Sourcing for startups

Why procurement could be getting in the way of innovation in your business

Anthony Potter Sam Parker

By: Anthony Potter, Sam Parker

The race to participate in innovative technologies and disruptive new business models and to avoid obsolescence is paramount in the agenda of most major corporates today. In a recent survey of CEOs, nearly two thirds of those surveyed ranked innovation as equally important as operational effectiveness.

From the perspective of the startup community (and moreover of their VC backers) partnerships with corporates are a golden opportunity. Why? They can help improve and refine their solutions, raise capital, and commercialise their capabilities. In short, the right partnership could help turn their idea into the the industry game-changer they believe it can be.

Yet for something so obviously beneficial to both parties, there seem to be far more stories of failed attempts than successes. For most large corporates, crystallising a fantastic contact made at a conference or a great visit to the incubator into a real programme delivering business value remains elusive.

The first hurdle which many corporates fall at is how to effectively engage and do business with the startup community. A study by Startup Bootcamp found that almost 70% of startups experience a complicated or long internal process working with corporates and half of startups had taken more than 6 months to sign a deal with a corporate. Why is this so difficult?

Startups are from Venus, corporates are from Mars?


Over many years, managers of large businesses have developed processes and standards for engaging with 3rd parties to maximise their purchasing power, ensure delivery and protect their operations, their information and moreover their customers. However, it is these very approaches which focus on cost and risk that create a major barrier for effectively working with the newest and most exciting concepts.

As corporate clients we expect our vendors to agree to our liability clauses, show their fiscal responsibility and guarantee outcomes for best price. But startups and their leaders come from an entirely different mindset of open collaboration, and of trial and error. They have a limited track record and little, if any, infrastructure to engage with procurement processes and extensive legal negotiation.

Just as more traditional models of R&D and change delivery have begun to give way to design thinking, rapid prototyping and Agile development, so too it may be that traditional sourcing mechanisms need to evolve for this new era.

Time to evolve

Take the RFI and RFP processes. These are tools designed to assess standard capabilities and make comparison between competing vendors on track record, competence and price. These are not helpful metrics when the organisation competing for business may not have any track record to speak of, nor a mature pricing model. Moreover, they aim to standardise different offerings to help comparability. When the main driver of working with startups is to find something unique or at least highly differentiated, it makes standard, template-driven comparisons unproductive.

An alternative approach might be for buying organisations to think about scouting for new ideas instead of assessing pitches. This is much a more a ‘push’ than ‘pull’ model of engagement than many of us are used to – proactively engaging the marketplace to find the right partners and making qualitative judgements based on first-hand experience of the solutions and the individuals. Such a mindset also has the additional benefit of promoting solution-centricity rather than commercial-centricity from the outset.

Once you’ve found the company you want to collaborate with, the next step would be to agree the contractual framework to work together. But in a similar way, typical Master Services Agreements are often significant barriers for small companies and need to be streamlined. The focus on strictly defining parameters within which the relationship takes place – often with a master / slave bias to the buying organisation – is too constrictive for startups and will ultimately limit success.

“An alternative approach might be for buying organisations to think about scouting for new ideas instead of assessing pitches.”

The reality is that big businesses need to accept a looser set of arrangements when dealing with smaller innovators and disruptors, as well as engaging procurement teams early in the process so that they can understand this changed dynamic. Precedents for such approaches do exist – for example using off-ramp clauses similar to those found in R&D contracts to allow parties to engage with fewer commitments on delivery but also to part ways more easily if progress is not satisfactory.

Culturally, the mindset needs to shift to establishing ‘freedom within a framework’. Here only minimum critical contracting requirements are established, lower liabilities are provisioned, IP is mutually protected and it is accepted that startups typically expect to share more information than corporates.

Companies need to look at creating legal and commercial ‘sandboxes’, framework agreements that reflect the principles followed for technical development and test environments, where the obligations and parameters of the buying organisation are not passed on to the startup until necessary. This allows them to test and develop solutions free of the restrictions that stifle innovation early on. These should focus on what’s relevant for the context – IP protections, basic liabilities and confidentiality protections and removing restrictive payment terms that small companies cannot support. Companies like Telefonica have taken this a stage further – setting up the Wayra accelerator as a separate vehicle to incubate and onboard promising startups.

Culturally, the mindset needs to shift to establishing ‘freedom within a framework’

Even in the ever more stringent regulatory environment around financial services, regulators such as the UK’s Financial Conduct Authority are establishing regulatory ‘sandboxes’ to allow financial insitutions to try innovative new propositions with customers in a controlled, time-restricted environment without the full obligations of regulatory compliance.

Finally, the means of contracting itself needs to pivot. Statements of Work (SOWs) have traditionally focused on deliverables, quality controls and price. To support new ways of working, they will need to establish an environment in which true collaboration can occur, to enable modular delivery, be easy to exit and contain payment terms which work for both parties.

For example, Unilever’s Foundry has halved payments terms for startups from 90 days to 45 to help cashflow sensitive small firms participate. They have also simplified standard contracts and confidentiality agreements, making the process of doing business with them much more attractive. When dealing with the least mature startups, the mindset of holding suppliers to an output-driven SOW will have to give way; the trick is to view the spend as an investment (which might lose money) as opposed to a cost line tightly linked to a set of deliverables and products.

Traditional vs. collaborative procurement with startups



We are seeing the beginnings of new ways of working. BMW’s iVentures, for example, have had notable recent success protecting their new mobility services from wider corporate structures:

“We try to not overload our startups with heavy due-diligence, we try to be more relaxed about things like reporting and key performance indicators” – Tony Douglas, Innovation Manager at BMW

Likewise we recently helped one of our clients put in place NDAs and high-level Heads of Terms pre-agreed with a selection of potential technology startup partners for an initial scouting visit. From the first meeting, the executive team were free to share plans and ideas and co-create solutions with the founders of the startups. Not only that but they could begin shaping and collaborating on projects with the most promising startups as soon as they got back to the office, not wait for weeks while due process stole the initial momentum gained.

While we all talk glibly of the virtues of ‘failing fast’, the procurement and legal mechanisms we have built up have been engineered to protect us against exactly that outcome and are inadvertently slowing corporate ability to adapt.

In the future, it might just be the organisation that allows for ‘failure’ every now and then in its sourcing and procurement activities, that ends up getting ahead.

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