Be Brave: Startups May Be Your Ticket to Real Innovation

Being among the first in your industry to experiment with mobile, video, tablets or social media tools, for example, can teach you what an emerging customer segment wants and put you ahead of rivals. When 1-800-Flowers opened one of the first storefronts on Facebook in 2009, the social network was unfamiliar land for corporate America. The flower seller considered the risks of doing business there but saw enough potential to try, offering about eight bouquets for sale. Business has grown since then – for 1-800-Flowers and Facebook, too  -- and now Facebook users can choose from dozens of bouquets and gifts. Rival flower merchant FTD, meanwhile, sends Facebook friends off the social network to its e-commerce website, taking the social out of social commerce.

CIOs who use enterprise technology from startups have to manage risk, both technological and financial, and they also have to have high levels of optimism and patience.

Monte Ford, the longtime CIO of American Airlines who left his job last month, says it’s part of a CIO’s “higher calling” to nurture innovation in the IT industry, including doing business with start-ups. He’d been at American since 2002 and saw the company through the 9-11 aftermath, economic recessions and retrenchment in the airline industry. As he told me:

"A CIO like me is supposed create an environment where innovation comes first. I'm supposed to find and pick small, young companies. When guys like me are willing to go with a different provider or a new technology or take a chance, those staid IT companies function better and [later] produce better products. The innovation I want to promote is not just at American, but across the IT industry."

My colleague Tom Kaneshige writes that CIOs have to break with tradition or risk having the IT group outsourced from under them. Small, agile vendors doing new things can help CIOs quickly enable new capabilities where established, slower moving vendors might stop a CIO’s momentum. Tom talks about how Starkey Laboratories, a hearing aid manufacturer, recently took a chance on Handshake, a subscription-based sales order and catalog app for iPads, from an Australian start-up. Rob Duchscher, senior vice president of IT at Starkey, told Tom: “Some of these small companies are doing really cool, innovative things. We're going to give them a shot."

The annual MIT Sloan CIO Symposium this year in May will include a session for 10 selected startups to show off their new products. 

They have to explain why CIOs should pay attention – what top and bottom-line results the new technologies could create.

But before jumping aboard, CIOs should take precautions, including:

• ·         Get to know the start-up’s employees before signing a contract. You want to assess the maturity of the people as well as of their business plan.
• ·         Build your systems so that they make smart use of the enticing new technology but don’t rely on it completely.
• ·         Hold regular meetings with the start-up to keep an eye on how the company grows (or not) and how it manages the trials any new company faces.
• ·         Consider having the vendor put code in escrow for use if the company goes under or gets bought.