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Friday, July 21, 2006

Keys for managing business risk

Why would a large, well-established company gamble everything by purchasing business-critical technology from a start-up?

When Christopher Crowhurst signed a contract with a specialist software developer in the fast-emerging field of web services, it was the end of an exhaustive selection process and the beginning of a slightly unusual supplier-customer relationship.

Crowhurst's company, computer-based assessment provider Thomson Prometric, had spent 14 months assessing its technology options before deciding to put its faith in the start-up software vendor, Actional. As vice president and principal architect, Crowhurst knew Thomson's fortunes - and the success of a strategic $5 million IT project at his company - would become inextricably tied to the vendor's viability. Success wouldn't just be down to functionality, implementation skills, technical prowess and the other factors involved in making any IT system operational - it would also be down to the supplier's ability to sell the same system elsewhere and so stay in business. And although Actional, a specialist in Service Oriented Architecture technology, has since notched up multiple live customers, at the time he began the selection process no referenceable customers were in production.

Crowhurst's informed gamble on Actional was an extreme but telling example of the factors that come into play when companies purchase strategically-important technology from small, relatively young vendors. In any market where much of the pioneering work is being carried out by venture capital-backed specialists, organisations that require bleeding-edge technology have to take two tightly-connected risks. Firstly, they need to be sure that the technology is stable and does what it's supposed to do - and secondly, they need to know the vendor will be around for long enough to keep on developing it. Larger vendors inevitably seize on this issue, so helping purchasers take steps to mitigate risk could be the difference between a start-up clinching and losing a sale. That's one reason why two staple components of any specialist vendor's marketing presentations are updates on the latest round of funding and a run-through of new customers.

What Crowhurst and others have done is push back the boundaries of the research process typically undertaken by customers prior to making a purchase. Beyond addressing features and functionality, most tech start-ups would expect their sales prospects to do some kind of financial due diligence prior to making a strategic investment. But it may not stop there. They may also want to meet the supplier's finance director and its venture capital backers, and check the composition of the board to ensure it's got the right balance of VC, strategic, financial and operational input. One customer that made a similar purchase to Thomson also drilled down into its vendors' middle management and engineering capability. This should all connect back to a strong visionary - getting a company with committed founders and a CEO who's passionate about the organisation, not just treating it as their next job. In addition, the start-up's technology and marketing partners will also be a factor.

Crowhurst suggests that the level of commitment shown by key individuals within the vendor company can be measured in several ways. He believes in spending face time with key players from the CEO down - in fact, he spent three days at Actional's headquarters, part of what he believes is a vital process to get beyond the salesperson. 'I developed a relationship with the CTO of Actional and have managed to influence development of the product - with some other organizations, we couldn't get beyond the sales folks,' he says. 'You need to get to the engineers, feel you can trust them.'

But he also argues that suppliers give much away by their own actions (or lack of), pointing to standards bodies as a good example. It's not enough for an organisation to be in a standards body - it's about being engaged in the body. Crowhurst subscribes to a number of standards bodies' newsgroups, which gives him insight into which organisations are active within the body, rather than merely taking up membership because they feel they ought to.

The flipside of managing the risk associated with a start-up is that there are many positive reasons for buying from a smaller business. For one thing, it's the smaller specialists that tend to set the pace in emerging technology sectors, leaving larger vendors playing catch-up. In addition, they can offer a different kind of purchasing experience. James Brewis, managing director of expenses management vendor Signifo Expenses, points to a deal his small London-based company won against a large US rival. 'On our side there was the usability, the greater speed and lower cost of implementation,' he says. 'On their side was all the bells and whistles functionality and the fact they were an established player with significant revenues.' The customer believed that the former offset the risk. 'As a business owner and an entrepreneur, you've got to be prepared to get in there and ask the customer to take a chance on you - to tell them you'll do everything in your power to meet their needs and ensure the highest level of satisfaction,' says Brewis. With local, London-based sales and support, he also believes he can provide a level of service and focus that some global players may struggle to match.

Inevitably, the process of winning over customers is time-consuming. Even after selecting Actional, another six months passed before the deal was signed as Thomson's internal team set out to convince the corporation that it was the right decision and developed the financial justification. During that time, several other Actional customers went into production, which helped boost confidence. Crowhurst's team also documented a back-up plan during its internal capital approval process in case of problems: because Actional uses a standards-based platform, the team was able to demonstrate that it would be fairly straightforward to take the Thomson configuration and implement it on another platform.

Ultimately, however, winning over this kind of customer may have benefits that go beyond mere revenue. 'I have an interest in [Actional's] success,' says Crowhurst. 'I promote the project quite ferociously - I need other people to buy into the technology. I'll gladly be an advocate - they're a great organization and I've worked with them extensively.' Deeds speak as loudly as words, and the fact that customers have tied their fortunes to a particular vendor for strategic projects is an important vote of confidence.

This article is developed from a feature that originally appeared in 'Loosely Coupled's Monthly Digest', a subscription-based newsletter offering in-depth reporting and analysis for early adopters of SOA and business process automation.