Archive: October, 2015

Nobody ever got fired for buying IBM

Not a month goes by without a new scandal being uncovered at a large corporation. For a while financial services dominated the news with tales of price fixing and mis-selling. This month the automotive sector joined the front pages in spectacular style when Volkswagen admitted installing software that cheats emission tests.

At the same time as large corporations are dominating the news for the wrong reasons, start-ups are attracting attention for phenomenal growth rates and astronomical valuations. Although the press’s favorites tend to be B2C start-ups like Uber and Airbnb there are plenty of noteworthy B2B start-ups: Deem is a cloud-based, integrated suite of travel, expense, and purchasing management software which raised $50 million in July valuing the company at $1.4 billion; Mesosphere received $36 million in funding in December to build what it calls a new kind of “data centre operating system” that takes all the machines a company uses in the data centre and makes them work like one big machine.

The lead article in the Economist this week is entitled “Re-inventing the company”. The article explains how public companies are declining due to a combination of conflicting interests, short-termism and regulation. The costs for start-ups, by comparison, are reducing. A new company can incorporate online for a few hundred dollars, raise money from crowdsourcing and buy-in services to enable them to expand globally without employing an army of staff.

This trend presents procurement with both an opportunity and a threat. By disrupting markets, start-ups offer procurement the ideal opportunity to reduce costs and improve service. On the other hand, start-ups cannot comply with the due diligence requirements that procurement traditionally demand such as providing 3 years audited accounts or being accredited with international quality standards. And by their very nature most start-ups fail. Better Place had a bold vision to reinvent the electric-car infrastructure. It raised $850 million but struggled to win over both carmakers and drivers. It declared bankruptcy in May. Color Labs raised $41 million from such venerable names as Sequoia Capital, Bain Capital and Silicon Valley Bank for its online photo sharing site. It was dubbed “the start-up from hell” by The Atlantic Wire and imploded under a lawsuit that alleged toxic culture, poor leadership, and shady bookkeeping.

So does the old adage that “nobody ever got fired for buying IBM” still hold? The procurement profession has changed a lot since the 1970s when the phrase was first used by salesmen to create “fear, uncertainty and doubt” (FUD) in the customer. Research from the Hackett Group show that procurement’s priorities continue to shift from cost to expanding the scope of spend influenced. In the never ending search for savings procurement can no longer afford to limit its focus to public companies. Managing a start-up presents different challenges that require different approaches. Due diligence is no longer a one-off activity but on-going. Relying on a fixed specification is replaced by developing business cases to influence product development. Waiting for a decision from a senior official is substituted by negotiating directly with the founder and owner.

Without doubt risk adverse organisations will only deal with start-ups when they begin to act like public companies, however, more entrepreneurial organisations should engage start-ups and explore opportunities to work together. If procurement can develop an effective approach to managing the unique risks associated with start-ups then they can bring significant value to their organisations. Perhaps the old adage should be replaced by fortune favors the brave.