Financial Times, February 28, 2007
Written by Sarah Murray
In downtown Memphis, near the banks of the Mississippi, EmergeMemphis, a business and IT incubator that hosts small start-up companies, has a new arrival - FedEx, a vast multinational corporation that employs more than 30,000 people in Memphis alone.
The company has located FedEx Labs, launched in October last year, at EmergeMemphis in the hope that the giant will benefit from the innovative spirit of its small, entrepreneurial organisations. FedEx already spends heavily on research and development in the technologies that collectively form the backbone of its global delivery business.
Through FedEx Labs, which supplements these activities, the company aims to develop new technologies, such as advanced optics for scanning and robotics.
An important part of the decision to site FedEx Labs at EmergeMemphis was the desire to give company researchers a chance to interact with people from outside their organisation.
Robert Carter, FedEx's chief information officer, says: "FedEx labs is co-located where these small companies are being born and brought into maturity and so that's an environment where our most innovative teams are side by side with the companies that are coming up with new ideas and products."
The move reflects the more open approach to innovation being taken by companies, which are casting their nets wide in the search for sources of new technologies - including tapping into the expertise of small companies and start-ups.
In the case of FedEx Labs, that means putting company researchers in the same place as entrepreneurs. Other companies are inviting entrepreneurs to come and work in their laboratories.
The desire to soak up a spirit of innovation is not the only reason why large corporations want to work with small companies.
"The software industry evolves at an incredibly high rate and smaller companies tend to be more nimble and faster to respond to customer needs," says Naseem Tuffaha, senior director of Independent Software Vendor sales and marketing at Microsoft. "So they often have a time-to-market advantage."
At the same time, small, young companies are less wedded to ways of operating that in larger organisations, may be embedded in the culture and hard to change.
"It's a difficult proposition to find new business models when you have a current one that's working," says Eric Mathews,co-founder of Mercury Technology Labs, a venture creation company that is working with FedEx'sIT Innovation group. "Small companies without bureaucracy and inertia have the flexibility to change and adapt quickly to technological opportunities."
However, when tapping into this flexibility, it is not always possible for large companies to have their research teams sitting next to entrepreneurs such as those at EmergeMemphis. More often, the way large companies interact with small enterprises is as customers or suppliers.
In the best of these scenarios, the relationship of buyer and vendor becomes more of a partnership, where ideas flow both ways.
This is the kind of relationship that has emerged between Reed Business, the business-to-business division of Reed Elsevier, and Teragram, a US-based company that develops and sells language-processing technologies.
Teragram and Reed started working together more than a year ago, when Reed was looking for a company that could develop the search engine technology it needed for RB Search, its new B2B search initiative.
The advantage for Reed in choosing a small supplier such as Teragram is that, unlike larger vendors, Teragram can customise what it sells to Reed very quickly.
"Our relationship with Teragram is more a partnership than one of simply buying some software and plugging it in," says Graeme McCracken, chief operations officer of RB Search.
This is easier for a small company, argues Yves Schabes, president of Teragram. "The people [at Teragram] who are interacting with customers tend to be much closer to the product development than in other companies," says Mr Schabes. "The product team itself is in contact with the customers."
While relationships with suppliers can prove fruitful, large companies also want to tap into the creative energies of entrepreneurs who may not have an existing relationship with them. The question then becomes how to identify these companies and assess the value of what they are doing.
For Mr Carter, forming close connections with venture capital firms that specialise in early stage technology is one way of doing this. "I've found the VC business important in helping mine new companies coming on the scene," says Mr Carter, who sits on the advisory boards of several venture capital firms.
If venture capitalists can provide a role as middlemen between IT entrepreneurs and multinational corporations, this is something Mercury Technology Labs aims to do by developing a role as what it calls an "innovation connector". Mercury builds relationships not only with small companies but also with university research and development teams.
As companies continue to look on small companies as sources of innovation, intermediaries - whether they are business incubators, venture capitalists or organisations such as Mercury Technology Labs - are likely to become an important part of the process.
Mercury's Mr Mathews says: "Large companies have a hard time keeping up with it all. They'll have an R&D group, but there's only so much that group can cover. So we are a force multiplier for them. We're scouts for new technologies."
