The Risks and Rewards of Using Startups

CIOs say that partnering with no-name vendors can lead to a big payoff (more innovation) or a total bust. Here's how to manage the relationship.

By Stephanie Overby
Fri, September 14, 2012

CIO — Several years ago, Rob Duchscher took a chance by signing a contract with a startup vendor of test automation software. Duchscher, now the CIO of Starkey Industries, the largest hearing-aid manufacturer in the United States, did his due diligence. The financials were in order, the company's leaders had a track record of success, and the startup's technology blew the competition away.

A few years in, the company was shut down. And Duchscher was left to pick up the pieces.

"At that point," says Duchscher, "I was hosed."

It wasn't the first time Duchscher got burned placing a bet on a young vendor. Some were bought. Others went bankrupt.

And it probably won't be the last. Unlike some IT leaders, Duchscher doesn't like to play it safe with vendor selection. "A lot of my peers are too risk-averse. They want to make the absolute safest choice," says Duchscher, who was vice president of software engineering and a research and development program manager before taking over IT. "Safe choices lead to a culture of status quo. And status quo, especially today, can make it hard to survive and remain profitable."

Increasingly, IT leaders, frustrated with traditional suppliers, are seeing the appeal of startup partnerships. "The desire for lower risk pushed a lot of CIOs toward the bigger players with deeper pockets and more money for R&D. But they gave up one risk for another," says Christine Ferrusi Ross, research director at Forrester. "They traded the risk that a smaller, newer vendor would somehow fail for the risk that they would be held hostage to a supplier with whom they have no leverage."

It's not just increased influence that draws IT leaders to nascent suppliers. Startups are more flexible with pricing terms and product features. Their contracts take weeks to negotiate rather than months; implementations take months rather than years. Most importantly, they are answering the technology questions that older vendors won't even ask.

"Small, startup companies are the primary drivers of innovation within the IT industry," says Mark Settle, CIO of $2.2 billion BMC Software. "A lot of startups are not only solving the newest problems out there," adds Ben Haines, CIO of Pabst Brewing, "they're solving them at a faster rate."

But working with startup vendors is complicated. They lack the processes and customer support frameworks of their more-established counterparts. Their rollouts and updates require extra oversight. And the CIOs that partner with them have to do a lot of hand-holding throughout the relationship.

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