Are CIOs Thinking Strategically Enough about Small Vendors?

By Allan Alter  |  Posted 06-01-2004

If you thought the dot-com bust would quench CIOs' thirst for deploying emerging technologies from small companies, think again. According to this month's survey, 84 percent of companies are willing to work with small vendors offering new technologies. Here are just a few examples:

A few years ago, New York City-based Bowne & Co. Inc., a $1 billion financial printer, began using file compression software from Cvision Technologies LLC, a Queens, N.Y., company with fewer than ten employees, to speed up the transmission and production of large financial documents over its network, and to save storage capacity, according to Michael Vorel, director of emerging technology.

In Uncasville, Conn., Jake Star, vice president of computer services at the Mohegan Sun casino and resort, is considering working with Intrusic Inc., a 15-person firm in Waltham, Mass., whose technology is designed to identify hackers, including hard-to-spot insiders who are stealing data from inside the firewall.

Ross Amarante of Amerex Group Inc., whose brands include Jones New York and Adolfo, is looking at apparel product lifecycle management software from five-year-old San Francisco-based Freeborders Inc. "We have no limit on the size of companies we work with," says the New York-based CIO, a sentiment he shares with all the IT executives we spoke with.

Why do so many companies consider small vendors? It's not just their innovative products. Smaller companies are so eager to make the sale, and CIOs of bigger companies enjoy such bargaining power, that they can obtain deals and make demands that larger companies can't or won't meet. "They are more willing to customize and enhance new technologies, so they're more readily deployable," says Bowne's Vorel. Mohegan Sun's Star says he actually prefers to work with smaller vendors. "They tend to have lower overhead, so the overall price is better. They tend to be more eager to deliver an awesome product. And they are generally much easier to deal with," he says. "I'd rather represent 10 percent to

30 percent of a company's revenues than one one-thousandth of a percent."

The advantages of large companies, such as compatibility and longevity, don't seem to matter that much. "People know that small companies use industry-standard tools and open, nonproprietary databases," says Terence Roche, a principal with Cornerstone Advisors in Scottsdale, Ariz., a consultancy to midsize banks. "People in our industry would rather buy something that works from a small company than buy promises from big companies."

Still, the lion's share of spending for emerging technologies doesn't necessarily go to small vendors. Even Star parcels out only 20 percent of Mohegan Sun's emerging technology spending to such companies.

That's not surprising. Small vendors pose potential dangers. "There's a whole taxonomy of risks" in turning to small vendors, says Howard Rubin, senior vice president of META Group Inc. in Stamford, Conn. "Will they stay in business? Can the technology be expanded out? Will the person behind the technology leave? Working with a small company is not a procurement issue. If it's a strategic technology, it's a marriage and prenuptial issue." That's not all: Emerging companies sometimes grow faster than their capacity to support their customers, says Chuck Lybrook, executive director of the Atlanta-based Information Management Forum, an association for IT executives.

CIOs are aware of these and other risks, and the many techniques they employ to manage them helps explain why so many are willing to use small vendors. Amarante requires vendors to hire a third party to audit the quality and security of their software if necessary, and sends a team to visit other customers of the vendor. Star avoids small vendors when the market for their technology is more mature and he feels a shakeout is looming. When he does consider them, he asks small vendors and their venture backers to reveal their current revenues, revenue projections, costs, business plan and organizational structure. "We make sure they haven't priced their products so cheaply they can't survive," Star explains.

CIOs may have procurement strategies for managing the risks and striking deals when buying emerging technologies from emerging companies. But META Group's Rubin wonders whether CIOs in general are thinking in terms of business strategy. For example, if the vendor's technology is truly strategic, should competitors be prevented from obtaining it? In that case, CIOs should consider obtaining some control over the vendor by buying a minority interest. Rubin also feels not enough CIOs consider the product life- cycle of an emerging technology. "You have to track what else is coming along, and know when to jump to something new," he says. "Imagine a financial market with 500 good IPOs a day. How do you know what to choose?" That kind of thinking is why selecting a new technology from a small vendor calls not just for technical acumen, says Rubin, but good management and business skills, too.