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Why you should invite a startup to your next RFP: the benefits and the risks

I can hear you ask: “Buy from a startup? Isn’ t that risky?” Yet, that shouldn’t be the first thing that comes to mind. Instead, start by asking yourself what you are trying to achieve. Do you want to bring your company into the 2020s? Maybe you want to be a more attractive workplace, become more agile or foster creativity in the workforce.

Whatever your reason, the real question is: will you achieve the results you are looking for by playing it safe? By doing things like you’ve always done them? Will that give you the competitive edge you are looking for?

If the answer is no, it’s time to consider inviting a few startups or emerging companies. And even if you intend to play it safe, you might want to invite them simply to challenge your thinking and expose your team to a fresh perspective. You might be surprised where that leads you.

A new perspective?

Startups were created because someone had a fresh idea to change the world and decided to act on it. Someone was frustrated with the current way of doing things and decided to create something better. When you invite a startup, you’ll get exposed to a solution that challenges current models. Your initial reaction might be that your company is not ready for that. It’s too new or too big a leap. You’ll have to convince too many people or the change effort is too much. All very valid reasons.

But you’re running a company for the long term. You can’t run your business like you did a year ago – the external environment has fundamentally changed. Startups see an opportunity to challenge the status quo and they go for it hard. If they didn’t, they wouldn’t be a startup. They are early adopters of new ideas and methods and they offer you an opportunity to look at the future of work: you can learn something from them about new ways of working and new corporate behaviors.

They are not in business because they copy history: they imagine something better. They have a vision of how things should and could be, and are tearing down barriers to realize that vision. And while you might not share that vision completely (or at all), it will help you clarify what you can and can’t do. That perspective alone is worth the invite.

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You need a revolution not an evolution

Do you need to shake things up? Have change programs not brought the turnaround you were aiming for? When we change organizations, we typically take baby steps so we don’t disrupt the business too much. But when you are not achieving your goals, it might be time to thoroughly question the approach, and do something completely different. Bringing in a startup allows you to go bold and offer an alternative.

Most startups are led by young people, who have only worked in companies for a short time and didn’t buy into the “we’ve always done it like this” culture. I’ve spoken to a number of companies who bought from startups because they “went a little crazy with their suggestions” and that pushed these companies to think outside the box. Even if they didn’t follow these startups all the way, it allowed them to come up with creative solutions the traditional vendors had not proposed.

Taking a bold approach has consequences that you need to take into account before you leap. You know your company best and are in charge: you can go just as far as you think is necessary. But if you want to shake up the establishment, inviting a startup might be the catalyst you need to get where you need to be.

This approach might have a secondary benefit: engaging with startups can bring a much needed boost to internal talent. Employees experience first hand how the startup team operates, and once they get involved in the project, they will be exposed to new ways of working and gain new skills. In this way, the opportunity to work with external founders could bring much needed changes in the behavior and skill sets of your internal team.

Professional problem solvers

Startups are created because their founders discovered a problem and came up with a unique solution. They can’t afford to copy someone else’s solution: that wouldn’t sell. They want to grow their startup. If they don’t succeed, no one will buy their solution and that will be the end. In short: they are committed to solving problems while creating value for their customers.

Startups solve problems for a living and they expect to help you with yours. They help you change a process so you are more in tune with your client’s need. Or they make it easier for employees to find out who has the skills required to complete a program successfully. They can’t afford to waste time so you won’t look at a long sales or implementation project: they must have you up and running within the shortest time possible (within reason of course).

Startups solve problems in a unique way: they don’t know anything about your history and are not restricted by internal barriers. Using a startup can give you a competitive edge by solving a problem differently, one that brings value to your company. One that has not been done before. Anything that helps you go to market quicker or cheaper than the competition will help you get results. And if you openly share your issues with them, who knows what solutions they might come up with?

Co-create as you go

Startups typically present a solution to a specific problem. By definition, they constantly improve it and look to build out the solution, incorporating more features. They are small and nimble and eager to work with new clients. That means that there is room for co-creation and collaboration: every feature they add increases the value of their solution.

startup collaboration

At the same time, it increases the value of the solution to you. You have the opportunity to suggest improvements, and because they don’t yet have hundreds of customers, your suggestions will be taken seriously and you could see them appear in future versions. When was the last time your current vendor responded like that?

The opportunity to co-create and collaborate is an important reason to work with a startup. Be careful though: they can’t act on every suggestion. Explain the problem to them and then leave it to the startup team to do what they do best: provide new solutions to innovate work.

The money factor

Startup solutions are often cheaper than established solutions and some customers find that odd. The reason is simple: they have lower costs. They need to be as cost-effective and lean as possible in order to survive and build. They employ fewer people, don’t carry a large overhead and they don’t need to maintain legacy solutions. Their staff is young and costs less, and many use a remote working culture and don’t have facility costs.

They might not be able to achieve the procurement discounts that larger vendors can negotiate, but with the current state of cloud technology, establishing a secure infrastructure doesn’t break the bank. And if they had a recent funding round, they might be inclined to offer discounts to early adopters.

Startups need you as much as you need them. They need someone that will be their sponsor, help them grow, and is willing to take a few phone calls from their prospects or volunteer for a case study. Armed with that knowledge, don’t go overboard when negotiating discounts: you want them to survive so you can continue to benefit from their services.

No legacy

This one is pretty obvious: Startups offer newer technology and newer processes because they are new. Even a startup that is 3 years old is probably not using the latest insights as well as a company that launches this year. Today’s startup is building on the lessons learned from that 3-year old startup and all the others before them.

Does that mean you should only look at startups that were founded this year? Of course not – you need to think about the maturity of the solution and the company as well. So while you want to invite the more mature startup (let’s call them the emerging company) to your selection process, you might want to invite a few of today’s startups to tell you what they are building and why. If you don’t plan to buy from them, please don’t expect them to come in for free, even though they might offer – you want them to survive and to do so, they need to get paid.

Try before you buy

Startups don’t come to market with a complete suite that covers all your HR processes. They focus on one or two specific processes and do that really well. Which means they are most suited for a company that uses a best of breed approach. With best of breed comes a requirement for integration and well documented APIs, so you can integrated the solutions easily into your existing HR infrastructure.

Because they sell mostly point solutions that are quick to set up, the majority of startups offer you a sandbox or pilot – you can try the solution with a group of employees before you actually finalize the purchase for the company. Startups don’t have consultants setting up the solution. Which means that during the pilot, you will get to know the team behind the startup better, and they will get to know you and learn what you need to succeed.

Startups can be very responsive because they are small. It’s not uncommon to wait weeks for an answer from established vendors, especially when they have given your question a low priority. Because the lines in startups are much shorter, you’ll see developers get involved in the answers, up to the CTO. They don’t yet have a large service organization, which means you’ll be talking to the experts much faster and more often.

What about the risks?

Let’s face it: there are risks when you buy your solution from a newly established company, even if you’ve done all your due diligence on the solution itself. There’s always a chance that their funding runs out and the company seizes to exist. An investor withdraws the funds. Or someone on the leadership team leaves and there is no adequate replacement. Before you contract a startup, you must carefully consider the risks.

First of all, startups are a lot less complex than established vendors. You can have an open conversation with their leadership team to determine the company’s health. Ask about their careers to discover if they’ve done this before and understand the challenges. You’ll want to know their run rate as well as their cash position. Checking their last funding round, the amount and the investors will give you a good indication of their long-term viability. And what’s their strategy to expand the solution?

Next, check their client base. Even though the # of clients is interesting, if they are all running pilot projects, the vendor is not getting paid. So ask for the # of paid employees they have live on the platform. This will give you a good idea of the revenue and if they will be able to sustain themselves longer term.

Finally, make sure that clients do not equal investors. There is a huge difference between “new clients”, meaning clients that bought the solution without an attachment, and clients that are actually investors and use the solution somewhere in their company to pump up volume.

Two exit dimensions

What is their exit plan? The exit question has 2 dimensions: first, where is the startup headed strategically? Are they working towards going public, or are they looking to be acquired by an established vendor? If a company wants to go public they will spend time acquiring new clients, seek more funding rounds and have long term independence in mind. If they follow an acquisition strategy, they might invest more in technology and closely align with their envisioned buyers, so their product evolves into an add-on rather than a stand alone product.

The second dimension of the exit question focuses on the end of funds: what does the vendor have in place in case their money runs out? Is their code in escrow? Can you take over their cloud hosting and/or their staff in such a case until you can move to another solution? What about your data? Which by the way, you should know for every vendor you buy from: an established vendor can be acquired by a company you don’t want to work with. So make sure you know your rights and fall back scenario for every solution you buy.

Remember that no one, not even a large established vendor, is untouchable. Today’s cloud contracts have a 3-year duration. While you might contract with a 3-year extension in mind, there is no guarantee that the solution will actually bring you the results you envisioned. It’s in your best interest to always have an exit plan in mind.

In the past, the cost of changing solutions was prohibitive, especially with company-wide change management projects. Today’s workforce is used to solutions that change frequently: the average life span of an app is 6 months, and that’s only for apps that do really well. Only a few survive long term (think: major social networks) and even their apps are updated several times a year. Users have developed a high tolerance for adopting new solutions without going through official change programs. The key to success: make sure the solution is intuitive.

Prepare to be challenged

When you involve a startup, you will get internal push back: not every company is eager or willing to take that kind of risk. Executives and departments have long relationships with established vendors and the contracts become more favorable when you buy more. Take a look at prior solution purchases: has your company worked with startups before? That success will tell you something about the viability of your approach. Read these Innovation Do’s and Don’ts for inspiration.

Spend some time early on to think about how you are going to convince people: why are you doing this? Why is it important? Why this startup and not one of the vendors you already use? The innovation and performance gain might be obvious to you, but the risk more important to others.

Be honest with yourself about the company you work for and the risk appetite of the environment. But don’t let that stop you: if you are convinced of a startup’s value and believe they offer a compelling solution, it’s worthwhile to take a stand. After all, the established HR vendors of today were in that exact position 10 years ago – what if no one had taken a chance on them?

It’s a win-win

Established companies don’t always follow how quickly technology and processes evolve: having constant interaction with startups can bring valuable insights and unveil the need for change. On the other hand, startups can have an unrealistic view of life in the corporate world, and exposure to how things really get done make them understand the requirements for and the value of their solution much better. They understand technology much better than process, and you have something to teach them as well. The outcome of such a relationship leads to an innovative solution that brings both of you forward.

If you are involved in decisions about solution purchases, I highly recommend that you identify a couple of startups and follow them. Maybe even reach out and engage with a few: they are always looking for mentors, especially executives from the corporate world. I’m sure the insights you gain will make it worth your while. Co-creation and collaboration between enterprises and startups lead to a win-win. Start by exploring the Solutions: an excellent place to learn about emerging companies that are innovating HR and the workplace!

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