Procuring IT from startups offers benefits, but beware risks

Companies can gain more innovative products and better deals when buying IT from startup vendors, but there are risks in scalability and support.
Written by Jamie Yap, Contributor

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.

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