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Enterprise Innovation Through Startup Partnerships

May 06, 2015
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Enterprise innovation has been a topic of academic focus since well before the MBA existed but only in recent decades has it become such an imperative. In 1997, Clayton Christensen introduced the world to his concept of the “Innovator’s Dilemma,” wherein large companies that focused too much on customer needs of today (versus their future needs) would miss out on game-changing products and solutions. Even the largest and most successful companies could be out-maneuvered in their own areas of core competency by “disruptive” emerging players that cashed in on these big “next-gen” ideas. Even some firms that invested heavily in new technology sometimes failed (hence the “dilemma”).

There’s a relatively clear reason why large organizations can’t sustain this type of disruptive enterprise innovation / R&D across all competitive fronts (at least in the software world). Building large solutions in-house is an incredibly resource-intensive commitment that has very low success rates. The Standish Group has maintained a database of such software development projects over the last ~10 years (called the CHAOS database, fittingly). Amongst other things, it groups and compares “small projects” of less than $1MM in input costs with “large projects” of more than $10MM. Standish concludes that 76% of small projects succeeded (e.g. were on time, within budget, and hit milestones), while only 10% of large projects did. 38% of large projects attempted within an organization were deemed “total failures.”

In sum, a multi-thousand-person company likely has a lot of resources, but has a much higher organizational burden when it comes to marshaling those resources in unfamiliar directions. Attention and active sponsorship from executives for enterprise innovation is hard to come by, builder teams aren’t always as close to the problem or customers as they could be, and resources for the quick and continual improvement of the product (post-launch) aren’t always well accounted for.

Let’s compare the in-house project to the alternative: working with a 3rd party solution (for example, a startup vendor). The executive at each of these startup vendors is 100% focused on solving this particular pain point for enterprises. She is constantly engaged and intimately involved in product decisions. Builders within the startup (and by that I mean engineers, designers and PMs) are equally focused. Falling far outside of time or budget constraints could mean no one has a job next year, so instead devs push code fast but are on the ready to continually upgrade. Salespeople and sales engineers within the company are ready to help onboard an enterprise client, and likely have protocols in place to make it easy for that org to “test” the product. Customer success teams at the vendor are also in place to gather feedback and ensure user satisfaction ad infinitum (lest they churn).

For areas of core competency, the high-risk / high-reward game of in-house enterprise innovation is one that must be played if CxOs expect to cash in on new “big ideas.” The development of Amazon’s IaaS services, for example, didn’t flow naturally from merely paying diligent attention to their eCommerce business. That said, in order to keep costs and organizational focus in a realm of reason, CxOs need to pick and choose their battles. That means having a strict definition of what core competencies the business should actually double down on internally. It also means finding an efficient way to outsource non-core business functions to the best possible partners.

Thanks to the rise of cloud software with its lower startup costs, faster onboarding, and lower relative switching costs, enterprises have more viable vendor options than ever. So, however, do their competitors. The stakes around staying technologically competitive have been raised dramatically across the board. Software selection has become a form of enterprise innovation in itself. For very large companies, however, building a robust program for discovering and vetting vendors is easier said than done. In order to build a strategy that works in the modern enterprise software ecosystem, however, a few key requirements are clear:

(1) Be crystal clear on which areas of enterprise innovation are priorities. This messaging needs to come top-down from a sufficient level of decision-making power within the organization. While user experience working with the product can only come from business end-users, the results should ultimately flow back to someone who can make a go or no-go decision. Have clear protocols in place to elevate the decision to expand the contract should milestones be met that put the onus on the trial participants to either move forward or move on.

(2) Enable your business to begin working with new potential partners faster. Ensure that the certifications and testing required of new potential vendors are truly necessary, and that red tape is minimized around areas of importance. Enable trials sooner, even if they are division-limited. Dedicate “beta budgets” to areas in which partner innovation is key that have the potential to expand into full contracts come budgeting time. It’s hard to foster enterprise innovation through startup partners if it takes half of the runway from their last financing for you to strike any kind of agreement.

(3) Create a company-wide “enabler” of partner innovation. This is probably the most challenging, as it will need to reflect the organizational setup of each enterprise. In some cases, an innovation or digital group can work (but it must be empowered to move partnerships through to contract in a timely fashion). This enabler group must have access to business-level decision-makers throughout the organization and be appraised of technological challenges that face each. It might also be tasked with creating relationships with sources of innovation (startups, incubators, VCs, sources of IP, etc.) strategic to the business. There are a number of successful models of such groups, though that topic warrants it’s own post.

Creating structural ways to surface beneficial new vendors within very large organizations isn’t a small task. In fact it’s likely an “Innovator’s Dilemma” it its own right. Given the successful enterprise-startup partnerships we see every day at Bowery Capital, however, our team is confident that the most forward-thinking CxOs are already on the right path.