The corporate procurement department is typically responsible for end-to-end sourcing, from the corporate brief for a product or service through to tenders, onboarding and relationship management. In the case of open innovation, however, some of these steps may already have been taken by the innovation team. This can cause a certain amount of friction in the process and cause delays. Bear in mind that standard process and onboarding are usually designed for established suppliers—not necessarily younger, innovative companies like startups.
“Our own inability to overcome purchasing processes [is one of the biggest challenges internally when working with startups]”
Kanwar Gill, Group IT Strategist, Rolls Royce - Touchpaper research
A good working relationship and understanding between the procurement department and the innovation team provides a real advantage.
There are great gains to be made by engaging procurement early on in innovation programmes.
Fundamentally, if an organisation has embarked on an innovation strategy, it has acknowledged and accepted the increased risk compared to their core business activities. The acceptance of additional risk must be extended to the procurement department, since their function is designed, in part at least, to manage the normal levels of risk. If procurement cannot adapt, innovation transactions will be more difficult to process.
Procurement has evolved beyond an essential administrative function. Modern procurement teams are engaged, helping source solutions to problems—not simply fulfilling purchasing decisions that have already been made.
Understanding the role your procurement department plays is key to your interactions with them when engaging with startups. Some corporate procurement teams have expertise in sourcing and procuring from startups, but we have not found this to be a common scenario.
If you do have a procurement team that is well-versed in procuring from startups, they’ll likely be aware of the issues we explore below. If you have a more traditionally functioning department, then the issues below may stand in the way of effectively working with startups unless you establish good communication and strong focus.
“We didn’t necessarily have the purchasing protocols to be able to acquire some of the services that we wanted. We had to build them on the way.”
Jessica Robinson, Director of Smart Mobility, Ford (Source: The Drum)
Some startups move very quickly and are ready to work with large clients at just 12 months old, or even earlier. But this can mean that certain standard corporate procurement procedures aren’t appropriate and may include requirements that startups cannot meet, such as:
1-3 years accounts (audited accounts are also required sometimes)
Total contract value of less than 30% of turnover
Benchmarking against other suppliers
Sustainability and equality criteria
If a startup cannot provide the requested number of years’ accounts, this shouldn’t halt the process; instead, make it part of the procedure to ask the startup to provide what it does have available. If this is nothing at all, ensure there’s a path for the transaction to continue—this is preferable to it failing, or long delays. Ideally, the innovation team would be working with the procurement team to preempt and solve any issues before they become bottlenecks.
Because the risks associated with engaging startups are inherently greater than that of regular suppliers, some risk factors may have to be accepted as risks rather than judged against standard measurements. For example, the contract value criteria above could be anywhere from within tolerance to 100% for a startup. Likewise, a benchmarking exercise simply may not be possible, as a similar product or service might not exist. If that’s the case, these requirements should be excluded from the procurement process.
Many corporates measure sustainability and equality for their supply chain and have a quota to meet. Whilst this is important in the context of the whole supply chain, it may be unrealistic for a startup with a headcount in the single digits. This is a good example of where it’s important to be aware of how appropriate your standard procurement processes are for non-standard startup transactions.
Typical corporate payment terms are around 60-90 days—sometimes longer. Cash flow is imperative to startup survival so a payment lag of this length increases their existential risk. This in turn increases the risk of disruption or cessation of service to the corporate entity, something often quoted as a blocker to working with smaller providers.
Agree on payment terms that don’t overstretch the startup’s cash flow, ideally 30 days or less. By providing better terms, you are reducing your risk by helping the startup’s cash flow and ability to operate effectively. Although shorter payment terms may not be standard policy, the volume of funds in question is likely to have minimal impact on any treasury considerations, a common reason for longer payment terms.
“The General Terms and Conditions implemented by large organizations are generally fit for purpose when dealing with other large organizations, and we cannot expect the same maturity from startups for which payment terms beyond the standard 30 days will be more damaging. Get the basics right (letter of intent, non-disclosure agreement and client-supplier terms for startups) to achieve a more efficient collaboration process.”
KPMG (Source: KPMG Report: On the Road to Corporate-Startup Collaboration)
Corporate procurement teams are often incentivised to improve the corporate P&L and purchasing terms. This drives them towards stronger price negotiation and long payment terms—factors which can cause lengthy delays or put strain on the innovation transaction.
If there is a conflict between procurement incentivisation and innovation transactions, then consider separating these types of transactions out from incentive measurement. This will allow the transaction to proceed without negatively impacting any procurement incentive structures. At a large scale, Touchpaper suggests that the innovation budget could be excluded from any savings metrics for the whole department.
Taking a long-term view is important for any innovation programme, and this holds true for the procurement function, too. It is important to review performance but it’s a longer term process for innovation transactions, in just the same way that a venture capitalist’s portfolio is judged over a longer period of time.
Just as negotiating with startups should be a collaborative process that aims for the best outcome for both parties, the procurement function should be prepared to work with the startup to help them navigate the procurement process.
Many of the usual assumptions you may rely on in normal supplier interactions do not hold up when working with startups. You can assist by clearly explaining not only what they require from the startup—but why. Help them succeed by identifying and adapting areas where the startup may encounter issues with procurement and onboarding. Overall, this will reduce the time needed to process the transaction and enable the startup to deliver the project faster.