Host Intro (Gene Kim)

All right. To set the stage for the next session, let me frame it this way. I think one of the problems most commonly expressed by this community is how to successfully influence other senior leaders in the organization. They struggle with powerful existing orthodoxies, conservative leadership, powerful centralized services, functional silo owners, and even having to deal with very conservative CFOs, whose job it seems like is to say no.

One of my favorite ways of framing this challenge comes from Ben Horowitz and his construct of ones and twos. There is a famous blog post written by Ben Horowitz of Andreessen Horowitz fame. He said that in the companies they invest in, they typically have two categories of CEOs. The first are the product visionaries, and the second are the process and execution people.

Their definition of ones is people like Elon Musk or maybe Jeff Bezos, people who have a very clear vision of what the product should be like. These people love talking to customers. They love playing eight-dimensional chess, and that is their preference. They would like to invest in companies that are led by ones.

The other category of leaders are the twos. These are the people who love and enjoy the process of a company that runs well. These are people who love process excellence. I think in this community, for this context, often you are the ones. You have a vision of a better way of working, and the people in the way are the twos.

In the program committee, we have searched for years about the right way to help us understand better ways to convince the twos in your companies.

Let me tell you about something that happened to me where I was unable to convince a group of twos. I had the opportunity to present at a CEO roundtable. These were 150 CEOs of software companies ranging from $100 million in revenue to $2 billion in revenue. These are people who live and die by the quality and speed of the software they deliver. I thought this would be easy, and I gave it my best shot. I have to say, it did not go terribly well.

In fact, someone came up to me afterwards and told me something that I really needed to hear. He said, "Gene, you kind of blew it. They totally didn't get it." That person was Chris O'Malley, the CEO of Compuware, a billion-dollar company. I am so grateful for the help that he has given me, coaching me in how we communicate more effectively to CEOs.

That led to a session we did in Las Vegas last year, which was probably one of the most talked about sessions in the conference. He talked about how we use the Beatles metaphor: how does every John Lennon partner with a Paul McCartney, and together lead the company to where it needs to go? I think what made it so useful was that in various parts of his career, he has not only been a two, but he has also been a one.

That led to a bunch of other questions. Dr. Mik Kersten and I went to visit him and his team in Detroit and spent a day with him, specifically to meet with the CFO, Joe Aho. In the morning, the first thing on the agenda was a data center tour. My reaction with Mik was, "Holy cow, why are we getting a data center tour?" I think I have seen enough Halon extinguishers in my life to not have to see another one.

And yet it was one of the most astonishing things I have ever seen, because here is what we saw: it was empty. Essentially, there were two Z mainframes, and on the floor were these outlines of where the racks of servers used to be. In the middle of each outline, like a dead body in a TV police show, was a placard or tombstone that said what used to live there, for example EMEA financials, HR systems, or email, as well as how much money was saved by getting rid of it.

That led to probably one of the most informative and educational days of my professional career. In fact, I would say the aha moment I left with was one of the biggest I have had in my life, and framed so much of what is in the last third of "The Unicorn Project."

The ask that I had for Chris O'Malley was this: would he be able to come back with his CFO, Joe Aho, and help teach us how to better communicate with CFOs and business leaders?

Before I bring them out, I want to address one thing very explicitly. Some of you might be asking, "Gene, why are you bringing a vendor, a CEO of a software company, to come speak to us?" It is specifically because one of the biggest challenges that we have as a technology leadership community is successfully influencing business leadership.

The problem is that often it is a black box. We do not actually get to see what happens inside the black box, so we get very few chances at bat, and it often seems capricious and random. Here is an incredible opportunity for us to learn how these people think and how we can better influence them.

Without any further ado, I would like to bring out Chris O'Malley and Joe Aho, CEO and CFO of Compuware.

Fireside Chat: Gene Kim, Chris O'Malley, and Joe Aho

Gene Kim: The slide I had shown was that picture of that empty data center, which I thought was shocking. I think in this community, there are many people here who are shackled with hundreds of thousands of square feet of vast IT estates that are automating bad business processes that they have to lug around for decades. From a CEO's perspective, why was it so important that you get rid of it all?

Chris O'Malley: To give some context to it, when I came to Compuware five years ago, the company in recent history had been in a chronic state of decline. Our revenue was going down. If you go back further in time, the company had enormous growth. Compuware became one of the leading software companies in the marketplace. But at the moment I came there, I was there with a turnaround responsibility, and I was accountable to the turnaround.

When you go through that effort as a CEO, you have to be first urgent about getting a vision. Vision discovery is talking to customers internal to your business. You have to have a new way of looking at the market to serve those customers that gets the business inspired and thinking, "Man, if we could do that for our customers, they would be infinitely more successful in serving their customers." You have to get grounded in this vision.

The second thing you have to do is have a mission. What is Compuware going to do in terms of a role that is actually going to make that vision come true? That mission has to make people think. One, they have to believe they can do it, but it also has to make them recognize that we have to change. Not just we as a company: all of us as individuals have to have new responsibilities, new accountability, if we are going to rise up to the point that we can actually make a difference in that vision.

The third thing you have to do is have a strategy. You have to have a sense of prioritization of the things that you do, but you also have to decide what not to do. A really bad leader always amends the list: one more thing we are going to do, one more thing. A good leader decides, "Hey, we have to focus on things, and I have to create alignment toward that end."

One of the very first things that I did was I went to my CIO, and I said, "In 2014, I do not believe in managing x86 servers internally. Anything that we do on these x86 platforms that creates a competitive advantage for us in the market and is something our customers care about, value they would see in what we could deliver, I want that on the mainframe. Everything else, I want as a cloud-consumed service."

We basically parted the Red Sea, made that decision, and then you see the end result of all that going into the cloud. The outcome was a couple of things. One, we saved $5 million of run rate, and we immediately took all of that money in a scenario where things were better, cheaper, faster as a result. There was really no consequence to putting all those things in the cloud and consuming the service. Then we invested all that money back into value to our customers, in innovation and bringing out new product sets.

The second thing it does is get you focused on the main thing, which is our customers. How much distraction is there in managing that infrastructure that brings no value at all to our customers? If I can get that all back to our IT staff and have them think and worry about things that are going to make a difference, those are the kinds of steps you take in terms of strategy to move the company along.

Gene Kim: And specifically, these are things that you would bring up in monthly town halls.

Chris O'Malley: Since the day I started at Compuware, we have done biweekly town halls for five years. You have to be a good storyteller. At the outset, you have a really cynical company that has been in a state of decline for years and years, and they are waiting for another CEO to come in and say, "Work harder, work smarter." You have to get them to believe that the world is going to be disrupted, and that if we change and bring more value, the dynamics in terms of our own success can be changed.

Then those things make sense in terms of the strategy. The things we have to do start to make sense to them, and they start to believe in them, because as much as anything, you are trying to change old habits to new habits. It is like smoking: even though people know it is going to kill them, they tend not to give it up easily. You have to tell them stories so they get bought in and believe in that vision, the mission, the strategy.

Gene Kim: What caught my attention so much was something, Joe, that you said as a CFO. You said you are a career-long CFO, and when you first heard Chris's plan, you thought it was crazy. You said, "This is never going to work."

Chris O'Malley: He thought I was crazy.

Gene Kim: Yeah, he thought you were crazy.

Joe Aho: Not the plan was crazy.

Gene Kim: But you changed your mind. Why did you think it was crazy, and what changed your mind?

Joe Aho: Let me paint you a little picture here. I had been at Compuware for about 18 years. We had just been bought and taken private, so that causes anxiety with employees whenever that happens. I had never met Chris. Chris comes in as the new CEO, and he says to me, "We are going to change everything. We are going to completely redo our G&A infrastructure. We are going to change our go-to-market sales model, and we are going to deliver new technology to the market every 90 days."

I am sitting here on day one of being a new CFO five years ago thinking, "We are not going to have any employees, or we are going to have a revolt on our hands." So that is why I thought he was crazy.

What started to change is exactly what Chris started talking about. He definitely put his sales hat on. The town halls were great. He immediately shifted from, "We are not going to worry about any of the decline or what got us here today." Chris started immediately operating with a growth mindset, and he started selling that mission, that vision, the strategy, the goals that supported it in these town halls. You could start seeing shoulders coming up. You could start seeing smiles. You could start seeing confidence and swagger come back in people, and that is important.

Secondly, we rallied around a main thing. I am assuming every company out there, whoever you work for, has a main thing. Ours is a metric called realization rate, which is centered around logo and customer retention. Everything we do, no matter what department you work in, or whenever managers sit down with their employees and go over their goals, you can tie it back to the main thing.

Lastly, look, I am a CFO: tangible results. You have to start seeing something. When I see our close process go from 22 days to eight days, when I see the software going out 18 quarters in a row, when I see realization rate improving, when I see account management metrics in Salesforce.com, those are things I can gravitate to, and I can see real tangible benefits coming from the change.

Gene Kim: Those are the top-line things that might make a CFO smile, but there was something on the bottom line in terms of the cost structure of the company because of what is no longer in the data center. Can you talk about what you achieved in G&A?

Joe Aho: Sure. We set out at first just getting together, doing some modeling. Every company goes through some top-down planning. Ours was to be under 10% G&A. We thought with our revenue numbers--

Gene Kim: And G&A is?

Joe Aho: G&A is all of your general administrative: your HR, your finance, your legal, your internal IT, administration.

Gene Kim: Stuff the customers do not care about.

Joe Aho: Yeah, exactly.

Chris O'Malley: Did he just call my job unimportant?

Joe Aho: You said I was crazy.

We wanted that to be well below 10%. We took out the white sheet of paper, which is everyone's dream come true. How many times have you been in a meeting and said, "What if we had a white sheet of paper and we did it differently?" We looked at it like Chris said: it was either going to be on the mainframe or it was going to be a cloud-consumed service. For example, we switched from our financial system onto NetSuite. We basically run the company, we joke, with a mainframe, Salesforce.com, and NetSuite.

The result of that was fewer people in certain pockets of the world. We have a finance team that sits in Detroit. We have one that sits in Paris. We service the whole company. The result was 6% of our G&A cost. Our goal was to be under 10%; we got to 6%. What we did was shift that money immediately into other things like R&D, which customers do care about, investing more in putting the customer first and making that change.

Gene Kim: I think the benchmark is that your average large organization has G&A of about 15% to 20% of cost, right?

Joe Aho: Yeah. Best in class is going to be 10% or under, and like I said, we are at 6%.

Gene Kim: When I looked at the empty data center and saw the applications that you were basically ripping out - EMEA financials, sales commission process, help desk, HR systems - the big question I had was the bravery it takes to touch all of those core business processes. In fact, what was really going through my mind was, what sort of suicidal maniac would change all those business processes all at once? What gave you confidence, and what gave you the motivation to do all that?

Joe Aho: A couple things. One is, again, everything we do is wrapped around the main thing. We were a company that was doing a lot of good things still. We had good technology, but we were not the easiest company to do business with. Sometimes it was hard for our salespeople to get things done. Our order-to-cash, order-to-pay, and commission systems were very inconsistent.

You have to establish consistency around the world to do that stuff simpler and more effectively. I want to make sure everyone understands, the words simple and effective are not mutually exclusive. Simple will be effective. I would argue that with anybody. The worst thing you want to be is complex internally. You do not want to be where it is hard to get business done at your place of work.

What motivated me was: let's make it simpler. Let's get our salespeople, our developers, and all of our customer-facing people focused on the right things so they do not have to worry about a lot of this back-office stuff.

Gene Kim: Just to make sure I hear what you are actually saying, complexity would be like I have 35 different warehouse management systems, or I have an SAP instance I cannot change anymore. Those all you would say are unnecessary complexity.

Joe Aho: Yeah. The best example I would give you along those lines is, I do not know the exact number, but I think we had 37 types of comp plans for our sales force. We went down to one. There is no reason to introduce those complexities.

Gene Kim: I am guessing there are a lot of people in the room who are envious of having this top-down level commitment to create simplicity in their organizations. Can I get a thumbs up or applause?

Chris O'Malley: Just to add a remark, Jennifer said in her presentation that you have to consider the risk in the status quo, in not making any changes in business as usual. There is a false sense that if you disrupt these things, the place will fall apart. You need to get over that.

Simplicity is really, really important in becoming a more agile and nimble business. Convincing yourself that complexity is somehow valuable, important, or cannot be overcome is a false reality. This sunk cost fallacy that people hold, that it is too big to get out of it: we very, very rapidly basically ripped the guts out of the company and reassembled it, and nobody died. You just have to have the courage, as you are saying, to actually get the work done.

Gene Kim: You mentioned the word courage. One of the questions I had, looking at that much emptier data center, was: how did it feel for the head of IT? That person spent decades putting all that stuff in there. That was that person's job. Can you describe what it felt like for that person and how you helped support that?

Chris O'Malley: In fairness to that person, they worked for decades to build this castle. Basically day one, I am coming in saying, "Disassemble it." It is hard to take. A lot of work went into making that a very optimal environment. But I had to explain to that CIO, that is not making a difference to our customers. Customers are not going to pay for that stuff that you manage. It is an effort that you have to do to reshape their thinking.

Every two weeks, just like the town hall, I sat down with the people who owned this two-platform IT initiative in the company, and we talked about it. We talked about why it is important. Every time they have a success, we celebrate it. You saw the equipment we have taken out of the data center. We have funerals for it. We celebrate the death of each rack as it goes out and the tonnage that we take away, and we go down to the loading dock as it is being taken away for recycling.

That is important for them to feel a sense that what they are doing is good for the company, because every time they do that, we are harvesting back dollars and time into what is making a difference for the company. We use the platform, like the town hall, to make their efforts in disassembling what they built part of the success, part of what is making Compuware better in the eyes of our customers.

It is a journey. It is hard to take. But now, as much as they celebrate building the castle, they celebrate that picture. We do data center tours every time customers come, and they have big smiles on their face. They were able to achieve that and make a difference for the company.

Gene Kim: Specifically, you talked about regular meetings you had with them to support them in every step of this journey.

Chris O'Malley: Every two weeks, they are meeting with me and we are talking about it. One of the things when you go through this journey to get rid of all that equipment is that some stuff is low-hanging fruit. Getting rid of your email is an easy thing to do. Going from Oracle to SQL is pretty rough. That is a rough exercise.

It is important that you keep nudging people along and keep giving them a growth mindset because you do have setbacks. Things go wrong, things do not go as planned, and you take 12 steps back. It is hard. But the CEO, at least in my instance, was actively trying to make sure, regardless of the things that happened that took us sideways, that we kept moving this forward.

Gene Kim: In your Las Vegas session and the fireside chat we did then, you made this statement that it was very important to you that you were able to fund this incredible DevOps transformation initiative without taking a large restructuring charge. Joe, can you help educate us on why that is important? What is a restructuring charge, why is that bad, and what makes it so amazing when you can do all this without taking that hit?

And by the way, that is code for, "We are going to fire everybody."

Joe Aho: Yeah, right. There is going to be a lot of severance to be paid.

Gene Kim: And we are going to redo everything.

Joe Aho: What is near and dear to a CFO is, one, we did not do that, so we did not have the cash flow outlay. But even more importantly, what that means is that the people who were at Compuware before this transition remained the people afterward.

Like Chris has mentioned a couple of times, there is some salesmanship going on. There is going to be a new journey. There is going to be an unbelievable transformation coming down the pike. Here is why we are doing it. Here is why we need to do it. Here is how we are going to do it. We want you to come along for the ride.

In a room full of technologists, I am sure they will agree, and Detroit is the same way at our company: these people are full of passion and full of grit. They want to work on solving customer problems. They want to work in a culture that thrives on innovation, that thrives on risk-taking, that thrives on them giving feedback and knowing that it is going to mean something. If you can put all that together, they are going to jump on board. They are going to go through the wall for you.

That was basically the most awesome thing that happened through this journey: those same people. Every time we have a town hall, we are celebrating numerous people on slides who have been with the company 15, 20, 25 years. These are the same people now walking into that town hall with a lot more confidence, a lot more swagger. They know they are working on important things, and that was key. That is why it was so important.

Gene Kim: You had mentioned one specific anxiety that you had on day one with Chris, about the worst that could happen if people walked out the door. That seemed to you actually a very real risk. Why?

Joe Aho: For sure.

Chris O'Malley: Not just him, the board.

Joe Aho: Right. Let's face it, people are resistant to change. When you have people who have been doing something for 15 or 20 years, they are probably not at a stage of their career where, "Hey, I have great news. We are going to totally change the way you work, and we are going to totally change the way the company does business. Are you ready?" It is not going to be that simple.

It has to be those constant town halls. It has to be that constant messaging. It has to be that constant celebrating of successes, whether they are short-term small successes or long-term. I talk to the company every single quarter about the financials. It has been good. I will tell you that in most quarters it has been a very positive message and one that has resonated well because they like the results.

However, there have been a couple of hiccups along the way, and your grit, your perseverance, and your resilience are really going to shine through coming off a bad quarter. We believe in our message. We believe in what we are doing. We have to stay the course, and now is your chance to learn from those mistakes and get better again. We have had a couple of those as well, but when you go through all of that, people get more and more engaged. Now they are in it, they are living it, and that passion is going to come through, which is really the name of the game.

Gene Kim: Yesterday, you shared some advice with a bunch of the technology leadership community as they were sharing their transformation stories and obstacles. There was one thing you said about these two or three metrics that matter. Could you share that advice?

Joe Aho: Sure. Employee engagement is one of them. Gallup has done a survey for 30 years, near and dear to a type two person like Gene said. This is real data, and Gallup tells you they have real data that suggests that only 33% of your employees are engaged at your place of work. Fifty percent are not engaged. That does not make them bad people. That just means they are basically there from 8:00 to 5:00, getting their work done, and going home. Seventeen percent are actively disengaged.

We want to do everything we can at our company, which is a big HR initiative, to turn that around. We think that can be a competitive advantage. If you can get more of your employees engaged, and then also on the customer satisfaction side - that is the other metric - whether you are using Net Promoter Score, surveys, whatever you are doing, if you can get employee engagement up and you can get customer satisfaction up, I can promise you your CFOs are going to be very happy. Here is why: if you get those two right, cash flow is going to take care of itself. That is an easy bridge for me.

Gene Kim: That was a very strong claim. Chris, do you agree with that claim?

Chris O'Malley: Yeah. For hundreds of years, that has been true, that the three things that matter most in business are employee engagement, customer sat, and cash flow. For another 100 years, or 2,000, for perpetuity, it will be the same. If you think about companies that have been successful, if you go back to GE and Motorola before that, those three factors were at play that made their success. If you look at Amazon today, if you look at Netflix, it is those three factors that are at play. The game in terms of how it is played has changed, but those are always the most important things.

As a CEO, I am constantly thinking about those three things. Is our engagement of our employees getting better? One of the things that I talk about internally is that the equivalent of illiteracy in the modern age is an inability to adapt. Everybody has to be willing to change. I challenge everybody in my own company, and I challenge you: do not think you have it all right. You have things you have to improve. You have things you have to understand. You have roles and responsibilities that have to shift over time. You have to be accountable to things that are far more difficult. All of us have to have a strong willingness to change.

In terms of customer sat, we exist as a company for the only purpose of serving at the pleasure of our customers. That is it. We can never lose sight of the fact that our customers are always wonderfully and beautifully dissatisfied, and we should not run from that. We should run toward that, because in that we will find ways to innovate and make our products better.

Then ultimately cash flow. You do this for the purpose of not being a charity. You are trying to make a profit and serve those who invest in your company and create more opportunities for employees who work within the business, and that is gotten through cash flow. Those three things always should be top of mind for anybody within a company.

Gene Kim: What I love about that is that it is so congruent with what we have been seeing in these experience reports, whether it was Jennifer Woods at RBS, Fernando and Benjamin at Adidas, the focus on internal employee engagement as well as customer satisfaction. I absolutely love the validation of that.

Chris, do you have any last words of advice to share with this community of technology leaders who are desperately trying to get their business leadership on board?

Chris O'Malley: First thing I would say: in the age of software, continuously improving software delivery velocity, quality, and efficiency is no longer an IT aspiration. It is an absolute business imperative, because your capacity to compete in the marketplace with these customers that are beautifully and wonderfully dissatisfied is how fast you can take ideas that they care about and turn them into deliverables that make a difference.

You sit in the middle of that. You are doing the things that are critically important toward that end. You have right on your side when you get up every day, because you are trying to do worthy and noble things that really, really make a difference at the core of your company and the company's competitive strategy.

But I will say it is not just that. It is the character that you bring. My mother told me character is defined in setbacks. It is how you respond to those things. Some people respond to setbacks by feeling a sense of failure: "I will never do that again. That was a huge mistake." They recoil, and they fall prey to settling into the familiar. They do things they feel safe doing, not taking risks.

But if you are going to be a party to making the company successful, you have to have what we call true grit. "True Grit" is a wonderful movie with John Wayne in it that was my favorite as a child. But true grit to me is, first and foremost, courage. You have to be able to take these setbacks on and not say, "Bummer, dude." You have to say, "Hey, that did not work. But I am a problem solver. I like challenges. I am going to stand back up again. I am going to take another crack at this thing, and I am going to progress and move forward." That is just nothing more than part of the learning process. You have to have that courage.

You have to have passion. The speakers you are going to see on stage here get you excited, get you fired up. They are good storytellers. They are good at talking about the good, the bad, and the ugly. They are honest about the quest. They are transparent. You have to have that in you because you are trying to elicit change.

Joe said that on average, if you are a large organization, only a third of people are engaged. Two-thirds do not want any change to happen. None. Seventeen percent want you to die if you are trying to elicit change. So you get up every morning with two-thirds of the company wanting you not to succeed if you are a change agent. Do not fear that, but you have to have passion that rises up to that challenge. That is really, really important, and that passion cannot be situational. It has to be every day in everything that you do.

Lastly, it is perseverance. You cannot give up. I spent a lot of time with large enterprises and listened to the struggles they have. It is hard to hear, because in this world order, big does not beat small; fast beats slow. If you are big and fast, you can dominate, but it is really hard to combine those two things. It is really hard to be big and fast. A big part of making that come true is absolute perseverance in the face of massive and difficult setbacks.

But be fired up. I got introduced to the community through Gene. I have seen so many people that inspire me. They get me fired up. You can truly make a difference. But when I say you, I do not mean you collectively; I mean you individually. You have a huge responsibility, a huge degree of accountability. Because if you fail, and if you do not succeed in actually making these things come true, I can guarantee you your companies will fail. They will absolutely fail.

When you go to bed at night, worry about that. When you get up in the morning, be inspired to take on that challenge, because it truly is that important.

Gene Kim: Awesome. Joe, Chris, thank you so much for validating the mission we are on and educating us on better understanding the minds of CFOs and CEOs, and both the type twos and type ones. Thank you so much.

Joe Aho: Thank you.

Chris O'Malley: Thank you.