Buy smart: best practices for sourcing IIoT solutions from start-ups

A lot of the innovation around Industrial Internet of Things (IIoT) is coming from start-up companies. But how do you buy a solution when the technology is still evolving, the use cases are emerging, and the company selling it may not be in business a year from now?

Let me tell you what won’t work – your “tried and true” sourcing practices that you use with your more established suppliers. In fact, these practices actually increase the risks for both you and the start-up company that you are buying from.

To understand why, let’s look at the unique sourcing risks. Then I’ll share ten new best practices that you should use.

Start-ups and IIoT: what could go wrong?

As a buyer, you face a “perfect storm” of risks at this point in time that could derail your  IoT projects. These risks are:

• Solution uncertainty. Today’s IIoT solutions are dynamic, immature point products and may not scale to meet tomorrow’s needs. Obsolescence risk is high as technology standards and protocols continue to evolve. There are hundreds of IoT platforms that don’t integrate or interoperate with each other. Security is limited and a disaster waiting to happen.
• Vendor uncertainty. Start-up companies face a number of challenges. They may go out of business or pivot toward a new direction. They may get acquired and abandon the technology. Or they may not be able to scale as business grows.
• Buyer risk. You spend a lot of time, money and resources for a solution that may be short term. You are locked into a proprietary solution as better options in the marketplace emerge. Your company loses time and advantage over rivals because you need to start over again with a new solution.

New risks require new procurement strategies

Despite the risks, there are many good reasons to buy from start-ups. They offer a solution that the “big guys” don’t have, or want to offer. They solve a problem that no one is able to. You get a disruptive solution that creates significant value over existing solutions and create a differentiated advantage over your rivals. Finally, they are easier to work with and more responsive.

To be successful, you must use a new set of procurement practices to manage these three risk types. Your current “tried and true” practices, used for established vendors, won’t work because they were designed to address a different set of risks.

The new set of practices is built off the following rules:

• Identify the risks, then manage it. You can’t manage something if you don’t know what it is.
• Know your risk limits. Match what you do with what you can tolerate. No more. No less.
• Know what you can control. Not all risks are in your span of control. Focus on what you can control.
• Set realistic expectations. Be prepared for failure, despite your best efforts.
• It’s a two way partnership. You and the start-up are committed to each others’ success.

Define your risk profile. Before you look at IIoT solutions, define what kind of technical, operational, resource, and financial risk you can tolerate. Which areas of your organization’s operations can you take this risk? What are you willing to risk – budget, resources, time, technology? What kind of expected gain do you need in return for taking on this risk?

You must match the solution “risk” profile to your organization’s risk profile. If your risk tolerance is high in one area of operations and low in another, then focus your “riskier” solutions in those areas. If your overall risk tolerance is low, then buying emerging solutions from start-ups isn’t for you. No amount of risk management will adequately offset the risk that will likely occur.

Buy for today’s needs, not tomorrow’s. In an emerging market, technology standards, use cases, and solutions are continuously evolving. Plan what you need today, and buy a solution which gives you that. Trying to predict the future in a very dynamic environment is difficult. Don’t overthink and over-invest. Don’t expect the solution to fit your evolving vision or base your ROI on a future that may not happen.

Keep your options open. In the dynamic IIoT market, there are no “one size fits all” solutions, no “tried and true” recipes, and no established market leaders. Don’t lock yourself in to one or two vendors too soon (unless you have no other options). Identify solutions that are part of a scalable ecosystem. Work with different vendors for different applications. At present, no one vendor will be able to give you everything you need. Expand your use cases and evolve your solution over time.

Look beyond ROI and cost. Today’s IIoT solutions are still immature point solutions. They offer limited functionality and solve a small set of problems. The real value of buying and implementing IIoT projects today is to gain experience through pilots and experimentation. Using traditional metrics like ROI and cost will result in IIoT projects being placed at the bottom of the priority list. Use a new set of metrics as learning value and skill building, scalability, performance, problem-solution fit.

Vet the people and company behind the solution. When you buy from start-ups, the real “product” you are paying for are the people. This is the team that provides the intellectual property that is codified into your solution. Unlike mature companies with established products where the intellectual property is codified in the solution, when you buy from start-up vendors, the intellectual property largely resides in its people.

Interview the key members of the company and examine their backgrounds. Do they have domain expertise in your industry? Are they willing to work with you and can you work with them? Are they responsive? Do they have what it takes to build a company? Who are their partners and can you work with them?

Examine the company. Do you understand their business model and how they make money? Do you believe that it is sustainable? What are their differentiators over their rivals? Where are they vulnerable (solution, team, capabilities, etc.)? What is their financial and funding situation? Understanding this helps you determine what risks you are incurring, how you want to work with them, or if you want to work with them.

Treat the vendor like a strategic partner. Besides money, your active partnership with a start-up is one of the most important things you can give. Make a commitment to work with the vendor at a deeper level than you would with other more established vendors. Give them feedback of what you like to see, report bugs, test out new features, and co-design the solution with them. When they release a new version of the solution, test it actively and give them feedback. Work with the same sense of urgency they have. Be a customer reference for them for their sales prospects and investors. The more engaged you are, the more likely they are to succeed, and the less risk you are incurring.

Don’t lowball the vendor. Buying from start-ups is risky, but low-balling is not a viable risk management strategy. First, start-ups are cash constrained. Lowballing them just pushes the financial burden onto them, and increases their cash flow risk and the chance that they will go out of business, or slow down operations to preserve cash. Second, initial cost is just one small part of your cost. Consider the total costs of any installation – purchase, installation, configuration, maintenance, upgrades, and decommission. If you need to reduce your upfront costs, get creative and consider performance based incentives (e.g. split the cost savings enabled by the solution with the vendor).

Pay your start-up vendors differently. Cash flow is the lifeblood of every start-up. It dictates whether they focus on building the solution, or fund-raising. It dictates how many people work on the solution. Your traditional payment cycles, designed for more established vendors, will not align with the realities of how a start-up operates. Consider alternative arrangements, such as accelerated payment cycles (e.g. 10 days instead of 30 or 60 days), and progress driven (milestone) payment schedules. Split the solution contract into a technology portion and a services portion (if appropriate) with separate payment provisions.

Develop a solution continuity plan. Plan for the scenario in which the vendor goes out of business, or pivots away from the original solution. Whether you want to take over the solution, or buy time to find an alternate solution, you must have a continuity plan to keep your operations going. Your plan includes access to the application source code and data extraction (as appropriate), a separate consulting arrangement for support from key members of the start-up or a third-party firm, or knowledge transfer to your own in-house teams. Identify what internal resources you need (people, tools, budget).

Develop a solution exit plan. There may be legitimate reasons to intentionally migrate away from the solution in the future. This may be due to the emergence of open standards, a more disruptive solution, or the solution just doesn’t scale to meet your future needs. Plan for this scenario in your risk management plan. Specify who owns the data, how it is extracted, and what support is needed in the contract. Set up a separate services agreement with the vendor to assist with the migration. Identify what internal resources you need (people, tools, budget).