By Angel Mehta, Managing Director, Sterling-Hoffman Executive Search
Angel Mehta: What was your entry point into the high tech industry?
Massood Zarrabian: It was with a co-op program with Computervision. I was doing my MBA and they had me on for a 90-day term, at the end of which they said, "Hey, you're a pretty good employee, why don't you stay on with the company?" I told them I would, but an MIT grad with half an MBA is worth more than three bucks an hour… which is what they were paying me, if you can believe that. They agreed. So I got a raise to five bucks an hour with a Manager's title…
Angel Mehta: A fifty percent raise? Great negotiating job… [Laughing]
Massood Zarrabian: Right. They also sponsored me to become a permanent resident, though I ended up getting a green card via my mother anyway. Anyway, the job with Computervision involved managing what is now called the QA function. So that was my start into the high tech world.
Angel Mehta: How did you come to be CEO of OutStart?
Massood Zarrabian: When I was at BroadBase, Bob Davoli from Sigma Partners actually approached my friend Dan Kossmann a couple of times to run OutStart. In January of 2001, about 30 days after the Servicesoft-Broadbase merger was finalized, Bob Davoli was aggressively going after Dan. So Dan came to me and asked me to do some due diligence on the opportunity - I think because he was hoping I would come up with some reasons to NOT join OutStart, so he'd have good reasons to give to Bob Davoli. Bob is a very aggressive investor, when he believes in something, as you know.
I did the due diligence on OutStart and found good technology, a wide open market, lots of white space…and it was backed by one of the top investors in the world… so I couldn't come up with one reason NOT to join the company. I told Dan, "You're not going to find an opportunity like this again - join them while you can. "At the end of the conversation, I made a comment like, "It's too bad I'm still at Broadbase because I'd take this opportunity myself if I could. "So Dan phoned Bob Davoli and told him what I said. At which point, Bob Davoli called me and said, "If you want the job, it's yours…"
So, Dan and I came to OutStart together.
Angel Mehta: I find it interesting that you would agree to join OutStart in March of 2001. This was probably one of the worst economies in American history…OutStart was a true early stage vendor at that time, which made it 10 times harder to sell anything. Companies were just not doing technology projects. So what was so compelling about OutStart that you would ignore all that?
Massood Zarrabian: My thinking was, if you have good investments in good products you ought to be able to at least survive. And when things improve, you ought to be able to hit doubles, triples and home runs. We knew that no IPO's were going to happen for a while - the market had crashed. But I'm of the view that human beings are very resilient. When things get tough, they actually reach a lot deeper and leverage their personal history, their experience, their passion, their emotion, and their brain a lot more than when times are easy. Tough times push you to do things that you otherwise thought were impossible. I believe that you actually focus on building great companies much better when times are tough.
So I wasn't afraid of the economy. Of course, the downturn lasted much longer than I thought it would. But still, we were able to build a business in the one of the toughest markets of all time - and we're proud of it. If you look at the way the company is managed today, from a financial controls and administrative perspective, it's run incredibly well. This company can make 30%, 40% profit before taxes at a run rate of $10m to $12m in revenue. Very few companies can do that. We looked at the cash as our own money…the joke around here, actually, is that Massood spends money at home more freely than he would spend money at OutStart.
Angel Mehta: Tell me how you create a culture of financial discipline…I know a lot of CEO's and entrepreneurs in particular struggle with how to do that, because every expenditure can seem important and you're under pressure to grow…
Massood Zarrabian: You have to communicate the message of financial responsibility to every layer of the organization. It can't just be the managers who embrace it - it has to be the whole company. Put it this way: at one time there was a rule at OutStart that if you want to buy any piece of equipment, you have to get my approval -- even if you wanted to buy a $20 headset. It was a way of trying to get people to understand that financial responsibility is very, very important.
Angel Mehta: It's funny that you mention that because I was talking to a CEO in Silicon Valley last week who said that his employees used to criticize how tightly he controlled expenditures in 2002, until they looked around one day and realized that they were the only company still alive in the category. All of their competitors had burned through their cash and went out of business. I remember Warren Buffet saying, "A good manager doesn't just randomly wake up one morning and decide to cut costs…" - it was supposed to be a given that costs would be controlled.
Massood Zarrabian: Yes! I used to tell people that when we created our core values, we purposely did not put anything in there about making a profitable company. Why? Because profit for a company is like blood in a body. You don't suddenly wake up one morning and say, 'Today I think I need blood in my body.'…unless you're very sick. Blood is in the body is a GIVEN - a healthy person just has it. Profit is the same way. It is the life of a company -- you have to accept it as a premise, not as an objective. Profit is supposed to be a given -- it's not something you should have to turn into a commercial or an end goal.
Angel Mehta: Has this always been your philosophy?
Massood Zarrabian: No I didn't always have that mentality. I learned the mentality actually in the late 70's early 80's when Computervision was just taking off and our stock was doubling all the time and people were just buying the stuff. Then we decided to fuel the growth by spending more money, doing more products, doing a whole bunch of random things. So what happened? In 1985, we hit a wall. The company laid off 1200 people out of 4000 total employees. I started reflecting on how we got to that kind of nightmare and the conclusion was, you know, we just went crazy. We forgot about focus. We forgot about how to run a business.
What happened to so many companies after the bubble burst was not a new thing. It has happened before…it is a cycle that repeats. So it's a lesson I've learned several times.
Angel Mehta: I want to talk about the market category that OutStart is in, because historically I don't think e-learning has been perceived as a critical priority. It was more of a 'nice-to-have'. Obviously you and the venture investors at Sigma, General Catalyst, etc. saw something different that very few others were seeing. What was it?
Massood Zarrabian: I agree with you that historically, it was a 'nice-to-have' but there were two trends that suggested that things were going to change and the category was going to take off. There are two major areas that companies have to address with regard to training: administration issues and products and service. Human Resources is responsible for the wellbeing and growth of employees. So, they have to do things like policy training: sexual harassment, expense reports, benefits. Generic stuff, where you train all new hires on the same content. This was a first generation problem: i.e. 'How do you make the administration of training on this type of stuff low cost?' Well, you offer it online; make it possible for people to get it done without trainers, etc.
Once people deploy these kinds of solutions, they realize that 1) the people competence is not increasing, and 2) the ROI is not there. That's when people step back and realize that the real improvement in competence and savings is going to come by transferring product knowledge FASTER, better, quicker, cheaper.
So, imagine if you could make every sales rep in the company have the exact same domain expertise and competence as your top sales rep. Imagine being able to get all your professional services consultants to the same level of competence as your top person. To do that, you have to create a content-centric approach where knowledge is captured and authored and deployed rapidly, and you need to make the knowledge deployment to be done in a personalized fashion based on people's existing competence.
By doing that, you don't have your best people wasting time on training they don't need. You help people who know 75% of the information to go and spend time on the 25% they don't have. And you have your newest people going through complete training in rapid fashion to catch up to the experts.
If you can create an environment in which that critical information is available 24/7, be received in any medium that the learner wants, and have it available to them anywhere in the world…well if you could do that, you will have defined the next generation learning strategy. It moves training from a support function to a mainstream business process. It becomes the way in which you increase the know-how, competence, of employees and partners.
Angel Mehta: How does OutStart differentiate? How does it compete? Presumably, the large mega-suite vendors are starting at least to enter the e-learning space, which on one hand is validation for the category. But, how do you compete against an Oracle or SAP?
Massood Zarrabian: The good news is, we don't. PeopleSoft, SAP, and Oracle all are in this market with a Learning Management System. It's an extension to what large software companies like PeopleSoft have already done. We do a content solution - in fact, we were selected by PeopleSoft as a partner. Both Oracle and PeopleSoft have announced that they have no intention to develop a content solution because it is just so far out of their domain. We actually bring PeopleSoft in whenever we see an opportunity for a Learning Management system in a global 2000 organization. At the same time, we can offer LMS solutions to the SMB market - it's a segment that simply cannot afford to buy from the larger vendors.
Angel Mehta: Bob Davoli obviously has this legendary reputation as a software investor… my question is, is there an order of magnitude difference between the value he brings vs. other venture investors you might have observed in the industry?
Massood Zarrabian: I actually met Bob Davoli for the first time in 1994 when I joined Bachman Information Systems. Sometimes you meet people and have an alignment of the minds. For some reason, I have that with Bob. I understand him without needing long explanations. I admit my errors to him comfortably. I don't worry about having to cover my screw ups with him. We share an understanding about what the responsibilities of a CEO are, and what the responsibilities of a board member are. He publicly acknowledges that as a Board Member, his job is to coach and help the CEO. It's not his job to tell the CEO what to do. If he's unhappy with the CEO, he shoots the CEO - he doesn't shoot anyone else.
The important lesson from the relationship I have with Bob is about clarity. Clarity about what I do versus what you do. The analogy I use is that a business is like a theatre production: Somebody puts the money in, and somebody hires the Director. A bunch of actors are hired, and for a while there are rehearsals going on. At a rehearsal, everybody can give opinions about how to act or play a role. Everybody might have tips for improving the production. Everybody can have opinions about how you can act better, right? Nothing wrong with that! But then when the opening night comes, everybody plays their role. At the end of the day, everybody has to know who's going to decide what, or it's going to be very confusing.
Bob is a great coach and mentor. He's got one of the sharpest minds I've ever seen. He's very strategic and, at the same time, he can go from strategy to the smallest detail, picking out the one tiny detail that is going to kill your strategy 6 months down the road. He believes in metrics, which I believe in also. So he's very rich in terms of experience, intellect, and passion. And that makes him a great board member. But we have two other great investors who are OutStart board members as well in Charlie Lax and John Simon - their contributions have been great. And I am fortunate enough to have been able to get Al Luccesse, who was chairman of the board at Concerto Software, to join the Board as an outside director. So it is a smart, experienced, committed and balanced Board.
Angel Mehta: What is your biggest weakness as a leader?
Massood Zarrabian: I wish I had just one. The biggest weakness, I think, is that I like to debate. Sometimes, I will argue a point with an employee and people assume that because I've argued my point, I've made a decision. In reality, I'm just making a point for discussion - and I want the employee to tell me why I'm wrong. But perhaps because of how I communicate, employees will think that I've already made up my mind. I'm debating, not deciding - and perhaps I need to be more clear about the difference.
A second weakness is my tendency to stick with the same people longer than I should. I just have a passion for coaching and mentoring, and tend to believe in the ability of a human being to grow and develop. The problem is, a company may not have the time required for a particular person to grow and develop.
So those are a couple of weaknesses I'd point out for you.
Angel Mehta: How has your approach to leadership changed over the last 15 years? What do you know today that you wish you knew back then?
Massood Zarrabian: There are two things in particular. First, separation of style from a person's character. And second, the need for speed.
Angel Mehta: Separation of style?
Massood Zarrabian: How a person communicates is not necessarily representative of who they really are. For example, I have known countless people throughout my career who I used to think were dictators. I assumed they were 'bad' people. What I realize now is that no, they were very good people. It's just the way they talk - it sounds autocratic, that's all. So I've learned to listen and hear people a lot more. I try to separate what a person is saying from how they say it or the words they use.
The second one has to do with the need for speed. I think I was way too patient. In retrospect, I should have made decisions faster. Terminated people faster. Hired smart people faster. Made decisions more quickly. Had I done that, I believe my organizations would have performed even better than they have.
Massood Zarrabian is President and CEO of OutStart. During his short tenure with OutStart he has overseen three successful acquisitions, most recently of Trainersoft Corporation, provider of a leading e-learning authoring tool. Prior to OutStart, he was President of the eService Division of Broadbase Software, a leading provider of eCRM solutions. Before that, as President and CEO of Servicesoft Technologies, a leading provider of intelligent eService solutions, he directed the successful merger with Broadbase Software. For article feedback, you can contact Massood at: mzarrabian@OutStart.com.
Angel Mehta is Managing Director at Sterling-Hoffman, a retained executive search firm focused on VP Sales, VP Marketing, and CEO searches for enterprise software companies. He can be reached for feedback at: amehta@sterlinghoffman.net
