commercialization partnerships as an enabler of uk public sector innovation: the perfect match?

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Commercialization partnerships as an enabler of UKpublic sector innovation: the perfect match?Magnus Schoeman , David Baxter , Keith Goffin & Pietro MicheliPublished online: 14 Sep 2012.

To cite this article: Magnus Schoeman , David Baxter , Keith Goffin & Pietro Micheli (2012) Commercializationpartnerships as an enabler of UK public sector innovation: the perfect match?, Public Money & Management, 32:6,425-432, DOI: 10.1080/09540962.2012.728782

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Pressure on public sector funding and anincreasing demand for public services meansthat many governments are trying to deliver‘more for less’ (Hawksworth and Jones, 2010).To do so, governments are considering newways of delivering public services.

Innovation in the public sector ismanifested in new processes, new services andnew governance and contractual models. Anew form of innovation in the public sector isthe commercialization partnership, which we defineas a partnership with the private sector togenerate economic value from a public sectorasset. To better understand the prevalence ofcommercialization, a survey of UK civilservants’ views on commercialization and twocase studies of successful commercializationpartnerships were carried out. This articleprovides the background to commercialization,reports our key findings and looks at theimplications for managers in the public sector.

Types of innovationNew public services, revised business processesand new contractual models are the principaldimensions of innovation in the public sector(IDeA, 2005). While product innovation is oflimited relevance to the public sector, thedevelopment of new services is an absolutelycritical area: the translation of new policy intoworkable, fit-for-purpose public servicesremains one of the key challenges forgovernments (Eggers and O’Leary, 2009).Likewise, business processes have been animportant focus of public sector innovation:

predominantly efficiency initiatives, but alsoattempts to make public services more citizen-focused (Varney, 2006). Although processefficiency continues to be an important pre-occupation for the UK government (Davis etal., 2010), it is also clear that a more radicalapproach will be required if the full extent ofspending cuts is to be achieved withoutdetrimental side-effects on important publicservices (CBI, 2010). In addition to developingnew public services and revising the processesthat underpin delivery, innovating thegovernance and contractual models that areused to engage citizens and partnerorganizations is also emerging as a criticallyimportant area (CBI and ACEVO, 2010).

Barriers to public sector innovationThe main barrier to innovation in the publicsector is resistance to change (Borins, 2006). Ina major survey of US local governmentinnovations, it was found that the characteristicsof the managers involved (for example their age,tenure, and education) influenced whetherinnovative ideas were adopted (Damanpour andSchneider, 2009). Resistance to change may beof particular relevance in the UK, as the EuropeanValues Survey demonstrated that UK officialsare highly motivated by conformity to socialnorms (Parker et al., 2009).

A literature review carried out by the UK’sCabinet Office identified that risk aversion isanother key barrier to innovation (Eggers andSingh, 2009). In the public sector, innovationscan involve risk for both ministers and civil

Magnus Schoeman isemployed in theGovernment Servicesteam in Post OfficeLtd and is a visitingfellow at CranfieldSchool ofManagement, UK.

David Baxter is asenior research fellowat Cranfield Schoolof Management,UK.

Keith Goffin isProfessor ofInnovation and NewProductDevelopment atCranfield School ofManagement, UK.

Pietro Micheli is asenior lecturer at theCentre for BusinessPerformance,Cranfield School ofManagement, UK.

Commercialization partnerships asan enabler of UK public sectorinnovation: the perfect match?Magnus Schoeman, David Baxter, Keith Goffin andPietro Micheli

This article examines the potential for private sector organizations to contribute topublic sector innovation. Specifically, the study explores how partnering with theprivate sector can go beyond delivery and extend to development of new servicesand new markets. The term ‘commercialization partnership’ is coined for suchpartnerships and the article describes an exploratory investigation of thisemerging form of innovation.

Keywords: commercialization and contractual models; innovation; partnerships; publicsector.

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servants and therefore might be particularlyhard to introduce.

A third barrier is centralization (Greenhalghet al., 2004): civil servants tend to see their ownsenior managers as the primary source ofinnovation (Parker et al., 2009). The NationalAudit Office reported that most UK public sectorinnovation is generated and driven by seniormanagement (Ayres et al., 2009). This issue wasalso recognized by the recent report, Putting theFrontline First, which called for decentralizeddecision-making and ‘freeing up the frontline toinnovate and collaborate’ (Treasury, 2009a).

Public–private contractual modelsDifferent models of ownership and governanceof services can lead to innovation in the publicsector (Hartley, 2005). Such models can allowthe public sector to not only tap into externalexpertise and resources, but also capitalize ontheir own capabilities (Moore and Hartley, 2008).Contractual models between the public andprivate sectors vary in the degree of operationalinvolvement, the extent to which ownership ortitle is transferred and the degree to which theycan enable innovation:

•Outsourcing is usually restricted to a discretefunction and there is no transfer of ownership.

•Concessions usually revolve around theexploitation of a discrete estate or asset—there is no transfer of ownership, but rights ofuse are granted for a set period of time.

•Public–private partnerships (PPPs), such asprivate finance initiatives (PFIs), typically seewider involvement of commercialorganizations with delivery to key outcomesbeing contractual obligations but, while R&Dcan be an explicit contractual obligation, widerinnovation is typically not evident (Rangeland Galende, 2010).

•Joint ventures entail involvement of a privatesector partner that can extend beyondoperational management into strategydevelopment, corporate governance andsenior leadership.

•Privatization involves transfer of ownershipwith a degree of control retained throughcontractual agreements; therefore,privatization is a potential route to more radicalreform by increasing private sectorinvolvement in public services.

•Commercialization is the development of anincome stream or generation of economicvalue from a public sector asset, whethertangible or intangible, which does not detractfrom its public sector mission (Cook andShahaney, 2008).

In commercialization, provision of public servicesis typically put on a more commercial footingand pricing is set at a level to recover overall costs(Baylis and Kessler, 2006). Brown et al. (2000)distinguish in-house commercialization (wherepublic sector organizations put services on acommercial footing themselves) fromcommercialization achieved through partneringarrangements with private sector suppliers. Inthis article we refer to the latter as‘commercialization partnerships’ and we provideempirical evidence over potential benefits andbarriers to its adoption.

Rationale for commercializationSince commercialization is a recent type ofcontractual model (Cook and Shahaney, 2008),there is still little evidence about its benefitsand shortcomings. From a theoretical point ofview, commercialization can be viewed as away of promoting a ‘work incentive’ in publicfirms. In this way commercialization has asimilar rationale to privatization. The prevalenteconomic argument for privatization pivotsaround agency theory: privatization is arguedto promote work incentives in public firms byaddressing the shirking behaviour of the agent.Shirking behaviour includes the barriershighlighted earlier: resistance to change, riskaversion, and a propensity to look tomanagement to take the initiative and innovate.Boycko and colleagues (1996) explain howprivatization can lead to increased efficienciesby redressing the balance of power betweenpoliticians (tending to protect and thereforeincrease labour costs) and managers andtreasury (seeking to reduce labour costs insearch of efficiencies). However, privatizationhas been a controversial model and themonopolistic nature of key services makescompetition difficult to achieve in practicewhich, in turn, can limit innovation and reducethe scope for enhancing service quality (Baylisand Kessler, 2006).

Commercialization could be a way to givestate-owned organizations the remit to pursuean objective of income generation, withouttransfer of ownership. In Australia and NewZealand, for example, commercialization hasbeen deliberately deployed with the expectationthat developing private sector managementtechniques and processes will create a moreefficient and effective public sector (Brown et al.,2000). Indeed, empirical evidence suggests thatonce a government-owned state enterprise isspecifically given the objective to generate income,it can become as efficient as the same firm inprivate ownership (Easton, 1997).

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Commercialization partnershipsIn the current economic climate,commercialization partnerships could provesuccessful in a variety of settings. Since thecoalition government came to power in the UK,markets for public services have been openedup, requiring public sector organizations (inareas as disparate as probation, health andtransport) to compete for business alongsideprivate, charity and voluntary sectororganizations (Cabinet Office, 2011). Public sectororganizations facing such competition thus havetwo choices:

•Develop relevant commercial expertiseinternally.

•Partner with the private sector and so gainaccess to their existing commercial skills andexpertise.

Developing commercial skills internally in thepublic sector takes significant time and effort: thepublic sector culture is generally counter toentrepreneurship (Ennew et al., 1998) and therequired skills are much less common amongpublic servants than private sector employees(Albury, 2005). In addition, the pace of reformrequired in the UK public sector means thatthere is only limited time to adopt new models,especially if any savings are to be made in thecurrent spending review window. Therefore,partnering with the private sector may have theadvantage of providing ready access to relevantskills and also allowing risks to be shared.

Despite the potential fit between the currentsituation and the nature of commercializationpartnerships, there is very little empirical evidenceavailable. We decided to investigate the extent towhich partnering with the private sector couldenable innovation in public services. In particular,we set out to understand the extent to whichcommercialization partnerships were beingadopted in the UK public sector, identify specificexamples of partnerships, and determine thekey barriers to successful commercialization.

Research methodology and findingsOur research methodology consisted of twophases: we first carried out a survey to betterunderstand the potential enablers and barriersto commercialization partnerships. As part of thesurvey, we asked for examples of successfulcommercialization initiatives. The two cases whichwere most frequently mentioned were examinedin the second part of our research. The analysisof the case study data enabled us to identifypotential positive outcomes of commercializationpartnerships and ways to overcome barriers to

their introduction.

SurveyIn June 2010 we conducted a survey of civilservants’ views on commercializationpartnerships. The survey was conducted viaCivil Service World (a broadsheet publication andonline network focused on UK centralgovernment: see www.dods.co.uk). An electronic(online) questionnaire was sent to 22,000 civilservants in a wide range of job roles and across allgrades, including subscribers to Civil Service World,attendees from the Civil Service Live event, andregistered users of the Civil Service Live Network.Issues covered in the survey included theawareness, understanding, importance, andenvironment for commercialization in the UKpublic sector.

In total, 661 responses were received (3%),mostly from long-serving middle managers,representing a good functional spread. Such aresponse rate is typical for survey research, butwas somewhat lower than usual for this sample ofcivil servants. The responses to the 12 questionsin the survey were collected online. They includedpre-defined responses, rankings and free textresponses.

Summary of main findings of the surveyThere were six main findings:

•In total, 68% of respondents felt thatcommercialization of public services will bemore or much more important over the nexttwo to three years. They perceived that thethree domains where private sectorinvolvement has been most successful, andwhere it will continue to be successful, were:environment and waste, housing, andtransport. A significant minority (5%) did notthink that any area of the civil service wassuccessful at working with the private sector.

•Seventy-eight per cent of respondents statedthat they understood commercialization ‘verywell’, ‘well’ or ‘adequately’, but when probedin a subsequent question, only 11% felt thatadequate guidance and support was availableon making commercialization work in the UKpublic sector. Over half (53%) felt that theCabinet Office/Office for GovernmentCommerce were responsible for providingsuch support and guidance. The Treasury(18%) and the Department for BusinessInnovation and Skills (12%) were alsosuggested.

•The most important barriers tocommercialization were perceived to beconflicts of interest and lack of skills and

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awareness. These areas were consistentlyranked as the key barriers over and above lackof suitable partners and lack of incentives.

•The top three attributes of an ideal privatesector partner were perceived to be:commercial flexibility, trust, and willingnessto share skills. Experience in the public sector,willingness to invest funds and mediareputation were deemed to be of secondaryimportance.

•The main function thought to be responsiblefor suggesting new ways to deliver serviceswith the private sector was procurement (citedfirst in 42% of responses). Policy andinformation technology were also prominentin many responses. Operational delivery,project and programme management andfinance were cited in much fewer responses.

•A minority of respondents (<10%) were vocalin their criticism of the concept of workingwith commercial partners and some evenquestioned whether there was any legitimaterole for the private sector in the delivery ofpublic services.

The following are example quotations from thesurvey:

•‘Commerce has no place in public servicedelivery’.

•‘Civil service jobs should be done by civilservants’.

•‘In 95% of cases we either ending up payingmore for less, or we end up with short-termgain for long-term pain’.

•‘Private companies see the public sector as acash cow to be milked’.

•‘It is a failed strategy that costs more than doingthe job in house’.

•‘They are out to rip the public sector off’.•‘It is hard to imagine any sector escaping this ill-

conceived and poorly reasoned experimentwith institutional structures’.

Case studiesThe survey invited civil servants to identify specificexamples of public sector innovation. From theanalysis of these free-text responses, two specificprojects emerged as the most frequently citedexamples of commercialization: Public SectorBroadband Aggregation (Welsh Assembly) andHealthy Outlook® (UK Meteorological Office).These organizations were approached and thelead individuals in each project were interviewedin face-to-face semi-structured interviews. Theinterviews were conducted between July andAugust 2010, and followed the progress of eachproject from early inception to full-scale launch

and right up to the present-day situation.The results of the survey also informed the

questions asked during the interview. On onehand, we focused on the barriers tocommercialization partnerships, such as potentialconflicts of interest and lack of skills andawareness. On the other, we tried to understandwhether some of the main enablers identified inthe survey (commercial flexibility, trust, andwillingness to share skills) effectively played arole in the two cases considered.

Case Study: Public Sector Broadband Aggregation(PSBA) WalesThe Broadband Wales initiative was launchedby the Welsh Assembly Government (WAG) withthe aim of stimulating public broadbandadoption; improving broadband access in ruralareas; improving access and reducing the costfor businesses; and improving the availability ofbroadband for public services. Quite how thesetargets were going to be achieved was not clear,not least because the Welsh Assembly was notallowed to install or commission the necessaryinfrastructure due to EU regulations on stateaid. Additionally, with the national regulator,OFCOM, still in the planning stages, there werefive different UK regulators that would need tobe satisfied.

In September 2003, Michael Eaton was hiredas a senior civil servant to manage a small teamas director of the Broadband Wales Unit. Eaton’sbackground was in the telecommunications andhigh-technology industries, in a number ofcompanies including several start-ups. Thisbackground helped him to deal with thesuccession of technical and commercial decisionsthat needed to be made, leading ultimately to theoutsourcing of the network infrastructure to thesystems integrator, Logicalis. Also, there weretwo major factors in helping him negotiate theintricacies of local, national and Europeangovernment:

•First, WAG assigned a very experienced civilservant to the PSBA team to mentor Eaton.

•Second, a minister acted as a Broadband Walesprogramme and PSBA programme sponsor.‘It really mattered to know that we hadministerial support… and it was fundamentallyimportant that they acknowledged that thisproject was risky’, remembered Eaton duringour interview.

Figure 1 reports key dates and achievements ofthis project. In terms of outcomes, PSBA nowrepresents the main supplier of broadbandservices to over half of the relevant public sector

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organizations in Wales and this has led toconsiderable savings driven by service consistencyand economies of scale.

Lessons learnt: According to Michael Eaton, theproject could not have delivered such resultswithout an experienced civil servant acting asmentor and guide—especially in the early daysof his transition from the private sector. On theother hand, Eaton’s commercial experience wascrucial to WAG successfully negotiating withcommercial organizations. Similarly, without theinvolvement the commercial partner, Logicalis,PSBA would not have had either the technicalcapability to design and implement the network,or the commercial incentive to grow.

Furthermore, the project team was locatedon a local business park, some distance awayfrom the main central government offices ofWAG. This helped engender a distinct PSBA‘team culture’ and gave the project a feeling ofautonomy.

Case study: Healthy Outlook®—Meteorological OfficeHealth ForecastingFrom 2005, the Met Office (at that time a tradingfund of the Ministry of Defence), used internalfunds to develop a new predictive forecastingmodel focusing on specific respiratory conditionssuch as chronic obstructive pulmonary disease(COPD). Alerts were email based and took accountof a variety of inputs in forecasting risk. Theforecast factored in weather patterns, seasonalityaffects, and current known levels of respiratoryviruses in a region. This service was pilotedacross National Health Service (NHS) primarycare trusts (PCTs) and practices in eight strategichealth authorities with a specific focus on accident& emergency (A&E) departments. Wayne Elliot,who had been employed by the Met Office for anumber of years, led the commercializationproject.

The real breakthrough for the service camein 2006 when, following a number of facilitated

workshops with PCTs to understand why theirpatients seemed slow to make use of their alertingservice, a chance meeting led to an introductionto a telehealth company: Medixine. A meetingwas arranged with Medixine to discuss how theirtechnology could make it easier for customers touse health forecasts. Within 24 hours, Medixinehad created a demonstration of an automated,voice-based telephone alert service. Medixineoffered:

•A proprietary technology platform that madeautomated calls to patients, delivering aninteractive pre-recorded message.

•A new commercial perspective which offeredclear incentives to increase uptake.

Medixine also had experience of the UK’s generalpractitioner (GP) market. The Met Office hadpreviously focused on larger hospitals as potentialcustomers, but working with Medixine led tomore attention being given to the GPs as a keytarget segment. Following an open procurement,a formal subcontracting relationship wasestablished between the Met Office and Medixine.Design sessions were held with clinicians and, bywinter 2006, the new service was being piloted inCornwall in the south west of England (aninnovative PCT which has since worked with theMet Office in developing a spin-off service toalert sufferers of seasonal affective disorder).Figure 2 reports key dates and achievements ofthis project. Since its launch, uptake of HealthyOutlook® has steadily grown. PCTs have reportedreduced admissions and patient morale andwell-being has significantly improved.

Lessons learnt: The importance of addressingintellectual property rights (IPR) from theoutset is highlighted by Healthy Outlook®.Over the course of the project, the Met Officefurther refined and distinguished the respectiveIPR that it brings to the collaboration withMedixine and clarity of ownership has been

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Figure 1. Public Sector Broadband Aggregation (PSBA) project timeline.

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critical. Another important area to emerge fromthis case is around the role played by the publicsector partner in the supply chain. In Elliot’sview, some public sector organizations do notfully appreciate the real value of their assets.Consequently there is a risk that they give up theaccess rights to these data too readily and do notfully share in the value generated. Finally, therewas also some NHS resistance to the idea of theMet Office charging commercially for this service.The Healthy Outlook® service would not befeasible and would not provide the same degreeof benefits if it were not charged for. HealthyOutlook® has been successful not just becausethe underlying forecasting models enable betterand earlier decision-making in patient care, butalso because the commercial partner has anincentive to grow the service. Genuine sharedbenefits result, including reduced hospitaladmissions and improved patient well-being.

Cross-case analysisBoth PSBA and Healthy Outlook® exhibit anumber of key characteristics: new or improvedservices are developed using a public sectorasset; the private sector partner providescomplementary skills and capabilities and helpsput service provision on a more commercialfooting; risks and rewards are shared. Table 1compares the two case studies and furtherexplores the key features of each example.

A number of common issues emerged in ouranalysis. First of all, both cases highlighted theneed to attend to governance early on: a greatdegree of the success of PSBA was down to theearly work that defined how the supplier industryand users would be engaged. Similarly, the MetOffice gave early consideration to their role inthe supply chain and addressed ownership ofintellectual property and data from the outset.In addition, organizational culture was a keyfactor for the public sector partner in both cases.In PSBA, the project team was ‘insulated’ from

the wider organizational culture in WAG and sowas allowed to develop relatively unhindered.The Met Office intentionally created anorganizational climate to embrace innovationssuch as Healthy Outlook®. Either way, the effectof organizational culture was recognized in eachcase and managed in both case studies. Finally,the importance of sales and marketing capabilityis underlined. PSBA relied on their commercialpartner for this area but, perhaps rather atypicalfor a UK public sector organization, the MetOffice used their own sales and marketingfunction, relying on Medixine mainly fortechnology capability. This is because, as a tradingfund, the Met Office augments its governmentfunding with commercial revenue streams inopen competition with private sector weatherforecast providers and so commercial skills arepart of its core function.

Discussion and conclusionsOur results showed that new contractual models(and, specifically, commercializationpartnerships) will be of increasing importance inthe next few years. Also, private sectororganizations are thought to play an increasinglysignificant role in innovating public services.However, our research also revealed a numberof barriers that will need to be addressed beforecommercialization is adopted more widely as acontractual model in the UK public sector.Although these barriers were particularly evidentfor commercialization, they also have relevanceto public sector innovation in general.

Organization cultureResistance to change is a significant barrier toinnovation in the public sector. The surveyfindings support this view and the opinionsgiven by some respondents revealed deep-seatedmisgivings around commercialization and indeedany greater involvement of the private sector indelivering public services. Furthermore, the

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Figure 2. Healthy Outlook® project timeline.

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survey revealed that some civil servants viewcommercialization as inconsistent with theirremit or interests: conflict of interest was citedas the most important barrier tocommercialization. The case studies providean insight into how such cultural issues couldbe addressed. PSBA, in effect, isolated theirteam from the wider organizational culture inWelsh Assembly and ensured that theyremained cognizant of the cultural issues byusing a long-term civil servant as a ‘coach’ forthe project. In contrast, the Met Office made astrategic decision to change the wholeorganizational culture to be more embracingof innovation and supportive of HealthyOutlook®: no doubt also helped by the fact thattrading fund status has encouraged a morecommercial view than central governmentdepartments such as Welsh Assembly.

Skills and awarenessThe other key barrier to commercializationhighlighted by the survey was the lack ofappropriate skills. As discussed earlier,commercialization involves process change,contractual innovation and servicedevelopment. These areas require a range ofskills including business development, contractnegotiation, supplier management, intellectualproperty rights and softer skills such as culturechange, stakeholder engagement andcommunications. These skills gaps can beaddressed in a number of different ways. The

Met Office developed these skills internally overa number of years and Wayne Elliot is a goodexample of a civil servant who developed businessdevelopment expertise through training andexperience. In contrast, the Welsh Assemblychose to go to the external job market for theappropriate skills to manage PSBA and providedthe necessary support to ensure Michael Eatoncould work effectively as project lead.

The role of commercial organizationsCommercial partners have a valuable role toplay in supporting public sector innovationand this can stretch beyond simply provisionof services as a subcontractor. Civil servantswant to work with trustworthy companies thatare flexible in their approach and willing toshare skills. This finding was reinforced by thecase studies. For example, Healthy Outlook®

benefited significantly by the involvement ofMedixine and the scope of this involvementwent beyond the direct provision of aproprietary telehealth system. In an excellentexample of commercialization, Medixineprovided input to the commercial strategy forHealthy Outlook® and in fact their involvementled to a complete change in focus in terms ofthe market segment being addressed.

The case studies also highlighted thechallenges that the public sector faces in termsof engaging with commercial organizations atan early stage. Medixine was only identified asa result of a chance meeting and PSBA had to

Table 1. Comparison of case study results highlighting key findings.

Key features PSBA Healthy Outlook®

Business development skills and capabilities From recruitment Internally developed

Contractual mechanism Direct subcontract to supplier Direct subcontract to supplier(Logicalis) with commercial (Medixine)incentives for private sector partnerto grow the service

Skills and capabilities provided by Commercial flexibility Technology innovationprivate sector partner Sales and marketing skills Knowledge of market

Skills and capabilities provided by Understanding of Welsh public Weather forecasting and modellingpublic sector partner sector and political aspects expertise

Knowledge of procurement rules Sales and marketing skills

Critical issues that had to be addressed Regulatory and governance Met Office needed to clarifyframework needed to be defined position in value chainPartner had to be selected that did Intellectual property rights had tonot conflict with regulatory constraints be clarified throughoutProcurement process was evolving(competitive dialogue was a new approach)

How cultural issues were addressed in Basing team off-site in a discrete office Resistance to charging for servicespublic sector organization Coaching of project lead by experienced was evident but lessened by trading-

civil servant fund statusSpecific corporate change programmein place aimed at promoting innovativebehaviours in staff. Healthy Outlook®

has been viewed as the pioneer projectand an exemplar of what innovationcan achieve in the Met Office.

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overcome regulatory hurdles, interview over20 suppliers and navigate a new approach togovernment procurement (competitivedialogue) before engaging Logicalis.Furthermore, the barriers to engagement arenot just procedural. The survey revealed thatthe procurement department was most oftenviewed as the function responsible forsuggesting new ways to delivering new services.In other words, many civil servants tend toview discussions with companies around serviceinnovation to be the procurement function’sjob, rather than their responsibility.

In conclusion, partnering with private sectororganizations using direct subcontractingarrangements may offer the UK public sectora viable route to successful commercialization.Commercialization has the potential to supportpublic sector reform, in particular aroundcontestability and opening up markets forpublic services, and deserves furtherconsideration by UK civil servants in the future.The success of commercialization partnershipswill depend on public sector organizations’capacity to address barriers associated withawareness, potential lack of skills andorganizational culture. Equally, it will requireprivate sector partners who are willing to beflexible around contractual arrangements andopen to sharing skills and expertise.

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commercialization partnerships as an enabler of uk public sector innovation: the perfect match?

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