Why buying from small businesses offers big advantages

There’s an old saying in corporate America that nobody gets fired for buying IBM. Buying from the big players is viewed as a safe move. And large companies have a reputation for stability and reliability.

But there are also major advantages to buying from small suppliers. Here are some of the reasons you should take a closer look at small vendors.

Social responsibility

Diversity isn’t just for hiring and investment portfolios anymore. Social responsibility has become part of the procurement agenda.

It’s important to note that limiting your procurement to the Fortune 500 means you are missing most companies. According to the U.S. Small Business Administration (SBA), small businesses (500 employees or fewer) account for 99 percent of all firms and 41 percent of private-sector payroll. In 2012, there were over 240,000 small firms in the high tech sector, according to the SBA, and there are likely even more today.

The U.S. government has allocated a percentage of government spending to companies owned by minorities, including women, veterans and other historically disadvantaged groups, to provide economic empowerment. In fiscal year 2015, 25.8 percent of U.S. contracting dollars went to small businesses, with the Departments of the Interior, Transportation and Agriculture serving as notable buyers from small companies.

And the trend has spread to corporate America, with many companies publicly committing to supplier diversity to achieve their corporate social responsibility objectives. AT&T, Dell, GM and Microsoft, for example, currently spend over $1 billion per year on diverse suppliers according to the corporate advocacy organization the Billion Dollar Roundtable. This procurement strategy is motivated by social responsibility but that is only part of the story.

Deep industry understanding

Starwood Hotels, which has more than 1,300 properties operated by over 150,000 staff, has increased purchases from small suppliers over the past few years. When it was looking for an eProcurement system, the company ultimately settled on software from Birchstreet Systems, a company with approximately 115 employees — but not before running a number of vendors through a competitive selection process that culminated in full-day demonstration sessions

How did Birchstreet stand out to Starwood Hotels? “They really knew the hospitality industry,” says Jim De Filippo, Director of IT Supply Chain at Starwood. Birchstreet’s eProcurement system is used by Hilton Hotels, Marriot Hotels, Fairmont Hotels and the Four Seasons. “Some companies may say they can find out how to meet our needs. Birchstreet was ready to go,” says De Filippo

“There are several benefits in buying from small suppliers,” De Filippo says. “I find that smaller companies are often more interested in learning the business and often more willing to accommodate one-off requests,” he says. At Starwood, one-off requests include supplying computer accessories to a single hotel property. Large suppliers may discourage such orders while smaller suppliers are keen to build their reputation.

“Our small suppliers benefit from being able to mention Starwood Hotels as a client so that’s an incentive for them to perform well,” De Filippo says.

Managing risk

Concerns over financial and operational viability are an oft-cited reason why large, established companies are preferred by many procurement professionals.

One way to mitigate the risk of operational failure is to find small suppliers that use infrastructure from large firms. For example, ecommerce startup Hubba, which offers a platform for retailers and suppliers to share product information,is built on Amazon Web Services.

Financial viability is another significant concern for companies considering small suppliers. Unlike their publicly traded competitors, small companies are generally under no obligation to provide financial statements.

Absent that information, how can you assess your suppliers’ financial health? Buyers may ask for a statement of the company’s cash levels or use an independent service such as Dun & Bradstreet, which draws on banking data, credit scores and other data sources.

Remember, too, that a small supplier may grow over time. From 2012-2015, over 125 small businesses that supply Dell grew so much that they exceeded the “small company” definition. For example, in 2000, Dell started working with OrangeDoor, a woman-owned integrated marketing agency with 3 full time employees. By 2016, the agency had grown to over thirty employees. Facilitating that growth with a vendor over time will translate to deeper understanding and more effective working relationships.

Finding diamonds in the rough

Small firms don’t have the resources to sponsor conferences, golf courses or TV commercials. How can IT managers searching for solutions find these small companies?

Look for third-party reports that identify up and coming players. Research firm Gartner’s Cool Vendor report identifies innovative and impactful small companies. Inc Magazine’s “Inc 5000” list includes high growth companies in multiple industries, including 1,000 companies in the IT services category. Also, look for individuals from small companies who are speaking at conferences and contributing to the industry conversation.

Finally, consider joining a specialized industry association to find certified diverse suppliers. “Dell works with government and multicultural organizations to actively identify and grow small businesses, including the Small Business Administration, the National Minority Supplier Development Council and the Women’s Business Enterprise National Council.  Additionally, there are several matchmaking opportunities, regional events and conferences that bring small businesses in contact with top decision-makers at their potential client companies,” says Mark Pringle, vice president of World Wide Procurement at Dell.