Why working with startups is worth it

Agility. Rapid delivery. Fast learning. An appetite for risk.

These are not words and phrases that spring to mind when thinking about a traditional corporate or government IT function. But they are likely to be used when describing a technology startup.

With IT functions under increasing pressure to accelerate and innovate, these are also sentiments many CIOs have taken to heart as desired attributes of the IT function of the near future.

And with CIOs specifically under pressure to play a role in business transformation – and at the same time at risk from losing influence to newer roles such as chief digital officers – they are words whose meanings CIOs should embrace as swiftly as possible.

So when it comes to learning what it means to be agile, fast, and tolerant of risk, who better to turn to than those organisations that live by these words every waking moment: The startup community.

The past year has seen unprecedented interest from major corporates in Australia’s early-stage startup community, leading to everything from site visits to incubators and accelerators, to partnerships and outright acquisitions.

Business transformation consultant, Fi Bendall, has been involved in numerous programs to bring startup thinking into traditional organisations, often using a model called ‘open innovation’, which challenges third parties to provide new solutions to large corporations.

“An open innovation model means business can gain all the input and thinking from the startup community, and the startup community gets to test its ideas in large organisations,” Bendall says.

Snacking company, Mondelez, used open innovation to invite pitches from Australian mobile startups to collaborate on new innovations with its brand teams. While this example was driven by marketing, Bendall says it works just as well in the technology function.

“Open innovation is perfect for the most traditional CIO with legacy systems, as it delivers fresh thinking from the front,” Bendall claims.

Behavioural traits

But transfer of innovation is just one aspect of the interest in startups, Bendall says. Many traditional organisations are also looking at the processes and cultures that enable startups to behave as they do.

This includes seeking a better understand of the agile and lean development methodologies they use, which enable them to ‘test-and-learn’ at an accelerated rate to mitigate risk.

Startups are also renowned for their ability to change tack quickly, known as pivoting, and are regarded as having superior customer experience skills. It is little wonder then that some CIOs look on them with envy.

The startup world is of great interest to the CIO at agribusiness company Ridley, Claudine Ogilvie.

“The attributes companies are trying to get more of are innovation, agility and speed, and they are looking for an ability to transform their business and become more competitive,” she says.

“The challenge all organisations have is a lot of legacy systems and infrastructure, and not just in IT terms. That can become very heavy within the organisation. So how do you cut through that?”

At Ridley, Ogilvie has adopted startup principles by creating a project management office that focuses on small trials and empowers staff to make decisions, accelerating overall project delivery.

“Essentially, it is a framework of risk management and helps us assess how much we are prepared to lose and remain in control of, while still enabling our people to go out there and learn and try new things,” Ogilvie says.

While interest in startups is now widespread, no sector has shown more enthusiasm than banking and finance. In his three years as CIO for retail and business bank at the Commonwealth Bank, Pete Steel was a regular traveller to Silicon Valley and drove a cultural transformation within the IT function. It’s something he continues now in his new role as the bank’s executive general manager of digital.

“Even in a highly digital, fast-moving environment, we are going to be a very important destination for customers,” he says. “That is why it is important we embrace others in there, so we can be as full-featured as possible.”

One of the key attractions of startups is their culture, and Steel has used startup models to break down traditional organisational silos in the bank.

“Startups tend to be braver and bolder in thinking with less constraints,” he says. “We try to emulate that. We have built up a lot of agile capabilities and we’ve really tried to install a mindset of ‘one team one dream’. They really have a sense of trying to do something special and different.

“We have emulated that quite well from the startup community. I often express it as we have 100 startups with a sense of purpose within CBA at any point in time, and everyone is aligned around each of those 100 purposes. And most of the time, they are customer experience breakthroughs.”

The cultural change within CBA also led the bank to reconsider its attitude towards risk, particularly the outcome when innovations fail. This is critical for a bank with millions of customers that expect optimal service delivery all of the time.

“We can’t really have solutions that are going to fall over, or are too early,” Steel says. “So for us it is the dilemma of how we make something big and solid and enterprise-grade, but still work with someone so they can be small and agile and innovate quickly. And I don’t think we have that worked out yet.”

This is where the ‘fast learning’ concept developed within startups – where ideas are tested before too much has been invested – is critical to the bank’s approach.

“We haven’t taken a heavy-handed approach to any failures, simply because they create organisational learning and upside,” Steel says. “But we did get to them early enough to stop them.”

Minimum viable products

One of the best established ways to test an idea early is to release it as a ‘minimum viable product’. This means the concept is developed to the point where it ‘just’ works and can be proven against a market.

Head of innovation at Westpac, Ian Hill, says this concept is essential to the bank’s culture of fast learning, which he characterises as “identifying an idea, getting it into some type of prototype as early as possible, testing it with people, and then if it’s not working to pivot to a new path or kill it outright”.

“We have adopted the idea of minimum viable product in our lexicon,” Hill says. “When thinking in the long-term about developing a service, we are thinking about what are the mid-term services that we could offer and test in the market to validate our hypothesis of what customers want.”

One project example started with the concept of allowing people to withdraw cash from an ATM in an emergency without their card by calling a call centre.

“That was basically a minimum viable product that later became Get Cash, which is a fully-fledged offering allowing people to get cash out of an ATM via the app on their phone without having to use their card,” Hill says.

Westpac is also bringing external thinking into the bank via its Innovation Challenge contest.

“We put out to the market a topic like agribusiness, and let entrepreneurs comes and pitch to us ideas of new ways to meet those customer needs, and then incubate the best entrepreneurs,” Hill says.

In addition, the bank is putting its own skin into the game through the $50 million venture investment fund, Reinventure. One of the fund’s first investments was in peer-to-peer lender, SocietyOne, a company many industry watchers consider has a model that is highly disruptive for traditional banks.

“That allows us to not only get intelligence on sectors and goings-on in the startup world, but have some kind of investment that’s at an arm’s length,” Hill says. “For these companies that we think will have potentially great futures, we get to be a part of shaping those companies, shaping the new markets that we are exploring. We also get to learn from them how to better service our customers.”

Two-way exchange

While there is strong interest from large corporates in working with startups, the relationships will only flourish if the benefits flow in both directions. For CBA, Steel says the bank can offer a startup access to the bank’s millions of customers.

“Getting access to customers and real customer feedback helps them learn,” he says. “The early stage for a startup is all about refining your proposition, getting something that is reasonably unique, or that you can execute better than anyone else. So in the absence of natural traffic, that is gold for them.”

Steel says the bank has also relayed technical advice from its own development teams and managers. “We are quite typical of other banks around the world, so if something works for us it will often work for other banks,” he says.

For some corporates, working with startups means overcoming the systems and processes they have built up over decades, particularly with regard to legals. Entrepreneur and CEO of advocacy group StartupAus, Peter Bradd, has had first-hand experience working with a large corporate, after he partnered with Qantas to distribute his startup’s digital postcard service. That deal took 16 months from agreement to launch, and while it was beneficial to both organisations, Bradd says it is essential the rules of engagement are made clear from the beginning.

“One of the first things a company needs to do is form its mandate as to how it wants to partner, what the rules are for engagement with entrepreneurs,” Bradd says. “The mistake that entrepreneurs make is they will say yes to stuff because they have a big partner that is going to promise them the world.”

The incompatibilities can come to a head in terms of legal issues, where startups simply don’t have the time or budget to overcome some requirements.

“My strongest advice to any entrepreneur who wants to do business with a corporate is to push back on the legals, even if it takes you a month or two,” Bradd says. “If they walk away, then they don’t really want to do business with you - you’re not important to them. And if you’re not important to them, then they are not going to put the effort behind the partnership. So make them jump through a few hoops as well.”

Clear rules of engagement are also critical for the ongoing evolution of the startup, which may find itself needing to pivot away from its initial offering.

“You need a breakup plan, because it happens,” Bradd says. “You want to plan for it so everyone can walk away rather than being in a bad relationship.”

The strong level of interest in Australia’s startups means local incubators and accelerators are now in regular contact with corporations. But according to Jason Lim, manager of the Melbourne-based co-working space, York Butter Factory, successful partnering means more than just a site visit, and expectations must be set accordingly. That means ensuring the initiative has strong support throughout the corporate management team.

“They want to come in to a place like the York Butter Factory to see how this works, and take learnings back into the organisation in terms of how to get things done more quickly,” Lim says.

“But if the organisation is serious about engaging with the startup, they must get the proper support and the proper buy-in from the right people, because the last thing you want is having no one to execute.”

Director of Perth-based start-up factory Atomic Sky, Andy Lamb, agrees a long-term strategy is essential for corporates, and can only come about if those involved have knowledge and empathy for the entrepreneurial process.

“It’s an ongoing cultural change that has to be supported from the top to the bottom,” Lamb says. “You’ve got to find people inside and outside your organisation that have done it before and are doing it at the moment.”

While the challenges of engaging with startups are not for the faint-hearted, the era of digital disruption means the reasons to do so are strengthening over time. According to Ogilvie, there really isn’t any other choice for many CIOs.

“I think CIOs have a mandate to step up and disrupt the business where it makes sense to do so in that strategic space,” she says. “One of the hardest things to do is disrupt your business, and that this is certainly what startups are doing all the time.

“If you don’t disrupt your own business, someone else will.”