Procuring IT from startups offers benefits, but beware risks

Procuring IT from startups offers benefits, but beware risks

Summary: Companies can gain more innovative products and better deals when buying IT from startup vendors, but there are risks in scalability and support.

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Purchasing IT from startup vendors, instead of bigger and established companies, can allow access to benefits such as more innovative technologies and greater negotiating leverage. However, customers must note and prepare for risks such as the potential issues in scalability and support.

When the marketplace is dominated by a few large players, the innovation of IT offerings tends to slow down, which ultimately impacts companies, said Andrew Bartolini, chief research officer at analyst firm Ardent Partners. "Unless an IT team is 100 percent pleased with what is offered by these big players, they should give startups a chance."

Enterprise technology "deserves much better", he argued, noting that it is not surprising if companies today increasingly turn to startups for more of their IT, not simply because of tighter budgets.

Elaborating on the benefits, Bartolini said startups offer a different approach to solving IT challenges, which are often competitive or superior features and functionalities at lower prices. There is also increased negotiation flexibility for organizations to enjoy, he said, noting startups are more flexible in the timing of their new product releases and what features are included.

Lyon Poh, partner and CIO at KPMG Singapore agreed, saying companies "benefit from the energy" from a startup vendor. These smaller IT vendors can be more competitive and innovative, and also faster and more willing to customize their service to meet client needs.

Risks in scalability and support
Still, industry watchers cautioned there are also tradeoffs that customers should take into consideration.

KPMG's Poh noted that a startup's IT solution could be less scalable and they might not be able to provide sustainable support compared to traditional big players which have stronger support infrastructure.

Ben Cavender, associate principal at China Market Research Group (CMR) noted that there is always the risk that a startup vendor will overpromise but under-deliver.

"It's very possible that the startup does not have a fully functional product, despite what they claim, as well as lack the resources to provide good customer service and support," he said.

Ultimately, this means customers won't get adequate support when problems arise or when their business is scaling up faster than IT can handle, he said.

Bartolini said another risk is whether the vendor will still exist in its current form over the next few years.

For instance, the startup could go out of business, or on the other hand, becomes so successful and gets acquired. If the second scenario happens, it becomes a question of whether the product or service--which made the company pick that startup in the first place--will still be continued by the new parent, he pointed out.

Nonetheless, Bartolini said customers should do their due diligence when dealing with startup vendors, in order to mitigate potential risks. One way is to negotiate for shorter-term contract durations with the option for renewal and a suitable termination clause or penalties, he recommended.

As they should with vendors of any size, companies need to do their own reference checks to see how well the startup can support its customers' IT needs as well as assess the financial risks involved in procuring from that vendor, he said.

Cavender urged companies to look at the teams behind the startups, rather than the fact that they are small-sized players. If it has a team that is highly professional with plenty of industry experience to fully develop and support a strong product for customers, "working with a startup can be a good route to go", he said.

Poh concluded that startup vendors offer an advantage if they provide unique and niche services. He suggested that these vendors can be engaged for smaller pilot projects where feasibility is uncertain and potential delays or failures will not pose any major business impact.

Topics: Enterprise Software, Start-Ups, Tech Industry

Jamie Yap

About Jamie Yap

Jamie writes about technology, business and the most obvious intersection of the two that is software. Other variegated topics include--in one form or other--cloud, Web 2.0, apps, data, analytics, mobile, services, and the three Es: enterprises, executives and entrepreneurs. In a previous life, she was a writer covering a different but equally serious business called show business.

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  • Well spoken

    These are all excellent points regarding the dynamics of choosing a startup, particularly for a cloud-based service offering. I think companies could also benefit by learning that there are variations to the term "start up." For instance, has the company been in business for only one year, or is it really more like 4 years? A start-up is not likely to divulge full financial information on their business, but basic attestations can be obtained. Ask about the start-up's business model, when it hopes to achieve profitability, and about any plans for further capital raises. A start-up will probably have their senior people working on a new large prospect and so these questions should be appropriate at that level. Questions about scalability and support should be easy enough to ask and obtain relatively trustworthy answers to.

    From the start-up's perspective, the challenge becomes a chicken and egg problem - how to obtain customers for references without having customers to use for references. One solution we have found at Certify.com is to do it the old fashioned way, which is to prove yourself to each client and execute exceptionally well in every area. The final stage of go-live is a happy new client that will gladly act as a reference. You have to climb the ladder starting with small companies that prefer the bleeding edge start-up and progressing into larger and more conservative companies. There are really no short cuts when it comes to B2B. B2C, absolutely, but not B2B.
    aneveu