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Should you buy enterprise applications from a startup?

Howard Baldwin | Sept. 3, 2014
It's risky to buy software from a company that may not be around next year. But IT executives focused on innovation are readily doing so. Here's why.

Multiple aspects of new ventures appeal to CIOs. Startups are hungry. To use a word that comes up a lot, they're nimble. They're also focused and responsive. DHL's Gardiner notes, "You can pick up the phone and directly call the guy who knows how the code works. You get a good level of response and agility when you use a startup. That is an upside."

CIOs may legitimately ask why — if they just need someone to focus on a project — they can't simply build what they need themselves. "Creating a startup within a corporate setting is a great way to innovate, but there will be distractions — the processes, the way things are done, the sheer legacy of the organization," says Kaiser Permanente's Gardner, himself a veteran of two startups.

Making it work

When you're taking risks, never underestimate the importance of relationships. CIOs and entrepreneurs alike confirm that it's easier to connect when there's a trusted middle conduit. Red Robin's Laping says, "As open-minded as I am, I won't take a cold call." He only meets with startups he's met through a "matchmaker" called Trace3 that brings together CIOs, venture capitalists and entrepreneurs. That's important, he adds, because when you're looking for a startup, "it's not like you're going into a bar to pick someone up. I rely on my peer network or partners to tell me about someone they've run into" who can meet a specific need.

Pedigree counts too. That means looking at what venture capitalist firms or angel investors are backing the startup, or simply checking out the top executives' resumes. Notes Accenture's Sullivan, "The guy who started Nest came out of a well-established product company called Apple. It had processes, it had quality control and he took that knowledge along with some of its employees." Along the same lines, Oomnitza's Lozinski spent several years at SAP Labs.

Sometimes to make the relationship work, CIOs need to apply special dispensation. In a previous position, Peter Bowen, who now manages a team of consultants at Bedford, UK-based Telesperience Consulting, bought a billing application from startup Centenary Services (which has since been purchased by another company). Bowen's company promised to make payments on faster terms than it did to other suppliers in order to help the startup avoid cashflow issues. "Basically, we micro-managed the whole process," he says. "Buying from a startup can be good, but you need to make sure the fledging does not get killed before it has learned to fly. You should be prepared to provide a helping hand."

One of the biggest issues both CIOs and entrepreneurs cite relates to product support — something that can overwhelm the startup and leave the enterprise frustrated. At Red Robin, Laping engaged San Francisco-based Firespotter Labs, which had developed an application for iPads named NoshList. It's essentially a self-service waiting list that texts walk-in customers when their table is ready. Though such a capability is more common today, Laping says, he believes that Red Robin was one of the first national chains to tackle this.


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