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Research report: June 2010

Buying Power?Is the Small Business Research Initiative forprocuring R&D driving innovation in the UK?

Kirsten Bound and Ruth Puttick


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NESTA is the National Endowment for Science, Technology and the Arts.

Our aim is to transform the UKs capacity for innovation. We invest inearly-stage companies, inform innovation policy and encourage a culturethat helps innovation to ourish.

Contents

Buying Power?Is the Small Business Research Initiative for procuring R&D driving innovation in the UK?

Part 1: Introduction 3

Part 2: Background context the origins and growth of the SBRI 5

2.1 What is the SBRI? 5

2.2 The United States SBIR as a model of success 5

2.3 Origin and growth of the UK SBRI 7

Part 3: Analysing the evidence - is the SBRI on track to deliver? 9

3.1 Solutions on tap? Public sector experiences of SBRI 12

3.2 An SBRI sunrise? Bene ts of SBRI for small businesses 15

3.3 A new lease of life for the SBRI? Challenges ahead 16

Part 4: Conclusion and recommendations 18

a. Scaling up the SBRI scheme 18

b. Quality control for SBRI 19

c. Boosting demand for innovation 20


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Part 1: Introduction

Public procurement of technology has beenthe basis of some of the most transformationalglobal innovations of recent decades. Ithas given us the GPS navigational systemsnow ubiquitous in our cars and the InternetProtocol (IP) technology that allows us to senddata between computers. At the same time,public procurement of products and servicesrepresents between 15 per cent and 20 percent of GDP for most European Countries.1 Itis worth around 220 billion a year in the UKalone.2 While only a small proportion of thissum is spent on research and development(R&D) the Government spent 2.5 billion on

R&D in private industry and public corporationsin 2005/6 3 it still represents a powerful leverfor innovation. Yet it is a lever that is under-exploited across Europe. While American publicprocurement markets are no greater than thosein Europe, the USA spends around twentytimes more than the European Union each yearon procuring R&D.4

This gap hasnt gone unnoticed. At a timewhen the UK government is acutely awareof the need to drive economic growth whilstcutting public spending, it has sought waysto make better use of this buying power todrive innovation. Yet many previous policiesand programmes have failed to bring aboutthe desired results. Not only has it provenexceedingly dif cult for small businesses towin government R&D contracts, governmentdepartments have also been unwilling toaccept the risk of nancing risky early-stagetechnology development.

Small businesses are a critical source ofinnovation, so it is vitally important to the

economy that we help them grow. 5 They are farfrom being a marginal group 99 per cent of

rms in the UK employ fewer than 50 people,

and between them they employ more than 11million and have a turnover of over 1,000billion.6 These include high-tech rms with highgrowth prospects, those that we are relyingon to drive economic growth.7 Unfortunatelytoo many of these will remain small, failingto attract the break that enables them toscale up their commercial activity. Contraryto popular belief, the fate of these high techcompanies is not solely determined in theDragons Den.8 Venture capital may fund thesparky spin-outs and later-stage endeavours,but commercial research and developmentcontracts are more likely to make a tech

business viable, and attract nance to grow itsinnovative activities.9

This is why the Small Business ResearchInitiative (SBRI) was established in the UK in2001. It was modelled on a highly successfulUnited States programme established duringthe Reagan administration. Designed as a toolto open up public sector procurement of pre-commercial R&D to a wider audience of smallbusinesses, it features a standardised processthat helps manage the risks of innovation onboth sides.

Yet the original UK scheme was a pale imitationof the US SBIR. The scheme was hampered bylimited public sector take up, and where SMEcontracts were awarded, researchers found thatless than 1 per cent of them were for researchand development. After successive calls for,and attempts at reform, a renewed UK SBRIwas launched in April 2009 after a pilot in late2008.10 The new SBRI nally resembles theAmerican SBIR with a clear model process tohelp public sector bodies work with innovative

SMEs and a strong focus on technological R&D.

1. European Union (2006)Pre-commercial procurement:A missing link in the EUinnovation cycle. Brussels:European Union.

2. OGC (2010) Policy ThroughProcurement Action Plan.Norwich: OGC. Available at:http://www.ogc.gov.uk/documents/PtP_Action_Plan.pdf

3. BIS (2009) SET Statistics:Science, engineering andtechnology indicators.London: BIS. Available at:http://www.dius.gov.uk/policies/science/science-funding/set-stats

4. European Commission (2008)Pre-commercial procurement:Driving innovation to ensurehigh quality public services inEurope. Luxembourg: Of cefor Of cial Publications ofthe European Communities.Calculated using OJEU andFPDS.

5. Evans, P. and Khan, M. (2009)The Characteristics of Patents.Economic & Labour MarketReview. Vol 3, 12.

6. See http://stats.bis.gov.uk/ed/sme/smestats2008-ukspr.pdf

7. Four- fths of high-growthrms employ fewer than 50

employees. Young rms aremore likely to be high-growth,even if most high-growth

rms are old. For more

analysis of the characteristicsof high growth businessessee NESTA (2009) The vital6 per cent: How high-growthinnovative businessesgenerate prosperity and

jobs. London; NESTA; andAnyadike-Danes et al. (2009)Measuring Business Growth:High growth rms and theircontribution to employment inthe UK. London: NESTA.

8. Broadcast on the BBC,Dragons Den is a popularTV show that featuresentrepreneurs pitching theirideas to ve multi-millionaireDragon venture capitalists.

9. Connell, D. (2010) Explodingthe Myths of UK InnovationPolicy: how soft companiesand R&D contracts forcustomers drive the growthof the hi-tech economy.Cambridge: CBR.

10. See Connell, D. (2004)Exploiting the UKs Scienceand Technology Base: Howto ll the gaping hole inUK government policy.Cambridge: TTP Ventures;and Lord Sainsbury ofTurville (2007) The Raceto the Top: A Review ofGovernments Science andInnovation Policies. London:TSO.


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With public nance sparse and R&D spendingunder pressure, it is timely to assess whetherthe newly reformed SBRI is on track to deliverthe desired innovation bene ts. The SBRIespouses a unique triple offer of helpinggovernment nd urgent innovative solutionsto public sector challenges, accelerating

technology development in the private sector,and driving economic growth. That is whydespite its relative novelty new competitionsare not due to deliver nal products for atleast another year NESTA has undertakenthis analysis of the new SBRI. A health-checkrather than an impact assessment, this reportlooks at a carefully chosen sample of new SBRIcompetitions to analyse the effects of SBRI onboth the companies and public sector bodiesengaged in the scheme.

Our research shows that the vital signs ofthe SBRI are good. Ten years after its originalintroduction in the UK, the reformed versionof the Initiative seems to have nally foundits feet. Thirteen public sector bodies areengaged, 28 competitions are underway,with 425 con rmed contracts amounting to acombined value of 27 million. For companiesinterviewed, it is lling a funding gap forinnovation. Speci c and appropriately sizedR&D contracts combined with a need tosolve live public challenges are acceleratingtechnology development. On the public

sector side, departments and agencies arelearning how to communicate their needs moreeffectively to the private sector, with genuinelyinteresting solutions going to market thatwould not have been reached by other means.

These are still early days for the SBRI, withmany outstanding issues both for governmentand the Technology Strategy Board, whichmanages and champions the SBRI in this newphase. These issues include how to increasepublic sector take-up of the scheme withoutcompromising the quality of what the SBRIoffers to SMEs, and how departments canuse the SBRI to help them transform theirwider approach to leveraging innovation withprocurement. Incentivising participation bypublic bodies is likely to be challenging inthe short term, particularly without a match-funding facility. Our research suggests thatthe SBRI will be most effective as part ofa comprehensive framework for leveragingdemand for innovation to pull new technologyto market. An open data policy that enablesrigorous analysis of economic impact is critical,

in combination with user networks that helpsupport the major culture shift required in thepublic sector.

Scaling up the SBRI is not necessarily aboutnew R&D money, but ensuring that moreexisting public resources for R&D are spentwith small businesses in a way that is likely tomaximise the impact of the investment. Thissaid, scaling up the SBRI scheme is not easy,and could require new means to incentivise

participation of public sector departments andagencies in the short term, particularly given itspotential economic impact.

While departments are under ever morepressure for cost effective procurement,government should ensure that the push forausterity does not allow us to lose momentumon achievements so far in using procurement todrive innovation.

In this report, we outline the origins andunique facets of the SBRI in Chapter Two.Then, we analyse seven of the most advancedcompetitions in detail in Chapter Three fromthe perspective of public sector bodies andsmall businesses. In Chapter Four, we concludewith a set of recommendations on how to buildon the early successes of the reformed SBRI.

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Part 2: Background context the origins and growth ofthe SBRI

The UK SBRI scheme is modelled on thesuccessful American Small Business InnovationResearch (SBIR) programme, operational inthe US since the Reagan Administration. Inthis chapter, we explain the SBIR conceptand describe the economic impacts of the USscheme. We clarify how the UK SBRI works;explaining what sets it apart from other R&Dfunding mechanisms, and how it differs fromthe United States SBIR. This Chapter alsooutlines the history of the SBRI in the UK todate, setting the scene to analyse achievementssince April 2009 in Chapter Three.

2.1 What is the SBRI?

The SBRI is a model process designed to helppublic sector bodies to procure R&D from smallbusinesses. The process has four broad stages.In the rst stage, government departments orpublic sector organisations identify a seriousoperational or policy problem and work outthe clearest way to communicate their needor problem to businesses. In the secondstage, there is an open competition, wherethose companies with promising solutions areawarded R&D contracts to test the feasibilityof their solutions (Phase 1 funding). In thethird stage, those companies that successfullypass the feasibility test can apply for furthercontracts to develop a working prototype(Phase 2 funding). In the nal stage, the publicsector either procures the resultant technologyor it enters the open market (or both).

To use examples that follow later in this report,the Ministry of Defence might be looking

for technology that could reduce the weightof equipment carried by its soldiers or theNHS might want to nd technology that

could reduce the risk to patients of hospital-acquired infections. Where small businesseshave technologies that could provide potentialsolutions, the SBRI provides an acceleratedroute to market for their ideas. Unlike manyR&D projects which offer grant or match-funding, SBRI provides 100 per cent fundeddevelopment contracts where government isthe customer. Phase 1 contracts for feasibilitytesting are valued at up to 100,000 and lastfor six months. Phase 2 contracts for prototypedevelopment are worth up to 1 million overtwo years. While the public sector has theright to license the resultant technology, its

intellectual property (IP) remains with thecompany. Whether the public sector procuresthe technology or not, the rm is in a positionto commercialise the technology on the openmarket.

2.2 The United States SBIR as a modelof success

Threatened by the rapid economic rise ofJapan and concerned that the US was failing totranslate research excellence into commercialadvantage, the US government introducedthe SBIR in 1982. Designed to support smallbusinesses in developing new technologythat helped achieve government missions, itinvolved a mandate for all federal departmentswith R&D budgets of over $100 million (69million) to spend 2.5 per cent of their R&Dbudget with small businesses.

Despite limited formal evaluations of economicimpact, there are some major success stories of

companies funded by SBIR, which now issuescontracts worth $2 billion annually. One earlybene ciary, Qualcomm, is now a telecoms giant


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with over 9,000 employees and annual revenueof $6.6 billion, while biotechnology rm Amgenhas grown to 14,000 employees and annualrevenue of $12 billion. Surveys have foundthat the SBIR was make or break for many ofthe technologies; 66 per cent of SBIR projectswould never have taken place without SBIRfunding and 20 per cent of contract winningcompanies were founded at least partly as aresult of an SBIR award. One quarter of SBIRprojects receive at least one patent. 11

Perhaps even more striking is the effect ofSBIR on company growth. One academicstudy found that over ten years, SBIR-funded

companies generated ve times more growththan other companies. 12

Contract R&D funding is an important avenuefor growing technology businesses. Whenwe think about ways of exploiting the UKscience and technology base for innovation itis easy to focus on the Silicon Valley model ofventure capital-funded growth. Yet this is onlyviable for a small proportion of technologycompanies, and when access to nance is tight,such funding becomes even more limited:

while 205 technology companies raised venturecapital in 2005, only 80 did so in 2009. 13 Morecommon are soft start ups when technology

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11. Lerner, J. (1999) Public

Venture Capital: Rationaleand Evaluation. In:Wessner, C. (Ed.) (1999)The Small BusinessInnovation ResearchProgram: Challenges andOpportunities. Boardon Science, Technologyand Economic Policy.National Research Council.Washington, DC: NationalAcademy Press.

12. Lerner, J. (1999) PublicVenture Capital: Rationaleand Evaluation. In:Wessner, C. (Ed.) (1999)The Small BusinessInnovation ResearchProgram: Challenges andOpportunities. Boardon Science, Technologyand Economic Policy.National Research Council.Washington, DC: NationalAcademy Press.

13. Dow Jones Venturesourcedata accessed April 2010(Industry Segment:Communications &Networks, Electronics &Computers, InformationServices, Software,Semiconductors, Other IT).

Phase 1* contractsWorth < 100,000over 6 months

Phase 2* contractsWorth < 1 millionover 2 years

Identification and communicationof problem/need

Feasibility testingof solution

Prototypedevelopment

DemonstrationOpen procurement

*Competition may be single phase

1

2

3

4

Companies apply for Phase 2 funding

Evaluation Selection

Open call for solutions (multiple channels)Evaluation Selection

Figure 1: How the SBRI works


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companies establish themselves throughconsultancy contracts for clients requiring helpwith speci c problems. This contract modelcan lead to growth by itself, or it can result indemonstrators and prototypes that will createa far more appealing investment prospect for aventure capitalist. 14

2.3 Origin and growth of the UK SBRI

The UK SBRI got off to a very slow start afterits 2001 launch. Of the few departmentsthat did adopt the SBRI, most contracts werefor policy studies or research grants, ratherthan technology development. A campaignfor renewal in December 2004 resulted in amandatory departmental SBRI spending targetof 2.5 per cent of external R&D.15 This couldhave allocated 100 million per annum for thescheme, yet the metric generated frustrationin departments and damaged its reputation asit was considered a small business tax.16 Only1 in 200 contracts placed before 2008 met theTreasurys de nition of R&D, with opportunitiesadvertised ranging from the supply of Chineselibrary books to lawnmower maintenanceservices.17 The SBRI was no more than a smallbusiness spending metric.

In 2008, Lord SainsburysRace to the Top called

for a far closer alignment of the SBRI with theUS model.18 It fell to the Technology StrategyBoard (TSB), a non-departmental public body,to implement Sainsburys vision, acting as achampion and steward of the scheme. The TSBdeveloped a new model process for the SBRIand began advertising contract competitions inApril 2009 following a late 2008 pilot.

The SBRI has some shared features with othermeans of funding R&D. Like challenge funds,the scheme sets out to nd solutions to speci cproblems, funding results not activity. A highproportion of R&D funding in the UK is in theform of collaborative R&D grants that oftencome with constraints such as a requirementto build partnerships. SBRI funding hasfewer constraints. A contract is awarded toa single company, although interdisciplinarypartnerships frequently develop as companies

join forces through sub-contracting to respondto a challenge. Since the focus is on near tomarket solutions, the results are likely to beavailable far more quickly than collaborativeR&D programmes.

SBRI is designed to bene t both the publicsector and the recipient companies, having

a signi cant effect on the wider economy. Itenables the public sector to:

Use innovation and technology to deliverstep function improvements in operationalperformance or in progress towards policyobjectives.

Rapidly access companies, new ideas andtechnologies that would not be reachedthrough normal channels.

Encourage innovation by de ning andbroadcasting challenges and desiredoutcomes and then procuring and supportingthe R&D effort of contract winners.

It supports innovative businesses by providing:

An intelligent lead customer to helpvalidate and re ne an idea and provide aroute towards market for new ideas andtechnologies.

100 per cent funded R&D contracts todevelop the idea.

Credibility for follow-on investment fromprivate sector, assuming rigorous publicsector due diligence and clear marketpotential.

A simple means of engaging with the publicsector and a link into mainstream publicprocurement.

Following the latest reform, the UK SBRI isnally starting to resemble the US SBIR. Yet

with the SBIR almost 30 years old and subjectto a different regulatory regime, it is too earlyto determine if the impact of the UK schemewill match that of its American inspiration.Table 1 compares the UK and US schemes.

During 2009 there were 789 topics addressedby the US SBIR, attracting roughly 12,000proposals, with 2,000 Phase I contractsawarded. With a streamlined applicationprocess, chances of receiving funding arevery high compared to many other innovationfunding mechanisms. In the US, SBIRapplicants have a 15-18 per cent chanceof winning a Phase 1 contract, while phase1 winners who apply to Phase 2 have a 50per cent to 60 per cent chance of winning acontract. Although currently run on a muchsmaller scale, UK applicant companies can

expect similar success rates there is currentlya 16 per cent chance of winning a Phase

14. Connell, D. (2010)

Exploding the Myths of UKInnovation Policy: How softcompanies and R&D drivethe growth of the hi-techeconomy. Cambridge:Centre for BusinessResearch.

15. Connell, D. (2006) Secretsof the Worlds Largest SeedCapital Fund Centre forBusiness Research. Centrefor Business Research,University of Cambridge.Cambridge: University ofCambridge.

16. See Budget 2005. Availableonline at: http://www.hm-treasury.gov.uk/d/bud05_

completereport_147.pdf;and DIUS (2008) InnovationNation. London: DIUS.

17. Connell, D. (2007) From thepresentation How to makeSBRI work effectively.

18. See Budget 2008.Available online at: http://webarchive.nationalarchives.gov.uk/+/http://www.hm-treasury.gov.uk/media/9/9/bud08_completereport.pdf.pp.55.


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1 contract and, if successful, a 46 per centchance of winning a Phase 2 contract. 22

Is there a hole in UK innovation policy?How do we compare globally?We highlighted in the introduction the size ofthe missed opportunity to use procurementto drive innovation. Experts criticised thisgaping hole in government innovationpolicy, in 2004.23 Today policy is catchingup, with a strong emphasis on policies thatleverage demand for innovation. 24 Yet thereremain signi cant gaps in practice. Whilethe US is a common benchmark for practicein pre-commercial procurement, severalAsian countries are also exploiting suchopportunities. With strong, central coordinationfor science and technology, China and Koreahave embraced related policy tools, while Japanhas used public R&D procurements signi cantlyto reduce the cost of fuel cell stations, makingfuel cell-powered buses a viable energyef cient public transport option. 25 While the

UK has stagnated around 40 th position inglobal rankings of government procurement ofadvanced technology, Singapore and Taiwan

have joined Finland and Denmark in the topten. 26

Nevertheless, after a false start, the UK SBRInow resembles the US SBIR programme inmethodology, if not yet in scale. In the nextchapter we look in more detail at the roll out ofthe UK SBRI since April 2009 to see if it is yeton track to deliver the expected bene ts forthe public sector, business and the economy.

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19. Connell, D. (2006) Secretsof the Worlds LargestSeed Capital Fund. Centrefor Business Research,University of Cambridge.Cambridge: University ofCambridge.

20. For a fuller explanationof the increased fundingthreshold see the Noticeof nal amendments toPolicy Directive in theFederal Register: March 30,2010. (Volume 75, Number60) [Page 15756-15757].Available from the FederalRegister Online at: http://edocket.access.gpo.gov/2010/2010-7018.htm

21. For more information,see: http://www.sbir.net/content/52/sbir-phase-iii.php

22. Personal communicationswith the US SBA and UKTSB, 21st April 2010.

23. Connell, D. (2004)Exploiting the UKs Scienceand Technology Base: Howto ll the gaping hole inUK Government Policy.Cambridge: TTP Ventures.

24. See for example Departmentof Business, Universitiesand Skills Innovation NationWhite paper from 13thMarch 2008. Available athttp://www.bis.gov.uk/policies/innovation/white-paper

25. European Commission(2008) Pre-commercialprocurement: Drivinginnovation to ensure highquality public services inEurope. Luxembourg:Of ce for Of cialPublications of the EuropeanCommunities.

26. World EconomicForum (2009) GlobalCompetitiveness Report2009-2010. Geneva: WorldEconomic Forum. Availableonline at: http://www.weforum.org/documents/GCR09/index.html

Table 1: Comparing the US SBIR and the UK SBRI

Date established

CoordinationMandated?

Eligible organisations

Value of contractsawarded per year

Phase 1

Phase 2

Phase 3

UK SBRI

2001 (Re-launched in 2009 with pilotsfrom 2008)

Technology Strategy BoardNo, discretionary take-up by publicsector bodies

EU companies of all sizes (SBRI isexempt from advertising contracts inOJEU)

370 contracts worth 24.5m (April 2009 December 2009)

Feasibility testing for up to 6 months.Contracts < 100,000

Development of prototype ordemonstrator for up to two yearsContracts < 1 million (but subject tounique needs of competition)

No Phase 3

US SBIR

1982

Small Business AdministrationYes, 2.5 per cent of Federal R&D budgetsover $100m

Small businesses (< 500 employees) atleast 50 per cent owned by an Americancitizen

4,000 contracts a year average, worth $2billion (1.4 billion)19

Feasibility testing for up to 6 months.Contracts < $150,000 (104,000)

Development of prototype ordemonstrator for up to two yearsContracts typically < $1 million(694,000) 20

No additional SBIR funds but followthrough from sponsoring governmentdepartment with support fortechnology development, and potentiallyadditional (non-SBIR) funding21


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Part 3: Analysing the evidence is the SBRI on track todeliver?

So, does the 2009 reform really representa new lease of life for SBRI? With earlycompetitions not due to complete for anotheryear, it is too early for formal evaluations.Yet the need for growth through innovationis urgent enough to demand a preliminary

assessment. In this chapter, we look closely ata number of competitions to analyse if the newversion SBRI is on track to deliver the desiredbene ts. After outlining the trend in SBRIroll out, we highlight some early indicationsof success. We look in turn at public and

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40

35

30

0

25

20

15

10

5

Number ofcompetitions

Time

Q408 Q109 Q209 Q309

Competitions to date Forecast

Q409 Q110 Q210 Q310

TSB/Department of Communities and Local Government Department for Transport

National Institute on Drug AbuseHome Office

Food Standards AgencyNational Health Service

TSB/Department of Energy and Climate ChangeDepartment of Health

Department for Environment, Food and Rural AffairsMinistry of Defence

Figure 2: Competitions launched April 2009 January 2010 and forecasted

Note: Forecast correct as at March 2010.Source: TSB.


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The case study competitionsTo gain a more in-depth understanding ofprogress, achievements and problems, weundertook over 30 qualitative interviewsduring January and February 2010. We spoketo government departments and agencies,companies, universities and other organisations

involved in seven case study competitions. Wecollected secondary sources where availablealthough very little data is yet available foranalysis. Table 2 on page 11 outlines our casestudies.

Bene ts on both sidesDiscussions about the impact of SBRI havepreviously focused on the value created forcompanies that win contracts. This impetusis shifting in the reformed SBRI: our researchfound that the impact of participation onpublic sector bodies is strikingly undervalued.This is perhaps best exempli ed by a 2008competition with the National Institute forHealth Research (NIHR).

Eradicating superbugs: a win-winsolution

The NIHR launched an SBRI pilotcompetition to help eradicate hospitalsuperbugs. With MRSA treatment costing

an average 9,000 a case, the total costnationally runs into billions of pounds ayear. The competition sought to addressthe dual challenge of detecting pathogensand improved hand hygiene. While existingtechnologies addressed each issue inisolation, they hadnt overcome the rangeof behavioural and compliance challengesthat mean an effective solution remainselusive.

View from the Department

When approached by the SBRI team atTSB with an offer to help them run acompetition, scienti c advisers realisedwhat a valuable addition this could be tothe suite of measures, from Rapid ReviewPanels to Showcase Hospitals, introducedin recent years to transform the capacity ofthe NHS to take up technology.

Why did we give SBRI this problem

to solve? We suddenly realised theimmediacy. We were going to get quickanswers. Every other procurement process

we have for procuring technologicaldevicestakes about seven years.

It would also overcome the frustrationof knowing that there is considerableexpertise in the SME community that theNHS has until now been unable to tap

into. The competition gave them access forthe rst time to those companies workingin the food industry that had solved theproblem for a different context some timeago.

With the second phase of the competitionnow in early stages, it is too early toevaluate what the impact of the 13Phase 1 contracts and upwards of threePhase 2 contracts will be. Regardless ofthe outcome, advisers felt that the SBRIcreated an opportunity to focus on thebig issues superseding the individual, localactivity... those things [the Department of Health] ought to be focusing on.

The SBRI helped the research team toidentify what the NHS wants, which iscritical for better spending of preciousR&D funds. But, as one advisor put it: thecorollary of that, the other side of the coin,is having said this is what the NHS wants, all the SMEs said fantastic, at long last,we know what you want. Well do it for

you.

View from the company

The British healthcare system is a uniquemarket opportunity, with the NHS aloneaccounting for 85 per cent of the UKsmedical technology market.27 34 billionwas spent on commercial suppliers by theDepartment of Health and NHS Englandlast year.28 But it is also an extremelydif cult market to crack. Companieslike Cambridge Design Partnership, atechnology development consultancy with

rst-hand experience of trying to workwith the NHS, are all too aware of this.Having recently wound up a companythat never quite managed to tap the scaleof opportunity, the SBRI presented aunique chance, not only for a 100 per centfunded R&D contract, but to access NHSprocurement.

In their application, CDP teamed up theirhand-held micro-processor platformwith unique biosensor technology

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27. UK Medical Technology

Market Environment andContext - May 2009.Supporting document forthe Ministerial MedicalTechnology Strategy GroupSME CompetitivenessWorking Group meeting,May 2009. Department ofHealth, UK.

28. Department of HealthNational InnovationProcurement Plan,December 2009. Availableat: http://www.dh.gov.uk/dr_consum_dh/groups/dh_digitalassets/@dh/@en/@ps/@sta/@perf/documents/digitalasset/dh_110178.pdf


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from Universal Sensors and expertisefrom Nottingham Trent University onappropriate tests. After winning Phase1 funding in 2009, the resulting mobiletesting device, PathGenFinder (anenzyme-linked immunosorbent assay) isnow starting Phase 2 and should be in

production by 2012. This fast, easy to usehandheld device will be able to detectpathogens like MRSA and C-dif cile inminutes, replacing the need to wait daysfor lab results.

CDP nds SBRI unrivalled by other R&Dfunding. One Director described it as likeadding nitrous oxide to a fuel injection

system. With few of the constraints ofother public funding schemes, it is highquality money that focuses a company onrapid delivery of a solution.

But its not just the direct effect ofcontract funding that affects companyprospects. Just winning a Phase 2 contracthas attracted ve new investors toUniversal Sensors, including a potentialmultinational investment worth 30million. If this succeeds, it will be a coupnot just for the companies involved, butfor the region.

Comparing these two viewpoints highlights themulti-directional bene ts of the SBRI. We nowlook at each in greater depth, starting with thatof the public sector.

3.1 Solutions on tap? Public sectorexperiences of SBRI

It can be dif cult to persuade governmentdepartments with increasingly restrictedR&D budgets that they should run SBRIcompetitions simply to support the growth anddevelopment of the countrys high-tech SMEbase. It would be easier to make the case ifthere were clear, rapid and direct bene ts fromparticipation. Our analysis has indicated thatSBRI can uncover new and innovative solutionsto operational challenges through accessinga larger range of suppliers from varied marketsectors. It can also be used to address policychallenges when a departmental lead customercan pilot solutions. More than this, the SBRI

competition management process comeswith an ethos of procurement that is notonly focused on outcomes, but on helping to

identify and communicate challenges. Adoptedand applied to appropriate problems, theSBRI could help transform the public sectorapproach to innovative procurement.

Operational solutionsThe superbug competition was an example

of an operational problem so severe that itescalated into a national policy crisis. That ninein ten competition entrants had never workedwith the NHS before is a striking vindication ofthe common perception that there are solutionsin the SME community just waiting to betapped. Departments have used SBRI to widenthe search for solutions which have provedelusive using other routes.

As well as widening the net to more SMEs, theSBRI enables access through TSB knowledgetransfer networks and other outlets to unusualapplicants. The NHS East of Englandscompetition for solutions to long-term healthconditions included the debilitating problemof asthma, a condition affecting 5.4 millionpeople in the UK and costing the NHS 996million a year to treat. Over a thousand peopledie each year from asthma, and 90 per cent ofthose deaths are preventable. Early diagnosisbrings a wealth of bene ts, including avoidingthe risk of permanently decreased lungfunction.29 Yet until now the only means ofdiagnosis has been a device called a spirometer,

into which a patient is required to blow adif cult task for babies and other at-riskpatient groups. The competition uncovered aproduct used on thoroughbreds in the lucrativehorse-racing industry that tested lung functionwithout this requirement. The product madeby a start-up called Exhalation Technology isnow being feasibility-tested as a hand-helddevice for use on humans; clinical advisers arevery interested in its potential for transformingdiagnostic capability.

The SBRI helps departments target newgroups of companies where they believe likelysolutions will be found for instance theDepartment of Transport used SBRI to accessvideo games developers 3D imaging skills tomodel synthetic environments to help improvemotorway management. Yet it also widens thenet when it is unclear where solutions mightcome from. For the Home Of ces counter-terrorism group, the challenge set throughSBRI was how to identify people with intentto commit violent acts in crowded places.Over and above scanning for weapons, this

aimed to tackle the growing need to predictviolent human behaviour. Six Phase 1 winnersranged from university research groups to

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29. Portnoy, J.M. and Jones,E.M. (2002) Diagnosingasthma in young children.In: Current Allergy andAsthma Reports. 2002, 2(6),pp.447-52.


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challenges. Retro t for the future hasallowed government to seek out and testways to reduce the impact of housing on theenvironment.

Retro t for the futureThe UK target for an 80 per cent reductionin carbon emissions by 2050 requiressome major changes in the way we live.Housing accounts for almost a third of UKcarbon emissions. Since more than 60 percent of the houses we will be living in by2050 have already been built, we needdrastically to reduce the carbon emissionsof our existing stock, 20 per cent of whichis social housing for which governmentis responsible. A Heat and Energy SavingStrategy consultation published by theprevious government detailed a radicalshift in ambitions to improve the energyef ciency of homes, setting a targetof retro tting seven million homes by2020. Yet the Retro t market in the UKis hampered by a lack of funding and anunderdeveloped supply chain.

The TSB worked with the Departmentfor Communities and Local Government,using the SBRI in combination with the

TSBs Low Impact Building InnovationPlatform, to try to drive the market forenvironmental retro tting. The SBRIcompetition provided 100 per centcontracts for whole dwelling solutions toenvironmental retro tting, with a goldenopportunity to test the solution in realhomes.

With an original target of 50demonstration prototypes, 139 companieswon Phase 1 feasibility funding, with 87 sofar taken forward to Phase 2 development.Against this background, it proved possibleto connect the future procurementneeds of registered social landlords andlocal authorities with the capability ofinnovative suppliers to develop highperformance and cost effective solutions.

To kick start the retro t market,dissemination and scaling up of thesolutions is already underway. With around100 showcase demonstrator homesspread across the UK there is a wealth of

information around the emerging supplychains and new innovative technologies,which can be drawn upon to stimulate

the sector. This could lead to a real stepchange in the retro t market.

Another example of how the SBRI has helpeddepartments address policy objectives is the

Hot Products competition to reduce thevolume and impact of mobile phone crime.

With 228 mobile phones stolen every hour,mobile phone crime is already a considerableproblem in the UK. But the growing trend form-commerce where nancial transactionsare conducted on the mobile phone willresult in increasingly sensitive and valuableinformation being held on mobile phones.With mobile phone churn a pro table aspectof business for mobile companies, there isconcern that they are not devoting enoughresources to developing secure devices. Aspart of the Design out Crime competition,SBRI has helped the Home Of ce and DesignCouncil to run a competition for technology tomake mobile phones and the data they holdharder or less desirable to steal. Although theproducts will not be directly procured by theHome Of ce, the intention is to stimulatemarket development in more secure devices,limiting data theft. The three Phase 1 winners,new initiatives between design and technology

rms, presented their technologies at the World

Mobile Phone congress in Barcelona in January2010. A fourth winner, which had revisiteddormant IP for the competition, was bought bya manufacturer during the competition.

In the Hot Products competition, there wasnever an intention that government wouldprocure the resultant technology, rather that itwould use SBRI to signal a market opportunityto other companies. This was unusual, sincelinking government research and developmentactivities with procurement opportunities is afundamental feature of SBRI. In fact, despitethe uniform nature of the process, it wasadopted in various ways by departments andagencies. At most basic, SBRI was viewedas an effective process for managing R&Dcontract competitions and a way to accessa far larger and more diverse pool of SMEsuppliers through the TSBs knowledge transfernetworks. But where it was used as a meansof growing a new ethos of using procurementto drive innovation a trigger for behaviourchange indications are that the effects on adepartment or agency are likely to be deeper

and more sustainable.

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uniquely large multiplier effect on the businesscommunity beyond direct contract winners.This probably re ects the unusually large scaleof the initiative, with 193 rst phase winnersand 87 second phase winners guaranteed anopportunity to demonstrate their solutionsin situ in social homes. Some companies

reported depleted supplies of raw materialslike solar panels due to the surge in demand,while others found the new community ofsuppliers generated to be the most remarkablefeature of the competition. It has openedup a whole network of small companies that are developing new products which are about to come to market it has increased our knowledge base quite dramatically.

In addition to those companies funded by thecompetition, it has driven the developmentof the wider supply chain. Wattbox, asmall company which has developed a newenergy saving heating controller system wasoperating as little more than a serious hobbyfor the founders. Yet by developing supplierrelationships with Phase 1 winners, its foundershave given up their jobs to concentrate onthe venture full time. By being involved inthe competition quite literally we havecreated jobs and are moving forward as abusiness, where previously it had just beena development process. The value of therelationships and supply chains created is

expected greatly to surpass the initial fundinggenerated through the programme.

3.3 A new lease of life for the SBRI?Challenges ahead

The majority of the interviewees in our samplewere using SBRI for the rst time. In order toensure that this re-launched SBRI representeda genuinely new lease of life for the schemewe also spoke to departments engaged in SBRIsince 2001. One is the Food Standards Agency(FSA).

With an annual research and developmentbudget of around 20 million, the FSA hadpreviously used SBRI to fund evidence-basedresearch for policy and to hire consultantswho quali ed as small businesses. There wasnothing unique about SBRI, and they saw noextraordinary value in participating. Yet in itsnew guise, they feel the SBRI has somethingdifferent to offer. The FSA is in discussions with

TSB to run four potential competitions fromits 30 work programmes. According to onescienti c adviser:The key is to be selective

SBRI wont work for everything, but for thoseapplications where it can, it adds unique value. One competition being considered is for newmeasurement equipment that will form thebasis for a widespread transformation of foodsafety standards. In its new version, SBRI isnot just about solving the problem, but creating

a platform for further innovation.

While the process continues to evolve andimprove based on the feedback of participants,a number of incremental improvements will berequired that are not the focus of this report.However, important issues regarding thecommunication and evolution of the SBRI alsoneed to be addressed.

The rst is the need for clarity regardingthe SBRI process. The research found thatfailure to manage expectations can damagethe SBRI brand. While procurement of thetechnology by the contracting agency is adesirable end, this is not a guaranteed result.Our research found mismatched expectationsamongst companies. One competition winnerregarded Phase 1 funding as almost likea blank purchase order whereas othersexpressed severe disappointment andfrustration where a competition did not followthe standard SBRI process and progress toa Phase 2 competition following Phase 1feasibility funding. The mobile phone security

competition, Hot Products, managed bythe Design Council, only adopted the SBRIprocess late in competition development.Even though it was only intended as a singlephased competition, companies read the SBRIliterature and assumed it followed the two-stage format. Confusion and misunderstandingleft companies feeling disenfranchised. As onecompany who secured Phase 1 funding in HotProducts complained: It is pointless givingus money if its not then going to be deliveredto market, its a waste of money. There isa balance to strike between promoting theunique proposition of the SBRI in creating newpathways to public sector procurement andallowing unrealistic expectations to breed.

The second is clarity regarding the SBRI ethos,and the need to distinguish the SBRI fromother innovation competition management tools. For departments and agencies there isan important balance to strike. When the SBRIis adopted only as a competition managementtool, indications are that the effects on thedepartment or agency are positive, but limited.

The Department for Transport competitionin our sample was a case in point. Althoughthe SBRI helped the departmental team

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achieve their aims of accessing a wider poolof SMEs from new industry sectors, the SBRIwas regarded as simply a.n.other tool forcompetition management. However, if theSBRI process represents a broader ethos, itdoes appear to be capable of transformingpublic sector capacity to promote innovation.

For NHS East of England, which adoptedand adapted the SBRI process to suit theirparticular needs with support of the TSB, therelationships created within the local publicsector spanning R&D and procurement hastransformed its capacity to create demand forinnovation. Adopting and owning the processand its ethos was far more effort-intensive thancompetition management. Yet by improving theNHSs understanding of how to identify urgentneeds and communicate them effectively to theSME community,SBRI has given us a tool wecan use from now on and a whole new way of doing things.

The third is ensuring that a spectrum of toolsfor driving demand for innovation developsalongside SBRI. The scheme can help leveragethe power of government demand for solutionsto generate and accelerate innovation in smallcompanies. It provides a route to interactingwith government that can elsewhere be hardto come by. It is too early to say how manyof these competition winners will go on towin supplier contracts with their innovations,

and in this intermediate stage we are not yetseeing the true power of government as leadcustomer. Indeed there remain concerns thatthere are still major hurdles to overcome beforethis process is integrated with mainstreamprocurement. Those individuals who dostrategy and R&D procurement can be verydisconnected from mainstream procurement with different skills, cultures and targets.However we are seeing governmentspotential as lead demonstrator. Platforms fortechnology demonstration such as showcasehospitals for the NHS, show homes for DCLGor major demonstration exercises for theHome Of ce are likely to have a considerableimpact on the speed of uptake of these newtechnologies both within and outside thepublic sector.

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Part 4: Conclusion and recommendations

Europe has so far failed to fully exploit theopportunity of using public procurement todrive innovation. To put things in context, theUS public sector spends around 20 times asmuch as Europe on procuring R&D, a factorthat accounts for around half of the overallgap in R&D investment between the USand Europe.32 While the US and some Asiancountries have well-established mechanismsfor pre-commercial procurement, despitebeing a thought-leader in the area, the UKis still on a steep learning curve in terms ofimplementation.

With the Netherlands, the UK was one of therst in the EU to develop an SBIR-type scheme.However, in the rst incarnation from 2001 to2008, that opportunity was largely wasted. The

rst competitions in the re-launched schemesince 2009 will not result in nal productsfor at least another year. Yet with carefulstewardship, our analysis indicates that thescheme has nally taken a form in which it candeliver on its potential.

The SBRI is an appealing concept because ofthe three-way bene ts it promises:

a. Driving improvements in the quality andcost-effectiveness of public services andhelping solve policy challenges.

b. Accelerating the commercialisation oftechnology and lling a damaging gap ininnovation nancing.

c. Supporting the growth of small companiesand consequently economic growth andrecovery.

To ensure that those bene ts are maximised,we make three main recommendations:

First, scale up the SBRI scheme in the UK tooptimise its impact on public bodies, and toreach many more promising small companies.

Second, focus on quality with any increase inthe number of competitions, to ensure that theSBRI remains an effective source of genuineinnovation.

Third, recognise the SBRI as a powerful tool ina wider system of demand-side policy leversfor driving innovation. These should not beoverlooked or watered down to focus solelyon short-term ef ciency rather than long-term

innovative capacity. It is worth looking at eachrecommendation in more detail, to suggestways to achieve them.

a. Scaling up the SBRI scheme

There are two main ways to increase publicsector take up of the SBRI: incentivisingparticipation or mandating it. Mandates havebeen ineffective in the past and risk damagingperceptions of the SBRI. While the latestGovernment commitment to spend 15 percent of overall procurement budgets on smallbusinesses is a positive signal, it is still verylow compared to the 23 per cent spent directlywith small businesses in the US (roughly 45 percent if one includes indirect expenditure withSMEs as sub-contractors).33 While expenditureon SBIR is mandated in the US, experiencesuggests that this would be very dif cult tomonitor in the UK, and could lead to unsuitablecompetitions being funded that would nothave the desired impact.

Research has suggested that incentives arelikely to be far more effective. In fact, the

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32. European Commission(2006) Pre-commercialprocurement: A missing linkin the innovation cycle.Luxembourg: Of ce forOf cial Publications of theEuropean Communities.Differences in defence andspace spending make up alot of the contrast, but whenthese are taken out of the

picture, the US still spendsfour times as much on publicprocurement of R&D thanEurope.

33. Richard, D. (2008) SmallBusiness and Government:The Richard Report.Submission to ShadowCabinet, The ConservativeParty, Appendix D.


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successful roll-out of the reformed SBRI to datehas been in part due to the complementaryfunding for competitions provided by the TSB,in addition to personalised support. Earlysuccesses of the scheme will help sell the ideato other departments, agencies and teamswithin them. However, as we have already seen,

severe cuts to departmental budgets couldput R&D spending under pressure and thusdiminish take up.

If nancial incentives are unavailable,34 Government should carefully monitor theroll out of SBRI to support the TSB toensure departments can be encouraged andincentivised to participate in other ways.

Provided these factors are in place, thereshould be scope to increase the value of SBRIcontracts awarded from 27 million this year to50 million next year and 100 million a yearafter 2011.

Scaling up is very unlikely to be equal betweendepartments. In the USA, health and defencemake up the vast majority of the competitionvalue. A similar distribution would be likely inthe UK. The Centre for Defence Enterprise is asuccessful model for coordinating competitionsand increasingly, integrating them with otherprocurement procedures. The Department ofHealth could use this example to consider ways

of coordinating competitions across regionsand innovation groups.

There are still additional untapped areas ofthe public sector for SBRI. One of these is theResearch Councils. David Connell has madethe case for how Research Councils could

bene t from adopting SBRI tools for someareas of funding, particularly those relating toscienti c instruments and other research toolsfor which academic research labs can act aslead customers, the platform for a considerableamount of innovation in the UK.35

These changes could put the SBRI on a verydifferent growth trajectory than in its earlystages. Figure 3 compares the stages of SBRIroll-out.

b. Quality control for SBRI

In our research, we found that the impactof the SBRI can vary according to howit is employed. Those public sector usersthat engaged the SBRI process very early,particularly in designing and describing theproblem area, were more likely to nd theprocess transformative. While the process wasregarded as effective when used purely as aninnovation competition management tool, it

9

34. The announcement inthe March Budget of 10million a year over two yearsas core funding for newcompetitions to scale up theSBRI scheme was reversedas part of plans to reducespending by 6.2 billionannounced in May 2010.

35. Connell, D. (2010)Scientists are customerstoo: How the SBRI can helpResearch Councils driveeconomic growth. London:NESTA.

2001-2008 2008-2010 2010-2012 2012-

Slow take-upfrom government

Mandated from2006

Over 100 contracts,but only 1 per centfor real R&D

Encouraged as partof dept efforts todrive innovationthrough procure-ment

Championed andstewarded by TSB

25 competitions 370 contracts 13 depts and

agencies 24 million awarded

in real R&D contracts

Stewardship by TSBand development ofpeer learningnetworks

50 million contractvalue

100 million

contracted value SBRI viewed as part

of an effectivespectrum of policytools for leveraginginnovation demand

Figure 3: SBRI growth trajectory


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was less likely to have as great an impact oninnovative procurement practices and createsystemic changes.

A certain degree of exibility in the SBRI isimportant to permit public sector bodies toadapt the model to their own preferences

and to the needs of particular competitions.However, for the long-term successful roll-out of the SBRI, it is essential that it retainsthe core set of principles that create its valueproposition. These are summarised at the endof the chapter.

We suggest three ways in which theseprinciples can be maintained:

a. Maintaining the Technology Strategy Boardstewardship role of the SBRI. TSB offersvaluable support to public sector agenciesto choose and shape competitions and gainthe maximum value from SBRI. Co-fundingof competitions is likely to help embed thisrole early on.

b. Ensuring an open data policy. Transparencyand a rigorous means of performanceevaluation are essential to the futuresuccess of the SBRI. Data on competitionwinners and the subject and value ofawards should be collected and madepublicly available (as in the USA).

Additionally, data on applicants whoapplied but did not win contracts should becollected to enable economists to track theeconomic impact of the SBRI.

c. Developing peer learning networks.Collaboration and information-sharingbetween public sector competition clientswill become more bene cial as the SBRIconcept and practice become embedded.Sharing success stories could be particularlyvaluable in helping to transform practicesaround procurement of innovation.

c. Boosting demand for innovation

In the UK, a raft of reviews and initiativesover the last decade have emphasised theimportance of demand-side drivers to pullinnovation to market, and particularly thepotential of public procurement to leverageinnovation. The best-practice guidanceproduced in the UK is undoubtedly an

international point of reference. Yet wefrequently seem to underestimate thechallenges of implementing this from skills

shortages to cultural barriers to a lack ofevidence about the likely bene ts. There is stillmuch work to do if means of driving demandfor innovation are to be embedded as standardpractice for public sector bodies, even asprivate sector expectations continue to rise.

This research indicated that the SBRI is morelikely to be effective if it is one of a spectrumof ways to support the use and developmentof innovative technology. The UK doesnt failto reach its potential for innovation because ofa lack of ideas. Instead, this happens becausethose ideas get marooned in an innovationsystem that still doesnt offer enough avenuesto translate them into viable commercialproducts. We need to ensure the end resultsof SBRI competitions do not suffer this fate.Mainstream procurement contracts should beone of several integrated routes for technologydevelopment in the public sector that includedemonstration platforms (such as showcasehospitals and show homes) and targetedschemes to maximise technology pull fromuniversities.

These are still early days for the new SBRI, andwe need to monitor the roll out of the schemeclosely to ensure it reaches its potential impact.But, for now, the outlook is promising; theUK must avoid repeating the mistakes of theearly SBRI and make the most of this valuable

opportunity.

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Acknowledgements

The authors would like to thank all the public bodies and companies who gave up their time toparticipate in research interviews. We are grateful to Mark Glover and his team at TechnologyStrategy Board (TSB) for access to data and fruitful discussions throughout. We would also like tothank David Connell at the Cambridge Centre for Business Research for his helpful insights and

commentary during the research. Any omissions or errors remain our own.


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