruns which were major contributors to the previously unexplained manufacturing variances. The cause of the variances was hiding in plain sight.

Great, appreciate you sharing that with us. Before we ask you to share more of your insights, can you take a moment to introduce yourself and how you got to where you are today to our readers.

I lived the traditional student life, attended college, and chose a major that I felt would provide job opportunities. Once in the workforce, I was confused by so many co-workers who showed little enthusiasm for their work.

i took an alternate route, seeking to be my best self, which would presumably result in promotional opportunities. My suspicions turned out to be correct, and I found myself being promoted and receiving significant pay increases for several years.

I advanced to Executive levels in large corporations. With passage of time, I recognized that smaller companies, family owned, sometimes second or third generation families, and newly formed start-ups, would benefit from my expertise. So after about 20 years in “Corporate America”, I took a flyer and launched a consulting practice assisting smaller companies who still needed the kind of skills I could bring. My work caught the attention of a major University who invited me to teach classes in Corporate Finance, and for 21 years, I taught classes while also running my consulting practice.

Central to my corporate work and my consulting practice is the principle that people solve problems, and technology is only a tool, not the ultimate solution. Additionally, I learned that often problems have simpler solutions than many might think, and applying basic logic and street-smarts can yield amazing results. i also learned that the most effective problem solver can be the one whose innocence and relative lack of company specific knowledge can ask the right questions, and challenge long held beliefs, that the indoctrinated often miss, or regard as ‘sacred cows’.

In my work I have learned to question people and organizations about the unspoken rules by which they operate. What are the untouchables in this organization, and why? “What if….” has become one of my problem solving mantras. Perhaps the most significant insight I have gained is this: often, when encountering an issue, one might conclude that something is simply not logical, that people are not behaving rationally. My truth is that people almost always behave rationally, and when something seems illogical, that is because you are missing a material fact. And so the quest becomes one of uncovering such fact. When all the facts are known, the situation makes sense. That does not mean that the situation is healthy or sustaining, but it simply provides a clear understanding, from which new solutions can be derived.

Trite as this may sound, our business has flourished for 22 years because we always strive to do the best thing, the right thing, even when that is difficult and one could potentially take an alternative path, but one that does not provide highest and best service to our client. With the obvious condition that in a capitalist environment, money is important, when we do the right things, money takes care of itself.

Example, we do a lot of buying and selling of companies for clients. Frequently, the party on the other side of the transaction will turn around and hire us for another project, because we treated them with decency and respect even though they were NOT our client. To me this is proof positive that doing the right thing, always, creates sustainability and goodwill. And yes, allows us to sleep at night.

We demand excellence from our team. Good is not enough. When we make a mistake, we own it, and we dig in to remedy. We do not justify, excuse, or enable continued mistakes. We are transparent about our experiences and expertise, and frequently refer potential clients to others who are better suited to our potential clients’ needs.

We do not ever consider ourselves to be the “smartest guy in the room”, and we shy away from clients who present as such. Collaboration and teamwork always yield a more compelling result than acquiescing to an aggressive owner or striving company executive seeking their own payday.

We have had to dismiss clients whose ethics and business practices lack transparency or truthfulness. Some of the most lucrative paydays could have been reaped by enabling such clients, but reputation and integrity are not negotiable.

We have built and maintain a strong reputation, and virtually ALL of our client acquisition is generated by referrals. All of it. Former clients, bankers, attorneys, CPAs, risk management executives, and other consultants refer work to us. Again, reputation and ethical practices govern. What we do for clients rests as their most important business and wealth management initiative. We take this personally, and so do our clients.

Let’s talk about resilience next – do you have a story you can share with us?

Bad things people do

Characters (in order of appearance):

Me: Phonology Interim CEO
Jack Hinson: Phonology Bankruptcy Counsel
Rick Martin: Potential Buyer of Phonology who claimed to have been bribed
Rory: Phonology VP of Operations
Morrie; Phonology VP of Sales
Hermana: Phonology founder and original CEO
Tony Leach: Potential Suitor of Phonology
Jack Cluster: Head of investor group and Potential Suitor of Phonology
Melvin Heinie: Phonology shareholder and member of investor group
Hermana: Founding CEO of Phonology
Wilmer Weakley: Potential Suitor of Phonology
Bradley Sheets: Potential Suitor of Phonology
Jay Kippa: Counsel for Bank

“The board told me to depose you”. Jack Hinson, Phonology Solutions Inc.’s corporate attorney, was adamant with me in an unexpected phone discussion. I was Phonology’s board-appointed interim CEO; this was in August 2003, eight months after the company had filed for bankruptcy protection.

“Allegation has been made that you tried to bribe Mr. Rick Martin for a job, otherwise you would not allow him to make a bid to buy the company. The board wants me to depose you.”

“Wrong” I countered. “I hired you, I paid you a $50,000 retainer, we’ve now paid you a quarter of a million dollars, and I’m the reason we still have a company. The board is the reason this company is bankrupt. And you want to depose me?”

My thoughts shot back to the events of 60 days earlier, when, in the dizzying stack of meetings with attorneys, vendors, employees, and customers, I had received a heretofore typical call.

“Good afternoon Mr. Lucarelli, I understand you are the interim CEO of
Phonology?” He continued, ”I’m Rick Martin and I’d like to talk to you about buying Phonology”.

Over the next several days Martin and I met to discuss his proposition. He positioned himself as a deep-pocketed investor, whose approach was to invest in distressed companies but retain key executives to restructure his investments while he provided the otherwise scarce capital to effect meaningful change. At the outset of the bankruptcy proceedings, we had set boundaries about what information we would share with potential buyers, and we provided him with such information, as had been presented to others with interest in the company. His proposal made sense, with a twist: he specified a condition that I would remain as CEO and convince the VP of Operations and VP of Sales to stay on. He wanted 3-year contracts, with non-compete provisions, to be executed by each of the three key executives, or no deal.

Rory, VP of Operations, Morrie, VP of Sales, and I had developed a strong bond over the prior six months spending untold hours, nights, and weekends, piecing together a strategy to save our company from liquidation in the bankruptcy court. By this time, we had each voluntarily agreed to salary cuts of 40%, while imposing a less onerous 15% pay-cut across our workforce of about 60 professionals, and our stock grants were now worthless.

Digressing, the bankruptcy was most notably the result of the falsification of test results of the company’s latest product, whose launch had been occurring for about two years. The company had been pouring all available resources into the R&D for this product, and the Chief Technology Officer, who was a co-founder of the company and 15% shareholder, had been lying to the board about the functionality of the product, hiding the fact that the product had been tested and had failed in three specific customer rollouts. The cash drain on the company was debilitating, and the forecasted revenue upticks had not materialized, and would not materialize. After hearing in the board meetings about the ‘successful’ testing in the field, I had individually confronted the CTO who broke down and tearfully admitted to lying to the board, of which he was a member, and finally acknowledged that the product was far from market ready. He blamed his co-founder and CEO Hermana for his falsification, pointing to her as the provocateur for his lies to the board. When Hermana learned of the CTO’s admission of guilt to me, she denied the CTO’s comments, and in an emergency board call she perpetuated the notion that the product was working well and on the cusp of revenue generation. I countered to the board with written assertions from a number of key members of the development team that the product was significantly flawed and not close to marketability. The board’s reaction was to issue a warning to the CTO to present facts in the future, and on he continued in his role. This single point of failure cast the company into a downward financial spiral, which was noted by the bank, whereupon the bank froze the company’s cash accounts, necessitating bankruptcy court protection to prevent liquidation of the company. In the weeks immediately following this board confrontation, the board terminated the CEO, but allowed her to continue as chairman of the board, and offered the position of interim CEO, whose role was to take the company to sale, first to Rory, who turned down the offer, then to Morrie, who likewise turned down the offer, and finally to me. I accepted.

Being a key executive in a company going through bankruptcy takes a huge toll on a person. Embarrassment of the condition, fear of the unknown, court mandated data requests and appearances, financial pressures every single day, employee panic, having little time to do your ‘real’ job, dealing with hate mail and hate calls from shareholders, can burn out just about anyone. But fortunately, the trio that was Rory, Morrie, and I had managed to keep focus and work through many challenges-to-date. The fact that we had successfully shielded the company, with the help of the bankruptcy court, from the consistent refrain of the carnivorous bank to liquidate (for pennies on the dollar) over the prior 8 months, spoke to our collective resolve. The fact that we had begun turning a small profit while in bankruptcy provided further evidence of our commitment and effectiveness.

Martin was persistent. He presented his contracts to the 3 managers and pressured us to ‘sign on’. Each of us, for his own reasons, was reluctant. Morrie lived in Dallas and was not sure he wanted to continue to have a travel job with even greater challenges. Rory was burned out and didn’t want to have to continue to swim upstream and commit 3 more years. I had several job opportunities offering more than twice what I was earning with very successful and growing companies present themselves to me over the past year, and none of these involved the requirement of restructuring a troubled company and rebuilding over the next 3 years. Martin’s reasoning was that having a management team under contract was crucial to his plan that Martin would present to the bankruptcy court to be granted the right to purchase the company. Any plan presented would need approval from the secured lender, and Martin’s reasoning on this point was sound.

The bond among Rory, Morrie, and me had grown strong. The idea of emerging and working together on a mission of recovery entered our collective realm of acceptability. So, after exchanging proposals and counter proposals, we accepted Martin’s offer to stay on and lead the company post-bankruptcy, should his proposal be accepted by the court. We had written offers which could only be executed if and when such acceptance were realized. Now, with consensus on the employment contracts, Martin presented to me a letter of intent to purchase the company from the bankruptcy court. He did not produce the $100,000 deposit so we withheld certain information, most notably the customer list.

Prior to, and amid discussions with Martin, I was fielding inquiries from other organizations interested in buying our ailing company. Some were frivolous, from competitors seeking confidential data with no intent to buy, others seemed more serious, worthy of consideration. Three other offers in addition to Martin’s warranted serious consideration.

One potential suitor was Tony Leach, a well-known successful business executive and investor. In addition to having bought, managed, and sold businesses, Tony was also a member of a private investor group based in our region. Tony deserved serious consideration. His visits included the head of such investor group, Jack Cluster. Coincidently, a 10% shareholder of Phonology, Melvin Heinie, was also a member of this investor group. As an aside, Heinie was an original shareholder in Phonology from the date the company went public, which was about 10 years prior to my employment as the CFO. Heinie had reached out to me upon my hiring and engaged in a regular discussion about the company. As head of investor relations, I felt compelled to interact with him in a healthy way, and provide him with color with information we could share with him publicly. I was well versed in the rigors of not sharing non-public information. Over the course of my first two years, I had several meetings with Heinie and felt we had established a good rapport. This was in stark contrast to a very Icy relationship that he had with the founding CEO who had hired me, Hermana. She had warned me to avoid Heinie because he was ‘just a troublemaker’.

Another seemingly serious suitor was Wilmer Weakley, CEO of a company in Columbus that offered its customers services that were complementary to Phonology’s. Like Tony, Wilmer was seeking specific data, data which the board and I had agreed would only be shared with those presenting a letter of intent and earnest money of $100,000.

Yet a third alternative suitor was Bradley Sheets, who owned several businesses in town and wanted to get into the tech space. Bradley’s approach was methodical and non-invasive. Bradley gathered data and learned of the company story in progressive stages. He was in early stages of the process when the others were weeks ahead.

Discussions with Tony, Wilmer, and Bradley differed from those with Martin in that Martin had contractual requirements for Rory, Morrie and me, and Leach, Wilmer, and Sheets had no such provisions. Each of these suitors had their own management team and were silent on the idea of retaining the executive team that consisted of Rory, Morrie, and me.

Weighing multiple offers in context of selling a company makes perfect sense. In a competitive environment, sellers enjoy greater leverage over potential suitors than in a situation where only one prospect is at the bargaining table. This ties directly to seeking the highest price and best proposal to a bankruptcy court. Bankruptcy courts are NOT in the business of concerning themselves with culture, environment, opportunities for future. It’s all about pulling together the most money to satisfy creditors. Period, end of discussion. To this end, bankruptcy is solely a mercenary endeavor. He who pays the most wins. Understanding this, I had advised and gained agreement with the board to impose a fee of $100,000 to any suitor who (a) executed a letter of intent, and (b) wanted to see our customer list. This accomplished two things:

1. Scared off the tire kickers who were simply seeking intelligence about the company with no intention to purchase;
2. Set the bar high enough that even serious buyers would need to be committed to a deal should other elements of a deal fall into place.

Discussions with Leach were efficient and productive. He understood the business exceedingly well from the outset. In only a few minutes, he was ahead of the game and was already knee deep in talking about a future business plan for the company. One important aspect of Leach’s inquiries was for specific customer data. But he did not want to pay the $100,000. Back and forth we went, he provided neither a letter of intent nor the fee. We had reached an impasse.

Discussions with Wilmer were less productive. While he understood the business at a certain level, he seemed data driven. Wilmer was very specific about wanting detailed customer data, employee rosters, pay rates, job descriptions. Similarly to Tony, Wilmer did not want to provide a letter of intent or $100,000 deposit. We had reached an impasse.

A few days following the unhappy call with Attorney Hinson, I found myself in one of the regularly scheduled court appearances to update the judge and creditors about the company progress. The bank is one of the 10 largest banks in the country, and they hired the most prestigious law firm in the city, for which we, the debtor, would have to pay. Attorney for the bank, Jay Kippa, called me to the stand. Jay was a severe-looking, balding man in his late 50’s with a lean physique and gaunt facial features, grey and black speckled facial hair. Standing uncomfortably close to me he challenged “Can you explain the circumstances leading to your requesting an employment contract for you to negotiate a sale of the company to Rick Martin?”

Thereupon began a series of accusations cloaked as questions, the theme of which was my supposed conspiring with Rory and Morrie to refuse to sell the company to Martin unless he agreed to provide lucrative contracts to us, and make me the CEO moving forward. Kippa’s Indignance and hostility at my purported egregious actions were palpable. Voices were raised on both sides as volleys abounded. Attorney Hinson and associates listened quietly as the interrogation took twists and turns and ended with neither side agreeing to much of any of what each side called ‘facts’.

Afterward in debriefing with our corporate attorneys, Hinson volunteered to me that “Jay Kippa is a very good man and a great attorney and litigator. He teaches at law school, too.” I told Hinson that Kippa’s behavior was beneath contempt, and advised him that if he wanted to bestow any more compliments on someone who was trying to liquidate our company and accuse me of federal crimes without substance, I would terminate him and his firm as our counsel.

Next Kippa turned to the subject of my “intent” to extort $100,000 from suitors in order to release information to them to enable them to buy a company. Kippa further demanded to know if I understood that I was in violation of court orders to use my efforts to secure a job for myself vs. sell the company. He cited discussions with Leach and Weakley in support of his questioning.

Then, Kippa requested to the judge that I be ordered to terminate the entire staff at the company, while I would stay on as an administrative agent to collect monies owed from customers on their 12-month paid-in-advance customer contracts.

A bit of background. As Phonology was a producer of software, an important part of the offering to customers was 24 x 7 customer support, which required the company to employ a staff of 12 customer support representatives. This crew would handle incoming customer trouble calls, and deploy to resolve with fixes or patches or training.

Kippa asserted that this move to terminate the employees was already agreed-to by the company’s counsel, as Attorney Hinson nodded in assent. This was the first I had heard of such an ‘agreement’.

Hearing this, I turned to the judge to my right, as I was in the witness chair, and said “Your Honor, the money about which we speak is paid in monthly installments, in advance, for us to provide phone support and fixes. Since our sale of new licenses has slowed, the majority of the $2 million we are owed is tied up in these contracts. If we have no one to take customer calls, we will have broken our contract with such customers and of course no one will pay us. What is being suggested here right now will end all cash flow to the company. Nothing will be left to pay the bank if we proceed as suggested here.”

The judge turned to Kippa and asked, “what about this do you not understand?” The judge was noticeably agitated with the situation. He then denied the motion from Kippa. Throughout the entire line of questioning and subsequent motion to terminate the staff, Attorney Hinson declined to intervene, object, or cross-examine me (to potentially point out flaws in the Kippa argument) and made no comment following the judge’s denial of Kippa’s “terminate the staff” motion.

We adjourned and Attorney Hinson asked me to follow him to his office a few blocks away. When we arrived, we were met by Kippa and the bank’s senior office in charge of the Phonology account. The topic was to figure out a way to terminate the people but keep the maintenance revenue coming in to pay the bank. Two minutes into this I stood and declared that this issue had been denied by the judge and that was the last I would hear of it, and promptly left them sitting there.

Following this court appearance Martin dropped out of sight. No phone calls, no emails, no communication whatsoever. Within a few weeks I received what I though was another typical follow up call from Wilmer Weakley. He explained that he had hired Martin on his behalf, and that he was aware of the ‘deal’ that had been struck for Rory, Morrie, and me to stay on if he and Martin bought the company. Wilmer explained that he was the money behind Martin. He proceeded to request our list of customer names, and wanted to come down to interview Rory, Morrie, and me. I reiterated that the price of the customer list was a letter of intent and $100,000 deposit.

Concurrent with this new initiative from Weakley, Leach visited again and demanded to see the customer list. He threatened to have the board replace me and to petition the court to hold me in contempt for blocking a sale.

Back to court I went a few weeks later. This time, Kippa revisited the topic of my supposed attempts to extort $100,000 from anyone who wanted to talk about buying the company, naming Tony Leach and Wilmer Weakley as the unhappy potentially extorted suitors. I proved him wrong by producing board minutes wherein the board had approved the provision of requiring this deposit in order to release customer names. Kippa revisited the topic of staff terminations and made a motion to dismiss my administrative assistant and accounting staff which had employed a staff of 4 but now consisted of two accounting clerks doing billing and collections and financial reporting. Attorney Hinson remained silent through this. The judge denied the motions.

I had set a practice of a monthly call with the board to keep them apprised. Following the court hearing wherein Kippa’s numerous motions had been denied, the board demanded that I develop a schedule of monthly terminations of staff to eventually reduce payroll to near zero. They then advised me to allow Attorney Hinson to depose me about the Kippa court allegations. I explained that no one would buy a company with no employees. I refused to proceed with terminations.

I told them I would not agree to be deposed, and they could terminate me if they wished. I updated Rory and Morrie of these goings-on. In the days following all of this, Morrie, VP of Sales, dropped off the radar. We were now in the stage of continuing to run the company, making a small profit, and attempting to find the right buyer who would meet our conditions and allow the company to emerge from bankruptcy. But Morrie stopped communicating. No calls, no emails, nothing. Weeks passed, and after a half-dozen unanswered communications from me to him, I terminated Morrie. At the time he was the highest paid employee in the company. On the next board call I advised the board of this event. The criticisms came fast and furious, and again threats of my termination were levied. They subsequently approached Rory to replace me, and he declined. At this point we are about 9 months into the bankruptcy proceedings. The irony here is being threatened with termination unless I agreed to cut payroll, and when I terminated the highest paid person in the company for insubordination and not working for 6 weeks, the board was upset.

I discontinued the board calls after this. I never heard back from Weakley, Martin, or Leach. Bradley Sheets continued his pursuit, paid his $100,000 deposit, and bought the company in December 2003. The gavel dropped, the bankruptcy case was closed, and Phonology had a new owner. When the company originally filed bankruptcy, it had about $800,000 in cash. When the case was settled, enough cash had accumulated to pay the bank 97% of the amount due to them, which was just shy of $2 million. This was on top of significant fees paid to company attorneys and the bank’s attorneys. As I was leaving court, I was greeted by the lead business executive for the bank, he who had demanded firing of all staff, and who was being represented by Kippa. He shot out his hand and with a big smile, said “thank you for everything”. The long and short of it is that he and the bank received more than 3 times the amount he would have received had we wound the company down as he had proposed. Now having a windfall, he was pleased and that was that. Strangely, Kippa did not attend this court session, his boss did. This was their triumph, for which the boss needed to be in attendance.

In the weeks prior to settlement of the case, despite my discord with corporate attorney Hinson, circumstances dictated that he and I work together for the final settlement of the case. In one of the meetings to prepare such settlement, Hinson advised me that he had been contacted by an attorney for Melvin Heinie, the 10% shareholder, who was planning to sue me for fraud and lying inside and outside of court. Hinson advised me that I needed to seek personal counsel as this was not a corporate matter, this was personal.

I never heard from any of the board members from the period of about two months prior to settlement until present day. A few months after settlement, while I was job-hunting, I learned that Leach owned majority interest in Phonology’s biggest competitor, but under a corporate name. His insistence to see our customer names became apparent. This was exactly the reason for asking for the $100,000. You may get the list, but you’re not getting it for free.

Epilogue

1. Two weeks following the settlement, in December 2003, now unemployed, I attended a business /social Christmas party hosted by a large business association consisting mostly of bankers, lawyers, accountants, and business owners.

Much of what had transpired with Phonology was publicly known, because this was a publicly held company. With a bit of reluctance, I attended. I was surveying the crowd when Jay Kippa approached me. He looked different now than in court. The swagger was gone, his shoulders slumped. He addressed me quietly, instead of with the rapid baritone indignance to which I had become accustomed. He looked more gaunt than he had when I last saw him in court a few months ago. He asked if I would move to a quiet corner of the room where he could speak to me.

He started slowly and quietly. “I know this does not undo what I have done. I cannot fix that. What I did to you was so wrong, so incredibly wrong. I wish I could take it back but I can’t. I want you to know that I apologize from the bottom of my heart. I’m a good father and grandfather. I’ve been teaching at law school for years. I like to think of myself as a good person. But what I did to you is not forgivable. It’s not who I am, but it is what I did. I want to ask for your forgiveness, I feel so badly about this. I knew what I was doing to you when I did it. This is not who I am. I am so sorry. This will come as no solace to you but I want you to know anyway. I’ve been an attorney for 30 years, and I landed this job with this firm a little over a year ago. This is the biggest job in my career, with a prestigious firm. This was my first big case, because we are representing one of the country’s largest banks, and I was told I needed to win. So I did what I did. But two weeks ago, after your case was settled, I resigned from the firm. I’m out of a job but I don’t want to ever do anything like that again or be a part of a firm that would do that. I broke my own ethical boundaries and damaged you in so many ways, and I knew I was doing it. I’m ashamed and sorry and I hope somehow you forgive me”.

2. The holidays passed and I was out looking for another job. I reached out to the bank executive who had hired Kippa, and who had been so confrontational. I asked him to lunch, over which we talked politely, and he advised me that he was pleased with the outcome, thanked me, and wanted me to know that this was nothing personal. We talked for over and hour and he assured me that he respected me for what I did, and we had a great result for the bank.

3. About 3 months later I was offered a CFO role by a global research company. We agreed to terms, and the job was perfect for my background, and was a nice increase from my previous role. I interviewed with the CEO and a few other people, then I met with the Chairman of the Board who gave me their signed offer letter. The company was growing and needed to secure additional bank funding. This is something in which I’ve become proficient, along with the other CFO responsibilities. I was to start in 3 weeks. We shook hands and he welcomed me aboard. A few days later this same Chairman of the Board called me. He was somber. He explained that the bank had learned of my hire at the company, and the bank threatened to freeze the company line of credit and refused to lend any more money if they hired me. Thereupon he revoked the offer of employment and that was that.

4. In the ensuing weeks I received a call from an attorney for Melvin Heinie wanting to meet with me, and I agreed to do so but never heard back.

5. Meanwhile, Phonology has changed hands several times and in now owned by one of the country’s largest telecom companies.

Are there any books, videos or other content that you feel have meaningfully impacted your thinking?

The Discipline of Market Leaders, by Michael Treacy and Fred Wiersema, is the most important book about business strategy that I have ever encountered. All of our consultants are required to read and apply these principles in every engagement

Google summarizes the book as such:

“The Discipline of Market Leaders teaches that to become a market leader, a company must choose one of three value disciplines—Product Leadership, Operational Excellence, or Customer Intimacy—to excel at, while maintaining competent, but not leading, performance in the other two. By relentlessly focusing their entire organization’s resources and culture around this single discipline, companies can attract and keep customers by offering a superior value proposition and dominate their markets, rather than trying to be everything to everyone.

The Three Value Disciplines

Product Leadership: Focuses on offering cutting-edge, high-quality products and services that are innovative and superior to the competition. Companies in this discipline foster creativity and innovation, hiring the best people and giving them the freedom to develop new products that can even make their current offerings obsolete.

Operational Excellence: Prioritizes lowest total cost and a hassle-free customer experience through highly streamlined, efficient, and standardized processes. Companies in this discipline focus on fast, reliable, and low-cost transactions and operations.

Customer Intimacy: Centers on building strong, long-term relationships with customers and providing tailored solutions and personalized service. These companies excel at understanding and meeting the unique needs of specific customer segments.

Key Principles for Market Leaders
Choose a Single Discipline: Companies cannot excel in all areas; they must pick the discipline that best suits their customers’ primary needs and their own competitive advantages.
Maintain Threshold Standards: While excelling in one discipline, companies must still maintain acceptable or “threshold” standards in the other two areas, so that, for example, a product leader doesn’t have terrible customer service.

Dominate the Market: Relentless focus on one value discipline allows companies to provide superior value to their chosen customers and, ultimately, dominate their industries.
Align the Organization: The chosen value discipline must influence the company’s entire operating model, including its structure, culture, processes, and technology.”

We apply these principles to each of our consulting projects. We need to clarify and emphasize how our client achieves the status stipulated in this book. Frequently, the company identity and current state does not fit into this optimal environment, and we then provide vision and tactics to bring the company forward to sustainability and growth as called for in the book

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