Why I Fired My Biggest Client
Losing a big client can spell disaster for a start-up. For Tiempo Development, it spelled opportunity. During the heat of the financial crisis in 2008, Tiempo's largest client, which accounted for 60 percent of the company's revenue, couldn't manage to pay its bills. So, Cliff Schertz, who founded the Tempe, Arizona-based software development company in 2005, took a calculated risk and "fired" his own customer. Schertz refers to that time as a "near-death experience," but in the end, it's what propelled his company's 975 percent growth in the last three years, landing Tiempo at No. 323 on this year's Inc. 500 list. Schertz spoke with Inc. reporter Issie Lapowsky about making tough choices, instilling trust in employees, and lessons learned.
When did the trouble with your client really begin?
It was around September of 2008. This one software client of ours was growing so fast that within a few months, they accounted for 60 percent of our revenue. That was a problem. I don't want any customer to be more than 20 percent of our revenue, but when you're early stage, you don't always get your wishes, and you don't want to turn business away. We were trying to grow the rest of our business enough to get these guys where they were 20 percent of our revenue, but they grew so fast, it was impossible.
That sounds more like a blessing than a curse, though.
Except they were growing too fast. They were out of control when it came to managing their financials. A few months in, they couldn't pay their bills. We assign dedicated teams to each customer. Because they were so big, we had 5 teams working for them. So, the challenge was, we had additional cost, because we had additional staff. Meanwhile, in Mexico, where our developers are based, if you lay someone off, you have to pay them three months' severance, plus 12-days' pay for every year they've worked for you. If we terminated employees, it would have been very costly. We were stuck.
So what did you do?
I tried hard to get them to pay. I met with their senior executives, and they kept saying they'd pay us whenever their clients paid them. Eventually, I had to make the decision, take our lumps, and terminate the relationship. That was in February of 2009. Our revenue fell every month, until we bottomed out in May. We almost died. Talk about near death experiences.
How were you able to make it through?
Well, I had another decision to make: do I downsize the company or do I try to maintain our size so I can leverage that to grow? In the end, we decided not to lay a single person off. Holding onto people kept us big enough that we were able to network and get new customers. If I'd let people go, we wouldn't have had the resources to bring them on board. For instance, that same year we won a contract with [the IT software company] Tripwire, which is now our largest customer. At that time they were skeptical if we could handle their business, because we were a small software company, but we convinced them to try us. If we would have downsized, we never would have won Tripwire. It probably took eight clients to replace that one big one, but diversifying allowed us to make it through and even grow the company. We did get behind on payroll, but fortunately, our employees were willing to wait.
Why do you think that is?
Our employees make about four or five times the average wage in Mexico. There are a lot of families that count on them. Plus, I always tell them, if you can be successful you're going to create job opportunities for kids who are in primary school today. I told my first employees that exact thing five years ago. There are 130 people today who have jobs because of them. That dream is the reason people stuck with us. Not everybody did. We had some turnover, but most of the people who left have come back to us again.
What do you have to say to other entrepreneurs facing this kind of decision?
Don't get in that situation in the first place. Keep your client base balanced. But if you find yourself there, ask yourself, do I think I can make it through this? Because it will be hard. I've been in business since 1980, but this was the hardest time in my life, by far. When you fire your largest customer, that's when you find out what you really have in you.