Archive for March 30th, 2010

Death of Enterprise IT startups?

Tuesday, March 30th, 2010

I had been mulling over writing a post about enterprise IT buying behaviour in relation to smaller vendors.  Then I spotted Joe McKendrick’s piece Why are enterprise IT startups vanishing?

Joe is bang on the money that enterprise IT has become so complex that startups are disincentivised.  With my CEO of Blue Prism hat on (we are not one of Joe’s big five), I thought I would add my thoughts to the debate.

Large enterprises like buying IT from large vendors.  Minimise the number of suppliers, and negotiate hard.  Reduce management and procurement costs.  Nobody really wants tangential relationships with small suppliers that might go out of business (or get bought by Computer Associates).

So enterprise activity, driven by corporate IT, has created rules and procedures.  A frustrated startup might think of them as guard dogs, fences, sentries and barbed wire, with the sole objective of keeping new vendors at bay.  IT calls this a supplier consolidation strategy and you can see why it makes sense on the face of it.

Even when a small vendor gets some limelight in a corporate account, they have to fund increasingly long and expensive sales cycles.  Free Proofs of Concept, deferred licence fees, an intricate (and near infinite) maze of decision makers to negotiate, and pressure from enterprise procurement to “recognise the reputational gain of working for us” – in other words drop price.

This is all bad for innovation because large vendors are not innovators.  They are not incentivised to innovate, nor agile enough to do so.  Quite the reverse.  So the enterprise actually loses out.  The lost opportunity of delivering real benefits by simply acting and delivering change quickly. Acting in this way may produce a small number of failures, but I believe that the overall benefit to the enterprise from increased agility and speed to deployment for the successful projects will more than compensate.

Nonetheless, startups need to acknowledge and accept that selling to the enterprise is much harder, much slower, and much more expensive than it used to be.  Investors have already realised this and diverted their funds towards companies in the Cloud, SaaS and virtualisation spaces because there is an apparent shortening of the sales cycle, partly by bypassing IT and selling straight to the business.  This leaves “traditional” enterprise IT startups struggling for funds, struggling for sales and struggling for recognition.

The good news for enterprise IT startups is, that it is now an underinvested space.  This, I believe, will create fewer but more exciting, and less competition bound, innovation opportunities.  In the end the economic case wins out.  If startups can find the most compelling of propositions, then corporate IT will ultimately adopt the innovation or have to find an alternative.  If I was investing right now, I would be looking for enterprise IT innovation.

Joe argues that most enterprises don’t have “anywhere near” the agility promised by SOA, cloud and Enterprise 2.0.  I agree that there is plenty of room for innovation and smart startups are the sparks that will create new fires in this space.