Focus

Procurement Tips When Buying From Web Firms

by Nona Ullman

 Public education is a hot market for Web-based start-up companies, producing an array of new educational and e-commerce products and services to school districts. But recent events make it clear that you must be careful doing business with start-up companies, no matter how promising the offering.

A recent review by KPMG Consulting showed that the Web-based start-up firms serving K-12 education often have fewer than 15 employees—and just enough venture capital to last from six to 12 months. Many already have gone bankrupt, while larger companies have acquired others and still more are teetering on the brink of solvency.

When you buy a product from companies like these, you need to guard against the potential risks: “vaporware” (the product doesn’t really exist); implementation failure (the product doesn’t work); business failure (the company goes out of business or is bought by another company that no longer supports the product); and incompatibility (the proprietary technology is incompatible with other technologies).

Four Suggestions

To avoid an expensive embarrassment, here are four practical strategies to follow when purchasing from Web-based companies:

* No. 1: Put in place a strong request-for-proposals process.

A strong RFP process can screen out potential problems up front. The process starts with an evaluation committee that reviews proposals and makes collective, objective decisions. These decisions are supported by measurable criteria identified in the RFP:

* Functional requirements. Describe what you expect the product to do and have vendors respond to each requirement.

* Organizational capacity. Ask respondents to identify which staff will implement the product.

* Financial stability. Determine the vendor’s fiscal strength (minimum requirements: in business at least two years, with annual revenues of at least $2-$5 million).

* Strong customer references. Require contact names and descriptions of successful implementations.

The RFP process should also include a product demonstration and a technical evaluation of the product’s functionality, scalability (ability to grow) and interoperability. Finally, giving vendors the opportunity to ask questions prevents misunderstandings later.

* No. 2: Conduct due diligence of the finalists.

Before contracting with a small Web-based start-up company, gather more information from customers and the management team. When you call former customers, compare the project to your own in terms of size, scope and version of the product implemented. Then address specific issues: Did the product meet the customer’s needs? Was the project completed on time and within budget? What training and technical support were offered? Is the customer planning to renew the contract? What problems or issues have arisen?

When you interview the management team, look for people who are experienced, articulate, knowledgeable and focused on key success factors for the company. Don’t be afraid to ask the same questions a venture capitalist would ask. After all, you’re making an investment of time, effort and reputation by purchasing from this company.

Comparing these answers to accepted benchmarks will give you a good idea of the company’s quality and stability. Some factors to seek are these: a 3- to 6-month contractual backlog; solid, long-term investors; six months to one year of current financing with additional financing in the works; demonstration of prior profitability; rank in top three in market share; strategic partnerships with larger companies; and no evidence of imminent buyouts or significant new investors.

Minimizing Risk

* No. 3: Use contractual terms to mitigate risk.

Build risk management into the contract by having the vendor commit to an escrow agreement. If the company goes out of business or discontinues sale of the product, the district will receive access to all proprietary programming code, procedural manuals and other product information.

Second, require the vendor to pay for a performance bond requiring payment in case of default on the contract. This payment will allow the district to hire someone else to complete the work initiated by the contractor.

* No. 4: Clearly set project expectations and timelines.

From the outset, clearly describe and document what functionality and service must be provided when. Managing adherence to a clear schedule of events will enable you to immediately identify warning signs and develop action items to fix them.

Buying directly from a Web-based start-up firm always will be a gamble. But by using these strategies, you can minimize the risk and maximize your district’s chance of procuring new products that are effective and give you a return on your investment.

Nona Ullman is the national education lead for the public education practice of KPMG Consulting, 757 Third Ave., 5th Floor, New York, N.Y. 10017. E-mail: nullman@kpmg.com