When it came time to select a new human resources management system, William Graff, senior vice president at Cerner Technology Services, had his pick of offerings from deep-pocketed, well-established vendors. Yet Cerner opted for a tool from a little-known startup. "The functionality was richer, the pricing model was more in line with the value we were expecting, and they were more willing to negotiate a better price," says Graff.
Welcome to the world of hot tech startups. Although high-tech businesses represented just 4.1% of all private-sector companies in 2011, high-tech ventures -- and the entrepreneurs behind them -- "are economic powerhouses, serving as key contributors to income generation, job creation and productivity growth," says a report from the Kauffman Foundation, an entrepreneurship advocacy organization.
University Health Network is another organization that's placing its bets on promising upstarts. "We have chosen to work with small startups, and I think we're going to see more of that," says Jim Forbes, UHN's CTO. "There are a lot of interesting smaller companies that are producing innovative products."
But choosing David over Goliath as an IT vendor requires weighing the risks -- a startup could run out of money, suffer from poor management, be purchased by a bigger company or go out of business -- against perks such as scrappy entrepreneurship, innovative products and potential for cost savings.
For James Levine, the decision to select business intelligence and analytics tools from New York-based startup SiSense over those of a larger vendor came down to deployment time. "When we started looking for business intelligence solutions, the ability to scale was important, cost was important, but most important was the implementation time -- how quickly we could get the solution set up and with very minimal IT involvement," says Levine, a senior analyst at Act-On, a Beaverton, Ore.-based provider of marketing automation tools. "A single business analyst can implement SiSense, whereas with some of the larger tools, we had an entire team dedicated to the back end."
Another advantage of working with a startup is quality of service. "Startups have to earn your business and continue to earn your business," says Levine. "So they'll go above and beyond and out of their way to make sure that we're successful and happy."
Jerry Jao, founder of a 20-person marketing software provider called Retention Science, agrees. "Smaller companies are more attentive, and we're willing to spend the time to try to understand the client's business," he says. "Even as CEO, I might be intimately involved in your business, whether it's a contract negotiation, an implementation, dealing with day-to-day operations or making sure that client campaigns are successful. I'm on the ground running and working with our clients."
But companies that turn to startups simply to cut costs are missing the point. Although Levine has successfully "negotiated significant reductions in price" with smaller vendors, the real advantage is being able to determine a product or service's actual value -- as opposed to its price -- before signing a contract.
"With startup companies like SiSense, we're able to test our environment before we even pay a dime so that we can see the ROI before we write the check," says Levine. That's a far cry, he says, from larger vendors that often refuse to "open the curtain all the way" and don't offer product demos.
But even the most impressive startups come with limitations. For example, Levine says he's reluctant to sign multiyear contracts with newer vendors for fear they'll be gobbled up by a competitor or will shut down unexpectedly.
Jao says he understands that reluctance. "Clients prefer not to sign long-term contracts, especially with a startup," he says, adding that many buyers "want the freedom to be able to try other solutions down the road."
Fortunately, there are ways to minimize the risks of doing business with a startup IT vendor. Jao advises IT leaders to make sure that vendors have "proper liability insurance" and that "they're properly funded."
In fact, Forbes says, "we always make the financial standing of the company a criteria" for selection. And that sometimes requires asking a startup to supply financial records. "Some products out there, especially around cloud, we're very wary about," he says. "We do our homework and make sure we understand the legal terms of what they're expecting and selling."
Cherry-picking which IT tools should and should not be provided by a startup can also safeguard a company against unexpected snafus. For example, a retail bank may decide to have its social media monitoring handled by a Silicon Valley newbie while leaving its data storage in the safe hands of a tech titan. Either way, startups are fast gaining ground as a viable alternative to high-priced established vendors.
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