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.

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Ricoh's Rothenberger has even talked to venture capital firms on behalf of three of his startup partners. "It's another more intimate way to get engaged. We get into discussions about where they're going for the next rounds of funding, their last six months of financials, strategies to take the company public or sell," he says. "Initially, you're just buying into the technology. But as the relationship evolves, you want to see the company succeed."

But too much guidance from--or customization for--a specific customer can handicap a startup. "My role is not to push them, but to act as mentor," Rothenberger says. "I'm hiring these guys because their product is unique. If I knew how to build it better than them, I would have done it myself."

The End Game

Startups aren't startups forever.

Loura at Clorox knows a CIO whose entire enterprise is now being run by a major ERP player even though he didn't buy a single piece of software directly from them. The big ERP vendor had acquired the smaller companies he was working with.

It happens. A lot. Loura has seen collaboration tools, social listening platforms, systems monitoring solutions, and more snapped up by legacy vendors or competitors. "Sometimes it's business as usual, but often the acquirer will make changes to the prior road map or strategy," he says.

At Pabst, Haines is waiting to see how Microsoft's acquisition of Yammer works out for him in the long run. "I'm a little nervous," Haines admits. "I've talked to them, and they've been open about Yammer remaining separate, which is good."

Contingency plans are key, starting with securing source code escrow and forensic toolkits in the contract. Even the big vendors can discontinue support for their own products. "It's just as easy for an IBM to make a SKU disappear," says Haines.

At Starkey, that source code and forensic toolkit enabled Duchscher to continue to use the test automation software that was shut down--for a time. "But the life of that product had ended. No more fixes, no more enhancements," Duchscher says. "You can live that way for a while, but eventually if the vendor is not moving their product forward, that impacts your ability to move your product forward."

Today, Duchscher is dealing with the aftermath of Compellent's sale to Dell. "We're not seeing the level of responsiveness that we saw when it was just Compellent," he says. "I'm happy for the people of Compellent, but it was not the best move for Starkey. When I had a real problem before, I could pick up the phone and call the president for immediate action. I don't have Michael Dell's number."

There's also some risk in startup success. "These startups can become big players themselves--not necessarily becoming behemoths, but really owning their space," says Ross of Forrester. "And the vendors can start to take on the characteristics [that CIOs] were trying to avoid in the first place."

Then there are the startup failures. "I've been involved in a couple, and they're always tragic," says Rothenberger. "It's never about the technical aspects of the product. Those things can be fixed. It always comes down to the human element--individuals who make poor decisions or don't communicate well and end up creating a big mess."

Working with startup vendors isn't for everyone. Joe Fuller once started his own a point-of-sale software company for specialty retailers. His employer, Dominion Enterprises, has invested in a startup accelerator program called Hatch. And Fuller has served as judge for Start Norfolk, startup event and competition in Virginia. Yet as CIO of Dominion Enterprises, he doesn't purchase any products or services from startups.

"We are typically dealing with large vendors for our expensive services and products such as disk storage and Internet connectivity," Fuller explains. "These are capital-intensive businesses that small startups really can't compete with."

Fuller wouldn't rule it out entirely. But, he says, "Most startups...are under-capitalized and they can't survive any setbacks. As CIO, I can't afford to go with an innovative company that offers a neat product at a great price if I'm afraid they will go out of business."


Copyright © 2012 IDG Communications, Inc.

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