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CALIFORNIACENTERFORINNOVATIVETRANSPORTATION

UNIVERSITYOFCALIFORNIABERKELEY∙2105BANCROFTWAY,SUITE300∙BERKELEY,CA94720‐3830

PHONE:(510)642‐4522∙FAX:(510)642‐0910∙HTTP://WWW.CALCCIT.ORG

INNOVATIONPOLICYBRIEF

With:

PROCURINGINNOVATIONATTRANSPORTATIONPUBLICAGENCIES

JANUARY2008

Preparedfor:

CALTRANSDIVISIONOFRESEARCHANDINNOVATION

Authors: IkhlaqSidhu,Director,CenterforEntrepreneurshipandTechnology

J.D.Margulici,AssociateDirector,CCIT

DavidJacobowitz,PublicPolicyAnalyst,CCIT

CarletonWong,GraduateStudentResearcher,CCIT

RosemaryDiPietrantonio,StudentResearcher,CCIT

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CONTENTS

ExecutiveSummary....................................................................................................................................................... v

Introduction .................................................................................................................................................................. 1

AboutCCIT ................................................................................................................................................................ 1

AboutCET ................................................................................................................................................................. 1

Methodology ................................................................................................................................................................ 2

ObservedIssues ............................................................................................................................................................ 5

ProcedureComplexity............................................................................................................................................... 5

CompetitiveBiddingRequirements .......................................................................................................................... 5

ForcedexclusionofPrescribersfromimplementationcontracts.............................................................................. 5

OnerousNon‐CompetitiveBid(NCB)ApprovalProcess ........................................................................................... 6

SlowandUnder‐ResourcedNewProductEvaluationGuidelines ............................................................................. 6

FeasibilityStudyReport ............................................................................................................................................ 7

RecentEffortstoImproveInnovationProcurement ................................................................................................ 7

Summary:ATaxonomicalApproach......................................................................................................................... 7

BestPracticesforInnovation:Operativelevel.............................................................................................................. 9

1.Roadmaps ............................................................................................................................................................. 9

2.Anticipation........................................................................................................................................................... 9

3.multi‐tiereddistribution ....................................................................................................................................... 9

4.KeepExceptionProcessesforExceptionalCases................................................................................................ 10

BestPracticesforInnovation:OrganizationalLevel ................................................................................................... 11

1.SignalStrategicNeeds......................................................................................................................................... 11

2.Identifyinternalcustomers,champions,andavailablefunding ......................................................................... 11

3.SpecifyfunctionratherthanForm...................................................................................................................... 12

4.InternalIncentives .............................................................................................................................................. 12

BestPracticesforInnovation:LegislativeConsiderations .......................................................................................... 13

iv

AppendixA:PrimeronInnovation.............................................................................................................................. 14

ModelsofInnovation.............................................................................................................................................. 14

MarketsandIntellectualProperty .......................................................................................................................... 15

Prizes....................................................................................................................................................................... 15

Grants ..................................................................................................................................................................... 16

CompetitiveBiddingRequirements ........................................................................................................................ 16

Procurement:SpeedversusAccuracy..................................................................................................................... 17

AppendixB:APrimeronProcurementRulesforCaltrans.......................................................................................... 18

AppendixC:ReferencesandInterviewExcerpts ........................................................................................................ 20

SelectedReferences................................................................................................................................................ 20

InterviewExcerpts .................................................................................................................................................. 27

AppendixD:PrimeronInnovationTypesandCategories .......................................................................................... 30

Terminology ............................................................................................................................................................ 30

TechnologyMaturationViewpoint ......................................................................................................................... 30

NewProductDevelopment:Disruptivevs.Sustaining(Christensen) ..................................................................... 31

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EXECUTIVESUMMARY

ExistingprocurementrulesfortheStateofCaliforniaaredesignedtouseafair,competitivebiddingprocessto

acquirethelowestpricedgoodsandservices.Whilethisprocessiseffectivetopurchasecommoditiesorhirecontractorforwell‐definedjobs,itposessomechallengeswhenanagencyisattemptingtoobtainveryinnovativeproducts.Almostbydefinition,innovativesolutionsaretypicallycarriedtomarketbyasinglefirm,whichmay

preventfurtherentrieswithintellectualproperty(IP)protection.Inthissituation,unlesstheinnovationbringsdownthecostofanexistingproduct,agenciesmaynotbeabletoobtainmultiplebidsinawaythatfavorsthe

innovator.Further,newproducttypesmayimposethatspecificationsbewrittentofacilitateprocurement,astretchofresourcesforpublicagencies.

WithsponsorshipfromtheCaliforniaDepartmentofTransportation(Caltrans),theCaliforniaCenterforInnovativeTransportation(CCIT)andtheCenterforEntrepreneurshipandTechnology(CET),bothattheUniversityof

California,Berkeley,investigatedthosechallengesthroughselectedcasestudies,andformulatedrecommendationsaccordingly.Thoserecommendationsaredividedintothreecategories.Thefirstgroupcanbe

implementedattheprocesslevelbyCaltranspractitionersandresearchanddevelopment(R&D)projectmanagers.Thesecondsetofrecommendationsaddressesorganizationalchallengesthatmayrequirecoordination

acrossmultiplefunctionalunits.Thethirdcategoryismorespeculative.Itsuggestschangesthatcouldbeenactedatthelegislativeleveltoalleviatesomeofthepaininvolvedinprocuringinnovativeproductsandservices.

1. BESTPRACTICESFORINNOVATION:OPERATIVELEVEL

Newinnovationsareoftenfirstavailablethroughasinglevendor.Theprocurementprocessworksmoreefficiently

whenmultiplebidscanbeobtained.ThesebestpracticescanbeimplementedwithoutchangestoexistingrulesinternaltoCaltransortostateandfederallaws.

1.1. Establishresearchanddeploymentroadmapswithclearyes/nodecisionpointsunderadefinedtimeline.Inparticular,maptheadministrativeprocessesneededforapprovingnewproductsandservices.

1.2. Anticipatelegalandadministrativetrapswhendesigningprogramsandtrials:iftheendgoalisto

purchaseanewproductorserviceforthedepartment,thenaprocurementplanshouldbeestablishedwellbeforealltheresearchandengineeringworkhasbeencompleted.

1.3. Encouragevendorstousemulti‐tiereddistributionnetworkstocreatecompetingbids.

1.4. Undercurrentconditions,avoidseekingapprovalfornon‐competitivebidprocess,duetotimeand

administrativeburden.Ifthisisanecessity,theapplicationshouldbestartedearlyinordertomitigatepossibledelays.

2. BESTPRACTICESFORINNOVATION:ORGANIZATIONALLEVEL

Theserecommendationsarestrategiestomanageinnovationasacontinuousprocesstoachievestrategicdirectives.

2.1. SignalinnovationopportunitiestooutsidersbycommunicatingontheDepartment’sstrategic

requirements.

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2.2. Asearlyintheprocessaspossible,identifyinternalcustomers,champions,andavailablefundingforinnovationwithinCaltrans.

2.3. Whenpossible,writeproductspecificationsthatdefinefunctionandperformance,ratherthanform.Inotherwords,specifythe‘what’insteadofthe‘how.’Thispracticeismorelikelytomaintainthe

Departmentinapositionwhereitcanbenefitfromthelatestinnovationsinsteadofbeingtiedtoaparticulartechnology.

2.4. WealsosuggestthatCaltransconsiderssettingupinternalincentivestoadoptinnovationatthe

individualororganizationunitlevel.Adiscussiononincentives,includingrewardsforintellectualproperty,isprovidedinAppendixA,‘APrimeronInnovation.’

Figure1‐Theprocurementanddeploymentprocessforinnovativenewtechnologies,products,andbusinessmodelsiscontinuousinnature.Variouselementsincludingawareness,communications,customeridentification,andchampionsbuildtoasuccessfulprocurementprocess.

3. BESTPRACTICESFORINNOVATION:LEGISLATIVECONSIDERATION

Legislativeaction,whileoutsidetheoriginalscopeofthestudy,couldsolvesomeofthelargerissuesthatstateagenciesmustgrapplewithtoprocureinnovativesolutions.WerecommendthatCaltransconsidersupporting

amendedlegislationtosimplifytheprocurementprocessforuniqueproductsandserviceswhencertaincriteria

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aremet.Forexample,legislationcouldenableCaltrans,withincertainstrategicareasdesignatedforinnovation,toawardacontracttoasolebidderifthecompetitivebidprocessdoesnotreturntherequiredthreebids.Toguard

againstoveruse,thestatecouldcontrolthenumberofsolesourceawardsperorganizationalunit.Thiscouldbedonebysettingbudgetlimits.Further,theseexceptionswouldbegrantedforalimitedtimeonly,sothat

competitioncandevelopandpurchasersdonotfindthemselveslocked‐intoasinglesource.

Giventhehighlytentativenatureofthisconcept,wedidnotspendunduetimeexploringit.Nonetheless,this

directioncouldbefertilegroundforfutureinvestigationsifpoliticalchampionsexist.

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INTRODUCTION

ExistingprocurementrulesfortheStateofCaliforniaaredesignedtouseafair,competitivebiddingprocessto

acquirethelowestpricedgoodsandservices.Whilethisprocessiseffectivetopurchasecommoditiesorhirecontractorforwell‐definedjobs,itposessomechallengeswhenanagencyisattemptingtoobtainveryinnovativeproducts.Almostbydefinition,innovativesolutionsaretypicallycarriedtomarketbyasinglefirm,whichmay

preventfurtherentrieswithintellectualproperty(IP)protection.Inthissituation,unlesstheinnovationbringsdownthecostofanexistingproduct,agenciesmaynotbeabletoobtainmultiplebidsinawaythatfavorsthe

innovator.Further,newproducttypesmayimposethatspecificationsbewrittentofacilitateprocurement,astretchofresourcesforpublicagencies.

WithsponsorshipfromtheCaliforniaDepartmentofTransportation(Caltrans),theCaliforniaCenterforInnovativeTransportation(CCIT)andtheCenterforEntrepreneurshipandTechnology(CET),bothattheUniversityof

California,Berkeley,investigatedthosechallengesthroughselectedcasestudies,andformulatedrecommendationsaccordingly.ThisstudywascommissionedbyCaltrans’DivisionofResearchandInnovation

(DRI),whoseroleistolaunchandadministerresearchprogramsforthebenefitofotherCaltransdivisions.Inanyorganization,transitioningtechnologiesandbestpracticesfromtheresearchstagestowidespreadutilizationisa

majorchallenge.Thedifficulty,andsometimestheimpossibility,topurchaseinnovativesolutionsisanaddedbarrierforCaltransandDRI.

Inthisbrief,wereviewthemaindifficultiesexertedbystateprocurementrulesonthepurchaseofnewproducts

andservicesbyCaltranspractitioners.Ourreviewcoversanobjectiveanalysisofwhatthoserulesstate,aswellasmorepracticalevidencegainedfrominterviewsandcasestudies.Wealsoaddedsubstantialmaterialonthe

natureofinnovationandthewayithashistoricallybeenmanagedbyfirmsandgovernment.Fromthisknowledge,weinferasetofrecommendationsforCaltranspractitionersandmanagers.

ABOUTCCIT

TheCaliforniaCenterforInnovativeTransportationacceleratestheimplementationofresearchresultsandthedeploymentoftechnicalsolutionsbypractitionerstoenableasafer,cleanerandmoreefficientsurfacetransportationsystem.PartoftheUniversityofCaliforniaatBerkeley’sInstituteofTransportationStudies(ITS),

CCITisestablishedasabridgebetweenacademia,industryandtransportationpublicagencies.Wefocusonmaturetechnologiesandbestpracticesthatcanbringshort‐termbenefitstohighwayandtransitoperatorsaswell

astothetravelingpublic.

ABOUTCET

Throughteaching,programs,andresearch,theCenterforEntrepreneurship&Technologyequipsengineersandscientistswiththeskillstolead,innovate,andcommercializetechnologyintheglobaleconomy.UCBerkeley

facultyandstudentshavestartedmorethan200UCventuresinareassuchasIT,biotechnologyandcleanenergy.

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METHODOLOGY

Overthecourseoftwosemesters,theprojectteamstudiedtherelationshipbetweenprocurementpolicyand

innovationatCaltransthrough:

a) Observationsandinterviewsrelatingtotherulesofprocurement

b) EvidencegatheredfromCaltranspractitioners,particularlywithinDRI

c) Evidencegatheredfromentrepreneursintheareaoftransportationinfrastructuretechnologies

Figure2‐ProjectMethodology

Commonpatternsidentifiedbetweenpracticalevidenceandcurrentrulesledtothefindingsandrecommendationsinthisreport.

A) ANALYSISOFPROCUREMENTRULES

Themethodologyusedforconductingbackgroundresearchfirstconsistedofreviewingtherelevantprocurement

rulesoutlinedintheState’spurchasingmanuals.ThePurchasingAuthorityManual(PAM),oneofthetwovolumesformingtheStateContractingManual,detailstherequirementsthatalldepartmentsneedtomaintain,receive,

renewanddelegatepurchasingauthority.Theserequirementsaddressissuesincludingthecompetitiveandnon‐

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competitiveprocurementproceduresofnon‐ITgoodsandITgoodsandservices.Procurementofficerswereinterviewedaswell.

B) CALTRANSPRACTITIONERSPERSPECTIVE

InterviewswereconductedwithDRIresearchanddeploymentmanagers,aswellasrepresentativesatthedistrictlevels.Theserepresentativesnotedtheiradherencetotheguidelinesoutlinedinthemanualstopurchasegoods

andservices,andsomeofthedelaysandfrustrationstheyhaveexperiencedovertheyearswhentryingtogetspecificproductsandservices.Thoseincluded,inparticular:

• ARDVAC:the"AutomatedRoadwayDebrisVACuum"or"ARDVAC"isalitterremovalsystemmountedon

atruckinordertomakeoperationssaferandmoreefficient.DesignedbytheAdvancedHighwayMaintenanceandConstructionTechnologyResearchCenter(AHMCT)atUCDavis,ARDVAChasbeen

readyforcommercializationsince2000.Caltransattemptedtojustifysole‐sourceprocurementfromavendorthathadpatentedthetechnology,butthisprocedurewasrejectedbytheCalifornia

TransportationAgencyafterthreeyearsofefforts.

• BalsiBeam:theBalsiBeamisamobilebarrierdesignedbyCaltranstoprotectworkersinaclosedlane

adjacenttotraffic.Boththedesignandthenameofthedevicewerepromptedbya2001workzoneincidentthatresultedinseriousinjuriestoaCaltransemployeenamedMarkBalsi.While

commercializationisunderway,ithasbeenachallengeforseveralyears:apatentfiledbyCaltransmakesthedesignanintellectualpropertyofthestate.Becauseofthat,appropriatelicensingmodalitieshaveto

bedetermined,alengthybureaucraticendeavor.

C) ENTREPRENEURSPERSPECTIVE

InadditiontointerviewswithCaltransrepresentatives,wemetwithentrepreneurswhohavedonebusinesswithCaltransandCCITinthepastfewyearstocollecttheirinputsonprocurementhurdles.Whileitisclearthatfirms

tryingtoselltoCaltransmayhaveastrongbias,theiropinionscannotbediscounted:theyaretheinnovatorstakingriskstointroducenewsolutionsinthedepartment.Iftheyseetoomanybarriers,theymaysimplywalk

awaytochaseotheropportunities.Becauseofthesizeofitsbudget,Caltranscanswaytheoverallmarketfortransportationinfrastructuretechnologies.Therefore,theorganizationmustnotonlyensurethatitcaneffectively

procureinnovationforitsownsake,butalsobecausefailingtodosorunstheriskofdiscouragingentrepreneurs,hencedryingouttheinnovationpipeline.Becauseofthisfeedbackloop,Caltranshasaninterestinlisteningtothe

entrepreneur’sperspective.Weinterviewedthefollowingcompanies:

• SensysNetworks:SensysNetworksInc.ofBerkeley,Cal.,isaninnovativemanufacturerofvehicledetectionsystems.Thecompany'sleadproductperformsthesamefunctionasinductiveloopdetectors

usedbyCaltransandothertransportationagencieswithintheUSandinternationally,atasubstantiallylowercostbutwithoutsacrificingperformance.Thetechnicalconceptsthatunderlietheestablishmentof

SensysNetworksweredevelopedwitharesearchcontractissuedbyCaltransDivisionofResearchandInnovation(DRI).AbusinesscasewrittenbyCCITreviewstheinceptionofthecompany,describesits

technology,andshowshowitsproductuniquelyaddressesacrucialneedofCaltrans.Startingin2007,SensysNetworkshasexperiencedsomelevelofsuccessprovidingitstechnologytoCaltransdistricts.The

companyisdoingverywellnationallyinthemarketforsignalizedintersectionsandmid‐blockdetection.

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• ParkingCarma:‘SmartParking’atrailtransitstationsdesignatesaparkinginventorymanagementsystemthatdisseminatesreal‐timeparkingavailabilityinformationtothepublicandfeaturesareservation

system.SmartParkingleadstobetterlandutilizationandcanpotentiallyincreasetransitridershipalongcongestedcorridors.Between2004and2005,ParkingCarma,Inc.,operatedaFieldOperationalTestofa

SmartParkingsystemattheRockridgeBARTstationinBerkeley,Cal.TheFieldOperationalTestwassponsoredbyCaltransDRIinpartnershipwithBART,andwasevaluatedbythePartnersforAdvanced

TransitandHighways(PATH)andCCIT.WhileParkingCarmaisnottryingtocommercializetheirtechnologydirectlytoCaltrans,theytargetcitiesandtransitagenciesacrossthestate,andhave

consistentlysoughtCaltrans’partnershipindoingso.

Finally,backgroundinformationregardingthreeadditionalfirmswascollectedthroughtheexperienceofthe

InnovativeCorridorsInitiative(ICI).ICIwasdevelopedforthe2005WorldCongressonIntelligentTransportationSystemsinSanFrancisco.ItconsistedinofferingCaltrans’rightofwayintheBayAreatoallowinnovative

companiestoshowcasetheirtechnologyduringtheCongress.Thisinitiativesetamodelforcommunicatingneeds,buildingawareness,hostingtrials,andstreamliningdeployments.WefocusedonthefollowingthreeICI

participants:

• Infotek:Infotekmanufacturesanadvancedmicro‐controllerandmodemforvehicledetectionstations.InfotekhassoldtheirtechnologytoCaltransDistrict10.

• Speedinfo:Speedinfomanufactures,installsandoperatesspeedradarsthatcancost‐effectivelyfillgaps

inanetworkoffreewaydetectors.Speedinfooperates300radarsintheSanFranciscoBayArea,andisinstallingseveraldozeninVenturaCounty.

• Dash:OriginallycalledCircumnav,DashhasdevelopedaGPSnavigationunitthatconnectstotheinternetthroughacellularmodem.Inparticular,Dashunitsuploadtheirpositionandspeedtofeedatrafficinformationsystem.Thecompanyputitsproducttomarketin2008.

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OBSERVEDISSUES

Ourinterviewsandinvestigationsrevealedseveralcategoriesofbarrierstoinnovationprocurement.Thissection

listssomeofthemorerelevantandfrequentlyoccurringissues.

PROCEDURECOMPLEXITY

MostCaltransrepresentativescitedthelengthoftimeoftenneededtopurchaseproductsasasignificantbarriertoinnovationprocurement.SomeCaltransstaffblamedthedelaysonproceduresinthestate’spurchasing

manuals.TheexamplesofARDVACandtheBalsiBeamwereoftenreferredtoasevidenceoftheintricaciesinvolvedinprocuringproductsthatareoutoftheordinaryratherthanmerecommodities.

Similarly,thefirstcomplaintexpressedbyentrepreneurswastheopacityandlackofresponsivenessoftheproduct

approvalandprocurementprocess.Allegedly,thoseentrepreneurswerewillingto‘playbythebook’andcomplywithsetprocedures,butthoseproceduresweredifficulttooutline.

COMPETITIVEBIDDINGREQUIREMENTS

Thestate’srequirementforcompetitivebiddinginmostcasesrepresentsacoreproblem.Moreover,whilethestatemanualscitetwovendorsastheminimumrequirementforinnovation,thecommonlyperceivednumberofresponsivebidsfromresponsiblebiddersisthree.Unfortunately,fornovelproductsorservices,theremayoften

beonlyonevendorthatsubmitsaproductforevaluation.InsomecasesthisvendorhasdevelopedtheproductincollaborationwithCaltrans.Inthisinstance,thecompetitivebiddingrequirementlocksoutaproductthatCaltrans

itselfcontributedtodesign!Infact,allfourexamplescitedinthemethodologyreceivedfundingfromCaltransDRI,eitherinthedesignorevaluationstages.ItisacruelironyofexistinglawsthattheStateofCaliforniacannot

benefitmorereadilyfrominnovationthatithelpeddevelopinthefirstplace.

FORCEDEXCLUSIONOFPRESCRIBERSFROMIMPLEMENTATIONCONTRACTS

Theprocurementmanualstressesthatanyconsultantthatcontractswithadepartmenttodevelopfeasibility

studiesorprovideformalrecommendationsfortheacquisitionofproductsorservicesisprecludedfromcontractingforanyoftheresultingworkpackages.Searchingforcompetentvendorstakesvaluabletimeand

resourcesawayfromefficientimplementationoftheproduct.Furthermore,suchasearchcanbefruitless.Inthecaseofnewtechnologies,theonlysupplierofthenewtechnologymaybynecessitybeinvolvedintheevaluation.

Iftheinvolvementisnotcontractedcarefullythroughathirdparty,itmayultimatelybeimpossibletopurchasetheproduct.

FollowingtheSmartParkingFieldOperationalTestatRockridgeBART,ParkingCarmafounditselfinaclose

situation.ThecompanyonlyreceivedfundingfromCaltransindirectly,throughtheUniversityofCaliforniaatBerkeley,anddidnotself‐evaluate.However,itdidfallintothetrapofbecomingaprescriberandadefacto

implementer.Forexample,inJanuary,2006,discussionsofthepossibleinvolvementofParkingCarmaintheGoCaliforniainitiativestalledbecauseCaltrans’lawyerswereuncomfortablepursuingrecommendationsgivenbya

firmthatsoughtanawardfromthestate.

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Byitsverynature,innovationisalwayscarriedbyasmallgroupofvisionariesandearlyadopters.Therefore,itistobeexpectedthatinnovatorsthathavetheabilitytoimplementwillalsobeplayingtheroleofadvocatesandthe

guides.Understaterules,thissituationposesaconflictofinterestissue,andthisrepresentsoneadditionalobstacletotheprocurementofinnovation.

ONEROUSNON‐COMPETITIVEBID(NCB)APPROVALPROCESS

Ultimately,someproductssimplycannotbeobtainedfrommultiplebidders,andanon‐competitivecontractisrequired.WhenCaltransdesirestopurchaseproductsforwhichcompetitionwasnotestablished,therulescallfor

aNon‐CompetitiveBid(NCB)justification.Thejustificationforsole‐sourceculminatesinapprovalfromtheSecretaryoftheBusiness,Housing,andTransportationAgency.

ARDVACrepresentsanexampleofthepitfallsoftheNCBprocess.DevelopedatUCDavis’AHMCTwith

sponsorshipandengineeringcontributionsbyCaltrans,thetechnologyforARDVACwaslicensedtoasinglecompanyforcommercialization.Unfortunately,ittookthreeyearsofback‐and‐forthnegotiationstopresentthe

NCBjustificationtotheSecretary,whoeventuallyrejectedit.Duringthattime,thevendordeclaredbankruptcy.Thoughtheintellectualpropertywaslaterpurchasedbyanothervendor,thiscouldhavemeanttheendofthe

ARDVACsystem.

Thecaseofacompanygoingtomarketbysecuringpatentprotectionishardlyunique.Infact,evenfortechnologiesdevelopedbyCaltrans,vendorsinterestedincommercializationwillseekexclusivelicensingrightsfor

suchnichemarketsastheoneforARDVAC.Thisisawaytooffsettheriskthatthosevendorstakebyattemptingtocommercializeanunprovensolution.Ofcourse,byobtainingexclusivelicensingrights,firmsgetanopportunityto

lockthemarketandchargeapricepremium,whichisexactlywhatstaterulesaredesignedtoprevent.However,itmustbeunderstoodthatthosesamerulesconstituteabarriertoinnovativetechnology.

SLOWANDUNDER‐RESOURCEDNEWPRODUCTEVALUATIONGUIDELINES

ManufacturersandvendorswhorequestCaltransproductapprovalmustadheretotheNewProductEvaluationGuidelines1.Thedocumentoutlinestheapprovalprocessandprovidesdirectiontothesub‐departmentalunits

thatareinvolvedintheevaluationofthenewproductssubmitted.TheprocessallowsCaltransfivemonthsbeforeacknowledgingreceiptofacompleteapplication.Fromthatpointforward,evaluationmaytakeyearsandtheprocessprovidesnoformaldeadline.Ifaprojectisrejected,vendorsmayappeal,openingthedoortoextendthe

overallprocessevenfurther.

Asofthiswriting,SensysNetworks’applicationhasbeenpendingsince2005.InaletterdatedOctober11,2005,

CaltransacknowledgedreceivingSensys’applicationandassigneditatrackingnumber.TheletteralsooutlinedaprocessandinformedSensysthattheywouldbenotifiedformallyregardinganevaluationprocedure.However,

thishasnothappenedyet.Asitturnsout,theNewProductGroupdoesnothaveadequateresourcestohandlevendors’requestsfortestingandapprovalofIntelligentTransportationSystemsproducts.Thereistypicallyone

staffpersonassignedtoprocesssuchrequests,butthisresponsibilityisonlyalow‐priorityitemintheiroveralljobdescription.

1http://www.dot.ca.gov/hq/esc/approved_products_list/NPGuidelines.html

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InthecaseofSensysNetworks,CCITconductedatrialfundedbyCaltransandprovidedunequivocalconclusionsregardingthedataqualityofferedbytheproduct.Sensysinvestedsomeoftheirownresourcestoensurethatthe

trialwouldbesuccessful.Yet,thistrialwasnotfollowedbyaformalproceduretoapproveorrejecttheirsensors,nordiditreceivemuchattentionfromtheNewProductGroup.Intheseconditions,itisdifficultforan

entrepreneurtounderstandhowCaltransrecognizesnewtechnologies,evaluatesthem,andpropagatesrecommendationstoitsdistricts.Totheoutsider,theselectionprocessmayappearad‐hoc,slow,andopaque.This

isparticularlyadversewhencompaniesmustseekfinancingfromventurecapitalistsorothersourcesinordertosupporttheirdevelopment,becauseitmakesitthismuchmoredifficultforthemtooutlineaclearpathtomarket.

FEASIBILITYSTUDYREPORT

AnotheradministrativebarriertoquickimplementationofinnovativeproductsistheStaterequirementforaFeasibilityStudyReport(FSR).AnFSR,whichpertainstoinformationtechnology(IT)projects,isamechanismfor

establishingthebusinesscaseforinvestmentofstateresourcesbeforeexpensescanbeapproved.TheFSRmustproviderationalesforagivenprojectandpresentitscostsandbenefits.Whilethisseemsreasonableandwell

intended,thefactisthatanentireyearmayberequiredtodraft,submit,process,andapprovetheFSR.Moreover,theFSRispreparedearlyintheprojectdevelopmentcycle,makingaccurateanddetailedcostestimatesdifficultto

obtain.

RECENTEFFORTSTOIMPROVEINNOVATIONPROCUREMENT

TheCaliforniaPerformanceReview(CPR),astudydevelopedtorestructure,reorganizeandreformstategovernmenttomakeitmoreresponsivetocitizens’needsandthebusinesscommunity,citesthreelargebarriers

toeffectivetechnologyresearchanddevelopment.Twoofthemarediscussedabove:theFSRandthedifficultyinobtainingsole‐sourceexceptionforimplementingresearchresults.ThethirdfindingfromtheCPRwasalackof

standardizationinthecontractingprocessforundertakingresearch,leadingtounnecessarycostsanddelay.

Effortstomitigatetheeffectsoftheseproblemshavetakenplace.TheInnovativeCorridorsInitiativewassponsoredbyCaltransandotherregionalpartners.Itsgoalsweretocreateaforumtobringtogetherthepublic

andprivatesector,aswellastoshowcaseandtestcurrentorupcomingtechnology.TheICIissuedaCallforSubmission(CFS)thatallowedformorenegotiationtime,requiredprivateindustrytoself‐fundpilot

demonstrations,andallowedtheproductsandservicestobetestedinareal‐worldsetting.TheCFScreatedacompetitiveapproachintheprivatesectorthateventuallyresultedinseveralagreementswiththepublicsector.

TheICI,whichshowcasedproductsandservicesatthe2005ITSWorldCongress,wascharacterizedbyadequatecommunicationbetweenparties,aninnovativemodelfordealingwithbudgetconstraints,andanalternativeway

forindustrytotestandshowcasenewideas.

SUMMARY:ATAXONOMICALAPPROACH

Therearemultiplecategoriesofinnovation,andtheyareaffectedbyprocurementrulesindifferentways.Forexample,improvementstoexistingproductsthatimprovequalityandreducecostswhilemaintainingminimum

specificationsmaynotfaceanyoftheissueslistedabove.NotethatAppendixDprovidesaprimeroninnovationcategories.

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Innovationsthatareconsidered“disruptive”–inthattheyintroducenewproductcategories–areaffectedthemost.Projectsinthiscategoryaremostlikelytobelaunchedbynewinnovativefirms,whoaredisadvantagedby

theexistingstructureoftheprocurementsanddeployments.

Table1‐TaxonomyofInnovationsandtheirRespectiveChallenges

Category Subcategory GenericExamples CaseExamples InnovationAffectedbyProcurementProcess

Incrementalproductimprovements(includingnewfeatures)

Newfeaturesandcapabilities

Unlikely,thoughhigherpricetagmaybeanissue.

Lowercostswhilemaintainingsufficientspecifications

Manufacturingefficiencyimprovements

Infotek Veryunlikely.Theprocurementprocessiswelldesignedtoembracethisinnovationcategory.

Low‐enddisruption(lowerfeaturesandcosts)

SouthwestAirlines,cheaper,targetsover‐servedcustomers

Speedinfo

Newmarketdisruption(newcapabilityexpandsmarket)

NotebooksoverPCs(newvalueismobility)

ARDVAC,BalsiBeam,Sensys

Systemsolutionstobrokenprocesses

Electronicdocumentprocessing

BalsiBeam

Newproductcategories

Openspacesinmarkets

Cateringtounservedmarketsegment(e.g.low,med,orhigh)

Speedinfo

Likely.Mainobservedissuesapplybecausetheseinnovationsresultinnew,unspecifiedproducts,oftenspearheadedbyasinglefirm.

BusinessModelInnovations

Costsharingofticketrevenueforredlightviolation,oradvertisingmodelsformaintainingbusstops

ParkingCarma Verylikely.Inadditiontoaforementionedissues,legalbarriersmaylimitinnovation.

Inthelightoftheissuesreportedthroughinterviewsandreferencestoexamples,Table1listsinnovation

categoriesandthetypeofchallengetheyarelikelytoface,ifany.

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BESTPRACTICESFORINNOVATION:OPERATIVELEVEL

Followingisalistof“tactical”recommendationstoimprovethedeploymentofnewtechnologyatCaltranstoday.

Theserecommendationscanbeimplementedbyindividualprojectmanagersanddonotrequirechangesincurrentrulesandorganizationalprocesses.

1.ROADMAPS

Giventhecomplexityanddiversityofadministrativeprocessesinvolvedintheprocurementofanewtypeof

productorservice,managerscanbenefitfromhavingagameplanfromtheonsetofaproject.Notallresearchprojectsareintendedtoresultinanewproduct.Butforthosethatdo,theendgoalisnecessarilytheprocurement

anddiffusionoftheresearchresults.

Aprerequisiteconditiontoincreasetheefficiencyininnovation,procurement,anddeploymentisaclear“ApprovalProcess”withspecificyes/noor“continue/stop”decisionpointssubjecttoapredefinedtimeline.In

ordertobeeffectiveforpublic‐privatepartnerships,suchatimelinemustbalancetheneedsofCaltranstomovecautiouslywithprivatecompanies’needtomovequickly.Aprocurementplanshouldbeproducedwellaheadof

theintendeddeploymentfortheproduct.Aninvestigationwithintheprocurementplanshoulddetermineorshowthatanexemptiontothenon‐competitivebidprocessisnecessarytoaccelerateinnovation.

2.ANTICIPATION

Thereareseveralpitfallsthatacontractcanfallintoifnotcarefullyplannedaround.Forexample,acompanycannotbidtoprovideproductsorservicesthatithasrecommendedaspartofanearliercontract(PurchasingAdministrativeManual,PAM,2.B6.2).Thissituationmayoccurwhenacompanyisinvolvedintrialsofitsown

products,aswasthecasewithParkingCarma.Similarly,IntellectualPropertymayrequirespecialhandling.ItisbesttoidentifyearlyonintheresearchstageshowIPmayhelporhamperthefutureprocurementofanew

product.InthecaseoftheBalsiBeam,IPownedbyCaltransisaddingtothecomplexityofpurchasingthisdevice.

Aspartoftherecommendedroadmaps,strategicplanningoftheprocurementstepscanbeusedtoavoida

discontinuitybetweentrialanddeployment.Thefollowingstrategiescanavoidthisproblem:

• Includethefutureprocurementinthetrialcontract,perhapscontingentonthetrialoutcome.

• Haveathirdparty(includesUniversityofCalifornia)conductthetrialonbehalfoftheDepartment

• Useasubcontractorstructuretoparticipateinatrial

• LetuniversitiesmanageIntellectualPropertywhenpossible,sincetheyhavededicatedresourcesto

designlicensingagreements.ResearchcontractsensurethatCaltranscannotbechargedlicensingfeesforIPwhosedevelopmentitfunded.

3.MULTI‐TIEREDDISTRIBUTION

Whenonlyonesourceexistsforadesirednewtechnology,theremayexistprocurementalternativesthatcomplywiththecompetitivebidprocess.

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Amulti‐tiereddistributionmodelallowscompetitivebidsevenwhenthereisonlyoneultimatesupplier.Oftenakeytechnologycanbedistributedthroughmultiplechannelsthataddvalueintheirownuniqueways.Thismodel

createssomelevelofcompetition,whennonemayhaveexistedprior.

Avariationofthemulti‐tiereddistributionandvalue‐addedresellermodelcanemploythepossibleuseofopen

standards,potentiallyincombinationwithkeycomponentsandintellectualpropertylicenses.Adrawbackofthisapproachisthattheinnovatingfirmriskslosingsubstantialvaluebyopeningthesolutiontooearlyorlicensingthe

technology,whicheffectivelyreducestheincentivetoinnovate.

Insomecases,theinnovationmaybeprocuredasasubcontractwithinalargerproject,particularlywhentheinnovationappliestosystemsubcomponents:forinstance,Sensysdetectorsmaybepurchasedinsteadof

inductiveloopsbyacontractordoingapavementrehabilitationjob.Forlargeprojects,asystemintegratororestablishedfirmcanabsorbtheriskoftestinganinnovationorguaranteeingitsexistenceoveralongertime

frame.Again,thislayeredapproachmaydiminishthevaluethattheinnovativefirmcancapture,loweringtheincentivetoinnovate.

4.KEEPEXCEPTIONPROCESSESFOREXCEPTIONALCASES

Thenon‐competitivebiddingprocessisatimeandadministrativeburden.Successfulnon‐competitivebidprocessesdoexist,butingeneral,theworkandtimeissubstantiallygreaterthancompetitivelyawardedcontracts.TheARDVACexampleisacaseinpoint.Thisbarriercanbeandhasbeensurmountedeffectivelywhentheproduct

caseisstrongandasponsorisshepherdingtheprocess.Therefore,projectmanagersshouldcarefullyassesswhethertheconditionsaremettosuccessfullyfightsuchabattle.

Becauseofthelikelydelay,thenon‐competitivebidrequestshouldbeprocessedassoonasthedepartmentforeseesthatitwillnotreceivethethreenecessarybidsforagiveninnovation.Thisgoesbacktothenotionof

roadmapsandanticipation.Forexample,theprocesscanbestartedwhiletrialsarestillunderway.Ifthetrialsareunsuccessful,theprocesscanbestopped.Butassumingthattrialsaresuccessful,valuabletimewillhavebeensaved.

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BESTPRACTICESFORINNOVATION:ORGANIZATIONALLEVEL

Unlikethetacticalprocurementrecommendations,thefollowingsuggestionsareintendedforconsiderationby

higher‐levelmanagement.Theyadoptalonger‐timeperspective,andrequirestructuralchangeswithinCaltransprocessesandorganization.Werecommendfoursetofchangesaspartofanongoingprocessleadingtothemoreefficientdeploymentofnewtechnologies.

1.SIGNALSTRATEGICNEEDS

InnovatorsexternaltoCaltransmustbeawareofCaltrans’slong‐termstrategicneedsinordertofashionproductstoservethem.Procurementsolicitationscanonlyattractextantproductsandcurrentneeds.IfCaltransdesiresa

steadystreamofimprovedproducts,itmustidentifyandpublicizelong‐termstrategicdirectionsandgoals.

DRI’syearlyCallforSubmission(CFS)processisaneffectivetooltopublicizeCaltrans’needs.Unfortunately,ittoooftenremainsconfinedwithinpublicuniversitiesandresearchcenters.Therefore,offeringmorecompelling

prospectsforprivatefirmstoparticipateinupstreamresearchprojectsmayyieldsomeresults.ThisisinfactoneoftheideathathasledtothecreationofCCIT,withsomenotedsuccesses.

2.IDENTIFYINTERNALCUSTOMERS,CHAMPIONS,ANDAVAILABLEFUNDING

Often,innovativeproductscouldbeusefultocertaingroupswithinCaltransthatsimplydonotknowoftheirexistence,oraretoobusytoinvestigatethem.EvenwithDRI’sbesteffortstomatchnewproductswithinternalcustomers,littlecanbeaccomplishedunlessthreeconditionsaremet:

1. Areceptivecustomer

2. Projectchampions

3. Identifiedfundingsource

Internalchampionsmustbeidentifiedwhounderstandtheproduct’spotentialvalueandwillseektowinover

skepticalwould‐becustomers,perhapsbyorganizingandmanagingtrials.Finally,fundingisobviouslythenameofthegamewhenitcomestodeployinganewtechnology.Insomecases,DRImaybeabletocreativelyassistits

internalcustomerswithfundingsources.

Caltransmustalsobeabletogiveupprojectsforwhichtheaboveconditionsaren’tmet.Havingclearerroadmaps,assuggestedintheprevioussection,canhelpsetdecisionpointsalongthedeploymentpathandgive

opportunitiestopulltheplugonaproject.Byeliminatingprojectsthatareunlikelytosucceed,DRIcanstimulateavirtuouscycle:fewerresourcesspentonlosingprojectsmeanmorearespentonpotentialsuccesses.

Experimentationispartoftheprocessofinnovation,andfailureisanecessaryconsequence.Whilefailureshouldnotbepunished,projectsthatfailtoattractcustomers,championsandfundingmustbeidentifiedandcutearly

enoughinordertofocusresourcesonfuturewins.

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3.SPECIFYFUNCTIONRATHERTHANFORM

Productspecificationsdescribehowaproductisimplemented,whereasfunctionalspecificationsdescribeonly

whattheproductmustdo.Productspecificationshinderinnovation,becausetheyprecludevendorsfromsolvingCaltrans’sproblemsusingalternativeapproaches.Functionalspecifications,ontheotherhand,exposeCaltrans’strueneedstoinnovators,allowingthemtoproposecompletelynewsolutionsthatmaybebetter,safer,and

cheaper.

Writingfunctionalspecificationsrequiresexpertiseandcare.Draftingfunctionalspecificationsismoretime

consumingandrequiresmoresophisticationbecausetheauthormustmakesurethatnorequirementsareomittedandthatunnecessarydetailsarenotincluded.Importantomissionscanresultinproductsthatarenot

satisfactory,andspuriousinclusionsreducetheoptionsavailabletoinnovators,potentiallymitigatingtheadvantagesofthefunctionalspecification.

Inreality,nospecificationiscompletelyfunctionalorcompletelytechnology‐specific.Caltransshouldendeavorto

makeitsspecifications“asfunctionalaspossible.”ThismeansthatinternalcompetenciesshouldbedevelopedwithintheDepartmenttofavorfunctionoverform.

4.INTERNALINCENTIVES

WefinallysuggestthatCaltransconsiderssettingupmoreinternalincentivestoadoptinnovationattheindividualororganizationunitlevel.Adiscussiononincentives,includingrewardsforintellectualproperty,isprovidedinAppendixA,‘APrimeronInnovation.’

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BESTPRACTICESFORINNOVATION:LEGISLATIVECONSIDERATIONS

Legislativeaction,whileoutsidetheoriginalscopeofthestudy,couldsolvesomeofthelargerissuesthatstate

agenciesmustgrapplewithtoprocureinnovativesolutions.WerecommendthatCaltransconsidersupportingamendedlegislationtosimplifytheprocurementprocessforuniqueproductsandserviceswhencertaincriteriaaremet.Forexample,legislationcouldenableCaltrans,withincertainstrategicareasdesignatedforinnovation,to

awardacontracttoasolebidderifthecompetitivebidprocessdoesnotreturntherequiredthreebids.Toguardagainstoveruse,thestatecouldcontrolthenumberofsolesourceawardsperorganizationalunit.Thiscouldbe

donebysettingbudgetlimits.Further,theseexceptionswouldbegrantedforalimitedtimeonly,sothatcompetitioncandevelopandpurchasersdonotfindthemselveslocked‐intoasinglesource.

Giventhehighlytentativenatureofthisconcept,wedidnotspendunduetimeexploringit.Nonetheless,thisdirectioncouldbefertilegroundforfutureinvestigations.

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APPENDIXA:PRIMERONINNOVATION2

Innovationistheactofcreatingsomethingnew.Thiscantaketheformofradicalnewideasandproducts,or

incrementalrefinementofwhatisalreadyknown.Itisoftenusedtodescribenewinventions–machinesthatdosomethinguseful.Butinnovationcanapplytoallproducts,services,andprocesses.

Caltrans’sfundamentalmissionistoimprovemobilityacrossCalifornia.Tothisend,ithasadirectinterestin

innovationinthetransportationsector;ideasandtechnologiesthatwillenableCalifornianstotraveltotheirdestinationsmorequicklyandsafelythantheycantoday.Becauseofthis,itisinCaltrans’sinteresttofully

understandtheprocessofinnovation.Sinceitisnecessarytotrackandcultivateknownsourcesofinnovation,Caltransshouldbeabletoanswersuchquestionsas:

• Wheredoideascomefrom?

• How(andwhy)doideasbecomeproductsandservices?

• Whatincentivessomeonetopursueaninnovativeidea?

• Whatisthemarketforinnovationandhowdoesitdifferfromtraditionalmarkets?

StewardshipisalsooneofCaltrans’sfivestatedmissions.Tothisend,Caltrans,likemostpublicagencies,hasmanyrulesandproceduresinplacetoensurethatitcanobtaingoodsandservicesfortheminimumcosttothe

taxpayer.Unfortunately,thisdutyissometimesatdirectoddswiththeincentivesthatgenerateinnovation.

MODELSOFINNOVATION

Therearemanymodelsoftheprocessofinnovation,butallofthem,atsomepoint,assumethatinnovationcomes

frominnovators:peopleandorganizationsthatdevelopideasandinvesttimeandmoneytorealizethoseideas.Fromaneconomist’sviewpoint,then,whetherasocietyenjoysthebenefitsofaconstantstreamofinnovationhas

muchtodowiththeincentivesthatinnovatorshavefordoingtheirwork.Afterall,awould‐beinnovatorhastheoptiontoworkonsomethingnew,orspendhertimeinanyotherway.Iftheincentivestoinnovateindifferent

sectorsvary,theninventorswillbedrawntosomesectorsmorethanothers.

Therearemanywaystoencourageinnovation,buttheycanbedrawnintothreebroadcategories:i)markets&intellectualproperty,ii)prizes,andiii)grants.Eachgeneralregimehasitsrelativeadvantagesanddisadvantages,

butitisalsoimportanttorememberthattheyareallsuperiortoafourthalternative:noinnovationatall.

WithrespecttoCaltransprocurementandpublic‐privatepartnerships,however,themarketandIP‐drivenapproachismostrelevantforthisdiscussion.WhatfollowsaretwoexamplesofhowCaltransprocurement

requirementscanimpactinnovators.

2 ThisentiresectionborrowsheavilyfromScotchmer,S.,InnovationsandIncentives,MITPress,2006.ISBN978‐0262693431

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MARKETSANDINTELLECTUALPROPERTY

Innovationdiffersfrommosttraditionalproductsbecauseideascanbecopiedatnomarginalcost.Forexample,it

mayrequiremillionsofdollarstodevelopandanewformulationforconcrete,butonceithasbeendeveloped,theformulationcanbeusedrepeatedlyatnocost.Unlikeconcrete,thatoncepouredcannotbepouredagain,theformulaforconcreteisnon‐consumable.Moreover,theideasbehindinnovationarealsonon‐excludable:thereis

nowaytostopsomeonefromusingthemoncetheyareknown.Becauseofthis,withoutintellectualpropertyprotection,itwouldbeimpossibleforinnovatorstoearnareturnontheriskandcoststheyboretocreatetheir

inventions.

Intellectualproperty(IP)wascreatedspecificallytoaddressthisproblem.Intellectualpropertyassignsownership

rightstoideas,andusesthepowersofgovernmenttomakesurethattheserightsarerespected.Inessence,IPmakesideasexcludable.ApatentisaformofIPgrantedbythegovernmenttoaninventorthatgiveshera

temporarymonopolyonalldevicesandservicesthatusetheideaspecifiedintheclaimsofthepatent.

Patentsareadouble‐edgedsword.Byassigningpropertyrightstotheinvention,innovatorscannowchargeapricefortheuseoftheirideasufficienttorecouptheirinvestment.Also,patentsforcethedisclosureoftheideato

thepublic.Thisisgenerallyagoodthing,asthisknowledgecanbebuiltonbyotherstomakefurtherinnovations.However,byvirtueofthegovernmentgrantingamonopoly,societyasawholedoesnotgetthemaximumvalueof

theinvention.Some“consumersurplus”istransferredtotheinvestor,intermsofhigher,monopolyprices.Thistransfermaybeperceivedasunfairbysome.Evenmoretroublesomeisthatsomevalueislostcompletelybecause

thesehigherpricesreducethenumberofpeoplewhocouldadoptandgainfromthenewidea–so‐called“deadweightloss.”

Amarket‐compatiblealternativetoIPforinnovatorsissecrecy.Dependingontheproductorservice,itmaybe

possibletoproduceaproductorserviceusingsecretinnovativemethods,withoutdisclosingthesecret.Aclassicexamplewouldbeasecretrecipe.Adisadvantagetosuchanapproachisthatthesecretmaybediscovered

independentlyordivulgedatanytime.Ifthatoccurs,themonopolyislost.However,secrecyhasonestrongadvantagefortheinnovator(whichisadisadvantageforeveryoneelse):unlikepatentswhichhavefinitelifetimes,

secretscanlastindefinitely.

Byfar,marketsaretheprimarydriversofinnovationintheUnitedStates,andsoarehighlyrelevantforCaltrans.Manyinnovatorswhocometothetransportationmarketdosowithaportfolioofpatentsandtradesecretsto

protecttheirproductsfromimitation.

PRIZES

Analternativewaytoincentivizeinnovationistoofferprizes.Prizeshavebeenusedtogreateffecthistorically,and

arecurrentlyenjoyingaresurgenceofinterest.Prizescomeinvariousforms.Underatargetedprizesystem,anawardisgiventothefirstinventorthatsolvesaparticularpre‐specifiedproblem.Thisisattractivebecausethe

prize‐givercanpotentiallyenlistthetalentsofmanyinnovatorsforarelativelysmallsum;onlythewinnerwillbeultimatelypaid.Innovatorsalsoknowthis,andthemostrationalwillonlyengageinthecompetitioniftheir

expectedvalue(theprobabilityofwinningmultipliedbytheprizeamount)isgreaterthantheircosts.Moreover,targetedprizescanonlysolvewell‐definedproblems.Often,usefulinventionsarecompletelynovel:theyarea

responsetoaneedsensedbytheinventor,nottheanswertoanyquestionpreviouslyarticulated.Another

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advantageofprizesisthat,nomoneymustbespentunlessthespecifiedproblemisactuallysolved;thegranterassumesnorisk.Acomplicationofthiskindofprizeisthattheprize‐givermusthavesufficientunderstandingto

properlyspecifytheappropriaterequirements.

Analternativetotargetedprizes,then,are“bluesky”prizes–prizesthataregrantedtoanyinventionthatsufficientlyimpressestheprize‐giver.Forexample,onecouldoffer$1Mforthebestideaproposedbeforea

certaindeadline.Ofcourse,thecomplicationwiththisisthelargenumberofunknowns,nottomentionthedifficultyofcomparingdisparateinnovations.Eventheentrantsdonotknowonwhatcriteriatheirworkwillbe

judged.

Caltranshasnotmadeuseofprizes,butforwell‐defined,pressingproblemsforwhichnocurrentsolutionexists,

suchanincentivemechanismmaybeworthinvestigating.Inthisrespect,prizeswouldnotdifferverymuchfromcompetitivebidding–asystemwithwhichCaltranshassignificantexperience.Theprimarydifferencewouldbe

thatratherthansubmittingproposalsforfuturework,bidderswouldbesubmittingdescriptionsoffinishedwork.Prizescanalsobecombinedwithcompetitivebidding.Forexample,Caltranscanawardasmallcontracttoeachof

severalbiddersthatpassaninitialvetting,awardingasecond,largercontracttothebidderwhomostsatisfactorilycompletesthefirstcontract.Webelievethatthismaybepossibleunderexistingprocurementrulesdependingon

interpretation.

GRANTS

Anotheroptionforenablinginnovationsisforgovernmentsorinterestedgroupstoprovidegrantstowould‐beinventors.Underagrantsystem,innovatorswithideaspresentproposalsfordevelopingtheirideastogranting

institutions,whichthenjudgestheworthofanidea,thelikelihoodofsuccess,andthelikelycosttocompletetheidea,beforedecidinghowmuchtogrant,andtowhom.Thestrengthofthistypeofsystemisthatitgivesgranting

institutionscontrolofthedirectionofresearch.Anotheradvantageofgrantsforthegranter,andforsociety‐at‐large,isthatthegrantercanspecifyaheadoftimethattheresultsofresearchconductedwiththegrantshallbe

madeavailableinthepublicdomain.Theprincipledrawbackisthatmoneymustbespentex‐ante,andcanpotentiallyyieldlittleornothingofvalue.Also,grantinginstitutionsmusthavesignificantexpertiseintheareaof

innovationinordertomaximizethenumberofsuccessesobtainedfortheirmoney.

Caltrans’DivisionofResearchandInnovationhassignificantexperiencewithgrant‐likemechanisms,primarilythroughtheissuanceoftaskordersandresearchtechnicalagreementstoresearchteamsworkinginuniversity

settings.

COMPETITIVEBIDDINGREQUIREMENTS

Competitivebiddingrequirementsencourageanddiscouragedifferentkindsofinnovation.Aclassicexampleofthepotentialtensionbetweenthedesiretosavemoneyandthedesiretoencourageinnovationcomesfromthe

effectofprocurementrulesthatencourageorrequirecompetitivebidding.Asafirst‐ordereffect,suchrulesgenerallybenefitthestatebecausecompetitionlowerspricesandraisesquality.Moreover,suchcompetition

encouragescertainkindsofinnovation.Ifonecompetitorinventsamethodtoprovideaknownproductorserviceatlowercostandhigherquality,hewillhaveacompetitiveadvantageovertheothersbidding.

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Butnotallkindsofinnovationareservedbytherequirementforcompetitivebidding.NewproductsthatserveCaltrans’needsintotallynewwaysorthatserveaneedthatwaspreviouslycompletelyunmetbythemarketfare

poorlyundercompetitivebiddingrequirements.Rulesagainstnon‐competitivebidsmakeitdifficultforCaltranstopurchasesuchnewproducts.ThisisunfortunateforCalifornians,astheycannotenjoythebenefitsofvaluable

newtransportationproducts.Overtime,however,patentsexpire,newideascomeuptosolvethesameproblem,andeventuallycompetitiveproductsmayemerge.

Butthereisasecondary,moreperniciouseffectofrequiredcompetitivebidding:knowingthatthesearetherules,entrepreneursarediscouragedfrombringingcertainnewproductstomarket.Bydefinition,newproductshaveno

competitors,sounderastrictinterpretationofNCBrules,cannotbepurchasedwithoutspecialauthorization.InCaltrans’scase,forsignificantcontracts,thisauthorizationmustcomefromtheDirector,underatime‐consuming

andcomplexprocess.Inthelongterm,rulesthatforcecompetitivepricingwillactuallydiscouragecertainkindsofinnovation.

Thestrengthofthiseffectisuncertain.Caltrans,forexample,mayormaynotrepresentasignificantfractionof

themarketforaproduct,soitsrulesmaynotmatterthatmuchtothemarketasawhole.However,thereiscertainlyanecdotalevidencetoshowthatsub‐sectorswithintransportationdosufferfromarelativedearthof

newproducts,andgovernmentprocurementrulescouldbeafactor.

Forthesakeofdiscussionandasanexample,Caltranscoulddecidetoaddressthisbyconsideringnew,non‐traditionalproductsandservicesseparatelyfromthebulkofprocurement,acknowledgingthatobtaining

competitivebidsforthemwillotherwisebedifficultorevenimpossible.Itcouldhenceawardaportionofcontractstonon‐competitivebidsofproductsandservicesthattheDepartmentbelieveswillbeofbenefittothe

State.Insuchcases,Caltranswouldbepayingmonopolypricesfortheseproductsandservices.However,thenegativeappearanceofthisstatementissomewhatmisleading.Presumably,Caltranswillstillonlypurchasea

productifitsbenefitsexceeditsprice.

PROCUREMENT:SPEEDVERSUSACCURACY

ArealityofprocurementinalargegovernmentalorganizationlikeCaltransiscomplexandtheprocurementprocessisfullofdelays.Aprocurementsystemthatisslowtomakedecisionsmayservetaxpayersbecauseithelps

toavoidcostlymistakes.Decisionsarenotmadeuntilallthefactsareknowntoahighdegreeofcertainty.Obtainingthatlevelofcertaintyhascostsofitsown.Thedirectcostisthelostutilitythatsuchproductscouldhave

broughttheStateifpurchasedsooner;itisthedelayedbenefit.Thishastobebalancedwiththeincreasedconfidenceandthesavingsfromdelayedpurchase.

Simultaneously,thevalueofanewproducttoitsinventorisdependentonthetimelinesswithwhichrevenuecanbegenerated.Entrepreneursmustviewtheirdevelopmenttimeandmoneyasaninvestment.Ifmoneywasraised

tocreatetheinnovation,theymayevenhavesignificantpressuretoearnareturnassoonaspossible.Asecondarydriverofthiscomesfromthefinitelifetimeofapatent.Becauseitcansometimesrequireyearstobringaproduct

tomarket,theactualprotectedtimewithwhichtoearneconomicprofitinthemarketmaybequitesmall.

TheoverallconsequenceisthatinnovatorswhoexpectaslowresponsefromCaltransmayturntomoreattractivemarketsinwhichtoinnovate.Thisisanimportantsecondaryeffect:longpurchasingcyclescandiscourage

innovatorsfromevenenteringamarket.Onceamarketisknowntobeslow,innovatorsmayapplytheirskillselsewhere,leavingthemarketemptyofnewproducts.

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APPENDIXB:APRIMERONPROCUREMENTRULESFORCALTRANS

Tworoutesexistforprocuringuniqueproductsandservices.Oneisacompetitivebiddingprocessandtheotheris

anon‐competitivebiddingprocess.

1. Competitivebiddingmethod:Inthiscase,competitionneedstobeapparent;howeveritmaybedifficulttomeetconditionswithinnovativeproducts.

2. Non‐competitivelybidcontract:Inthiscase,therearesubstantialadministrativepains/costs.Forthis

category,wefocusonhowcanthisbemademoreefficientandwhatcanbedonetoshortenapprovalorreduceriskoffailure.

Figure3‐ProcurementProcessDiagram

Competitivebiddingmethodsaredescribedbelow:

1. RequestforQuotation(RFQ):Straightforward,clearlydefined,lowerriskpurchaseofgoodsand

InformationTechnology(IT)goods/services.

2. InvitationforBid(IFB):AnIFBisusedwhenspecificationsaredetailedinfunctionaland/ortechnical

termsforgoodsandIT,orfornon‐ITserviceswhenthereislittlediscretioninperformingthework.Awardisbasedonlowprice.

3. RequestforProposal(RFP):

a. ITwhenspecificationsarestatedinamoregeneralnaturedescribingtheproblemtobesolvedor

goaltobeachieved,or

b. Non‐ITservices,PrimaryMethod,whentheserviceapproachcanvaryandawardisbasedonlow

price,or

c. Non‐ITservice,SecondaryMethod,whentheserviceapproachcanvaryandawardisbasedonapointsystem.

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Inaddition,thestatequalifiesbidstodetermineifeffectivecompetitionisachieved,asindicatedinTable2.

Table2‐BidderQualificationsandEffectiveCompetition

Term Definition

Responsiblebidder financiallycapableofperformingcontract

Responsivebidder abletomeetthespecs&requirementsofIFB/RFP

Effectivecompetition twoormoreresponsive&responsiblebidders

Competitionhasonlybeenachievedifthereis“effectivecompetition”asdefinedabove.Thecontractisawardedtothelowest‐costbidder.Otherwise,theentirebidmustberewrittenoraNon‐CompetitiveBid(NCB)processmaybeinitiated.

Furthermore,theactualprocurementprocessdiffersdependingonthetypeofgoodsorservicestobepurchased,andthetotaldollaramountofthecontracttobeawarded.Dependingoncircumstances,aRequestforQuote

(RFQ),InvitationsforBid(IFB),orRequestforProposal(RFP)willbeused.

TheillustrationbelowshowswhichbiddingprocessescanbeusedforNon‐ITGoodsvs.ITGoodswithpurchasingthresholds.

Figure4‐ProcurementMethodsbyTypeandCost

20

APPENDIXC:REFERENCESANDINTERVIEWEXCERPTS

SELECTEDREFERENCES

[BESTPRACTICES02]UNITEDSTATES,GENERALACCOUNTINGOFFICE.

[BestPractices02]UnitedStates,GeneralAccountingOffice.BestPractices,TakingaStrategicApproachCouldImproveDOD'sAcquisitionofServices:ReporttotheChairmanandRankingMinorityMember,SubcommitteeonReadinessandManagementSupport,CommitteeonArmedServices,U.S.Senate.Washington,D.C.:U.S.General

AccountingOffice,2002.

TheU.S.GeneralAccountingOffice(GAO)lookedatsixleadingprivatecompaniesandstudiedtheirdramaticchangesthatresultedinsignificantcostsavingsandserviceimprovements.Thestrategicapproachtakenbythe

leadingfirmscouldserveasageneralframeworktoguidetheDepartmentofDefense's(DOD)servicecontractinginitiatives.Alongwithcommittedleadership,theestablishmentofcross‐functionalprocurementprocesseswasa

mainfocusinthereport.Theuseofcross‐functionalteamsresultedinamixofknowledge,technicalexpertise,andcredibility;theteamsvariedinsizebutgenerallyincludedrepresentativesfromthecompany'spurchasingunit,its

internalclientsorusersoftheservices,anditsbudgetorfinanceoffice.Theteamsanalyzedspendingdata,definedinternalneedsandrequirements,andconductedmarketresearch.WhiletheGAOstatesthatthestrategic

approachfollowedbythecompaniescouldserveasageneralframework,italsorecognizesthattheDODmayfindthata"one‐size‐fits‐all"approachwillnotworkforallservices.TheDOD'ssize,therangeandcomplexityof

services,andtheuniqueaspectsofthefederalacquisitionenvironmentneedtobetakenintoaccount.

[HOWTODOBUSINESSWITHCALTRANS03]

Schwarzenegger,Arnold,SunneW.McPeak,andJeffMorales.HowToDoBusinessWithCaltrans.StateofCalifornia,DepartmentofTransportation(Nov.2003).Forcommodities,Caltrans’DivisionofProcurementandContracts(DPAC)purchasesmorethan$200mfromcommercialsourcesannually.TheDepartmentofGeneral

ServicesauthorizesCaltranstomakepurchasesunder$25k(under$100kforasmallbusinessordisabledveteranbusinessenterprise);purchasesgreaterthanthismustbedonethroughaformalbiddingprocessbyDGSonbehalf

ofCaltrans.Serviceandconstructioncontractsunder$120karewrittenandprocessedbyDPACinSacramento/Irvine,whileservicecontractsgreaterthan$120kareprocessedbytheDepartment’sEngineerOffice.

SolicitationsaredonebyIFB,RFP,orRFQsforfourteen“commercial”orseven“personal”services.Specialbiddingpreferencesareprovidedtosmallbusinesses,disabledveterans,orbusinesseslocatedincertainareas.DGS

ProcurementDivisionpublishesStateconstruction,commodityandservicecontractingopportunitiesintheCaliforniaStateContractsRegister(CSCR)online,whereservicescostingmorethan$5kmustbeleftfora2‐week

minimum.Inaddition,Caltrans’DPACmaintainsawebsite,listingallcontractsouttobid.SmallpurchasesofcommoditiesandservicesmaybedonebyVisaCal‐CardCreditCards,pettycash,ordraftpurchaseorders.

[INFRASTRUCTURE05]CALIFORNIAPERFORMANCEREVIEW.

[Infrastructure05]CaliforniaPerformanceReview.Infrastructure,Ch.4:INF17IntegratetheState’sInfrastructureResearchandDevelopmentPrograms.2005.Introduction:Californiaspendsmillionsoninfrastructureresearch

withoutastrategicplanorcoordinationamongagencies.ThisfragmentedapproachhindersCalifornia’sabilityto

21

solveitsinfrastructureprogramsandfullyleveragemoneyandideas.Thestate’sinfrastructurehasbeenunabletomeetthedemandofCalifornia’sgrowingpopulation.TheinfrastructureR&DagenciesincludeCaltrans,CEC

(energycommission),IWMB(wastemanagementboard),SeismicSafetyCommission,andSWRCB(StateWaterResourcesControlBoard).Eachsetsitsowngoalsandagenda.

[Infrastructure05]CaliforniaPerformanceReview.Infrastructure,Ch.4:INF17IntegratetheState’sInfrastructureResearchandDevelopmentPrograms.2005.StrategicPlans:Statelacksaplanforinfrastructureresearch.An

effectiveR&Dprogramwillhaveaplanbasedonstate’svision,haveastrongleaderandorganizationtoensureactivityfulfillsthevision,havequalifiedstaffknowledgeableinresearchareas,andbeadvertisedforcompetitive

solicitation.TheStrategicPlanshoulddefinemajorcriticalareasofresearch,identifytheresourcesforshort‐andlong‐termprojects,establishtheprocessforidentifyingprojectsthatcouldleadtocommercialization,andset

milestonesandperformancemeasures.

[Infrastructure05]CaliforniaPerformanceReview.Infrastructure,Ch.4:INF17IntegratetheState’sInfrastructureResearchandDevelopmentPrograms.2005.CommercializingResearchResults:Commercializationturnsresearch

intoauseableproduct,createsbusinessopportunitiesandthepotentialforstaterevenue.Thestatehasnostandardpolicyonhowandwhentocommercializeresearchresults,sostateagenciesdeveloptheirownseparate

strategies.Thestatusquo’s“disjointedeffort”dilutesthestate’sabilitytopoolitsresources,developtargeted/marketabletechnologyandfullyleverageprivatesectorfunds;thekeyisgettingresearchtoa

marketablestageandmakingitknowntotheprivatesector.Severalstateshaveaddressedtheissuebycreatingcentralofficesorjointpoweragreements,butthiscreatesadditionallayersofgovernmentandcanbe

costly/complex,haveconflictsofinterest.Thechallengeishowtogetthemostoutofthecurrentsystemwithoutaddinglayersofbureaucracy.Currently,thebusinesscommunitydoesnothaveeasyaccesstoinformationsinceit

isscatteredindatabasesthroughoutthedifferentagencies.Threeexistingbusinessandresearchgroupsarepreparedtogetresearchresultstomarket‐regionaltechnologyalliances(privatenon‐profitthatbringslocal

universities,businessesandlocalgovernmentstogether),localeconomicdevelopmentgroups(thatworkwithcitiesanduniversitiestocreatebusinessopportunities),andtheCaliforniaCouncilonScienceandTechnology

(establishedinlegislationandisamemberoftheNationalResearchCouncil).Somerecommendationsforamoreeffectiveandefficientstateresearchanddevelopmentprograminclude:whenselectingresearchbeclearonthe

intendeduseoftheresults;involvebusinessexperts,keystakeholdersandend‐usersatallstagesoftheresearch;andmaketheresearchresultseasytofindandusebythebusinesscommunity.

[Infrastructure05]CaliforniaPerformanceReview.Infrastructure,Ch.4:INF17IntegratetheState’sInfrastructure

ResearchandDevelopmentPrograms.2005.ThreelargebarrierstoeffectiveR&Dincludethecontractingprocessesforundertakingtheresearch,theFeasibilityStudyReportrequirements,andthesolesourceprocessfor

usingresearchresults.Itcantakethreemonthstooneyeartogetacontractexecutedandcostupto$10,000percontract,duetothefactthatstateagenciesarenotrequiredtousestandardizedagreementterms.Intellectual

propertyrights,overheadratesandownershipofpublishingandroyaltyrightsarerenegotiatedforeachcontract,takingupalotoftime.TheStateAdministrativeManualrequiresaFeasibilityStudyReport.Itmustbeapprovedby

DepartmentofFinancepriortoexpendingfundsrelatingtoIT.InterpretingtheFSRrequirementtoapplytotheinitialresearchphasecandelayorkillaproject.AnFSRdetailsthetechnology,implementationprocedures,costs

andcost‐benefitratiosofasystembeforeitisimplemented.Resultsfromresearchareunknownandunquantifiableattheoutset,soitis“nearlyimpossible”fortheDOFtoapprovearesearchFSR.Thestatemay

neverbeabletousetheproductsfromcommercializedresults,whichwastesresearchfunding,jeopardizingworkersafety,andreducingproductivity.Gettingsolesourcetobeapprovedtakesalongtime.Togetnew

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productsmanufactured,licensesareissuedtoonevendorsincenoothermanufacturerswillapplyforalicenseiftheyhavetocompetewithothermanufacturers.

[Infrastructure05]CaliforniaPerformanceReview.Infrastructure,Ch.4:INF17IntegratetheState’sInfrastructureResearchandDevelopmentPrograms.2005.TheGovernorshouldworkwiththeLegislaturetocreatetheOfficeof

InfrastructureResearchandDevelopmentwithintheBusiness,Transportation,andHousingAgency.TheSecretaryofBusiness,TransportationandHousing:shouldestablishanInfrastructureAdvisoryCounciltoprovideinputand

adviceonanewplanforR&D,shoulddirectthenewofficetopartnerwithregionaltechnologyalliancesandlocaleconomicdevelopmentgroupstoreviewresearchconceptsforcommercialpotentialduringallstagesofthe

researchprocess,shouldconsolidatetheadministrativefunctionofthenewofficeandmakeefficiencyimprovements(e.g.adoptaresearchcontractwithoneoverheadrateandonepolicyonintellectualproperty

rightsandroyaltyissues,establishoneinvoicingprocess,consolidateandintegratethestatusofresearchandresultsintoonedatabase,negotiatewithDOFtorequireFSRaftertheinitialresearchisconductedandbeforeany

productisimplemented,andworkwithDGStodeveloppolicyforsole‐sourcepurchasingapprovalwhenthereisonlyonevendor).Therearesignificantsavingswiththeserecommendations,withstudiesthatshowthat

consolidatingadministrativefunctionscansave12‐30%.ReducingstaffandimplementingastandardcontractwillsavemoneyandPY,andthesavingsintheformoffederalfundscanbeusedforotherrelatedactivities.

[PURCHASING05]STATEOFCALIFORNIADEPARTMENTOFGENERALSERVICES

[Purchasing05]StateofCaliforniaDepartmentofGeneralServices.“PurchasingAuthority,Basics,Chapter1.”PurchasingAuthorityManuel,1.1.7(Sept.2005).Authorityforpurchasingnon‐ITgoodsandITgoodsandservicesforStategovernmentresideswithDGS.Adepartmentmustdecidewhatpurchasingcategoriestouseinconducting

theirpurchasingactivities.Adepartmentmayselectoneormoreofthefollowingpurchasingcategoriesorsub‐categoriesasapplicabletotheirselectedpurchasingauthoritytype,suchascompetitivesolicitations,non‐

competitivelybid(NCB)contractapproval,smallbusiness(SB)/disabledveteranbusinessenterprise(DBVE)option(valuedfrom$5000.01to$99,999.99),leveragedprocurementagreement(LPA)orders(whicharesub‐categorized

intoCaliforniaMultipleAwardsSchedules(CMAS)contracts),SoftwareLicenseProgram(SLP)contracts,StatePriceSchedules(SPS),orStatewideContracts(SC)).Therearethreelevelsofcompetitivepurchasingauthoritygranted

tostateagencieswhenthesedepartmentsapply:minimum(lowestdollarthreshold,fordept’sthatdoverylittleprocurements);standard(informalsolicitations,requiredforthoseseekingformalthresholdstatus);andformal

(nosetdollarthreshold,dollarthresholdgrantedoncase‐by‐casebasis).Non‐ITandITdollarthresholdsforallthesecategoriesareprovidedinTable1.3.0ofthismanual.Authoritytopurchaseisnotrequired,butthose

departmentswithoutareprohibitedfrompurchasingnon‐ITgoodsgreaterthan$100(PCC10308)orITgoodsandservicesofanydollarvalue.

[Purchasing05]StateofCaliforniaDepartmentofGeneralServices.“PurchasingAuthority,ScopeofPurchasingAuthority,Chapter1.”PurchasingAuthorityManuel,1.3.5(Sept.2005).Departmentsmayrequestincreased

competitivepurchasingauthorityfornon‐ITexceeding$50,000andITfor$500,000andmustcompletetheRequestforOne‐TimeProcurementtoIncreaseAuthorityforITornon‐ITgoods.AnyNCBcontractthatexceeds

$25,000.00mustbesubmittedtoDGS/PDforreviewandapproval.Non‐ITincidentalservices(i.e.set‐upandinstallation)maybeacquiredduringtheoriginalpurchaseofnon‐ITgoodsbuttheservicesmustbesubordinateto

theoverallpurchaseandnotexceedadollarthresholdof$4,999.99.Iftheserviceportionofanon‐ITgoodspurchaseexceedsthatamount,thentheserviceportionofanon‐ITgoodsmustbeseparatedfromthenon‐ITgoodspurchaseandexecutedasacontract.Non‐ITgoodsvaluedat$100orlesscanbepurchasedbydepartments

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(theyaregivenstatutoryauthority)withoutDGS/PDoversight.Non‐ITservicesInter‐AgencyAgreements(IAA)svaluedat$50,000andovermustbeapprovedbyDGS/OfficeofLegalServices(OLS)(seeSCMVol1.)Procurements

fornon‐ITgoodswillbeconductedbytheDGS/PDAcquisitionsandContractsSection(ACS).ProcurementsforITgoodsandserviceswillbeconductedbytheDGS/PDTechnologyAcquisitionsSection(TAS)ifitexceeds

department’spurchasingauthority..PCC10329prohibitsordersplitting–“nopersonshallwillfullysplitasingletransactionintoaseriesoftransactionsforthepurposeofevadingthebiddingrequirementsofthisarticle.”

[Purchasing05]StateofCaliforniaDepartmentofGeneralServices.“ProcurementPlanning,PurchaseClassificationandPlanning,Chapter2:SectionB.”PurchasingAuthorityManuel,2.B3.7(Sept.2005).Statepurchasingactivities

aredividedintothefollowingthreeclassifications–non‐ITgoods,ITgoodsandservices,andnon‐ITservices.Non‐ITservicesincludedwiththepurchaseofnon‐ITgoodsmaynotexceed$4999.99andmustbedirectlyrelatedto

thepurchaseofthegoods,suchassetuporinstallation.TheStateConstitutiongenerallyrequirescontractingoutforpersonalservicestobelimitedtothoseservicesthatcannotbeperformedbycivilserviceemployees.Ablanket

purchaseisanacquisitionmechanismestablishedfornolongerthanoneyearwithonesupplierwherethequantitiesofspecificproductsarenotknown.Innocasemayablanketpurchaseexceed$4999.99pertransaction,

unlesstheblanketpurchaseisissuedunderanLPAcontract.Departmentsgrantednon‐ITorITpurchasingauthoritytoconductcompetitivesolicitationsmayestablishtermpurchasecontractsthroughacompetitivebid

process;thistermcannotbegreaterthan36months.Acompetitivebidmustbeconductedwheneverthedollaramountis$5000orgreater.

[Purchasing05]StateofCaliforniaDepartmentofGeneralServices.“ProcurementPlanning,RequirementsSpecific

toITGoodsandServices,Chapter2:SectionB.”PurchasingAuthorityManuel,2.B6.2(Sept.2005).Productiveuserequirementsaretobeusedinallpurchasesforinformationtechnologygoodsandtelecommunicationsgoods(IT

goods).Thepurposeoftheproductiveuserequirementistoprotectthestatefrombeingatestsiteforprototype,experimentalor“beta”testsoftwareandnewequipmentthathasnorecordofprovenperformance.

RequirementsareasindicatedinSAMsection5221,illustration2.Anyconsultantthatcontractswithadepartmenttodevelopfeasibilitystudiesorprovideformalrecommendationsfortheacquisitionofproductsorservicesis

precludedfromcontractingforanyworkrecommendedinthefeasibilitystudyortheformalrecommendation.

[Purchasing05]StateofCaliforniaDepartmentofGeneralServices.“ProcurementPlanning,DesktopandMobileComputingPurchases,Chapter2:SectionB.”PurchasingAuthorityManuel,2.B7.1(Sept.2005).UndertheDesktop

andMobileComputingPolicy,departmentsmayacquiredesktopandmobilecomputinggoodsnecessarytosupportthedepartment’sprogrammaticfunctionsandbasicneeds.AlthoughSAMnolongeraddressesthe

requirementtocompleteaWorkgroupComputingJustificationForm(WCJF)inlieuofaFeasibilityStudyReport(FSR),itdoesnotexcludedepartmentsfromcontinuingtoestablishandmaintainappropriatestandardsforthe

purchaseofdesktopandmobilecomputinggoods.TheDMCPincludestheacquisitionandsupportofcomputers,PDAs,printers,LANs,andsoftwaresuchaswordprocessing,spreadsheets,anddatabases.

[Purchasing05]StateofCaliforniaDepartmentofGeneralServices.“ProcurementPlanning,Information

TechnologyandTelecommunications,Chapter2:SectionC.”PurchasingAuthorityManuel,2.C6.1(Sept.2005).DepartmentsgrantedITgoodsandservicespurchasingauthoritymustobtaintherequiredapprovalsfromDOF

priortoinitiatinganyITprocurementactivityorencumberinganyfunds.ThemechanismsforapprovinginformationtechnologyprojectsthatultimatelyprovidethenecessaryauthorizationtoacquireITgoodsand

servicesareFeasibilityStudyReports(FSR),compliancewithDMCP,acquisitionofITgoodsandservicesbased

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uponapreviouslyapprovedeffortmostoftenasaresultofanapprovedPostEvaluationImplementationReport(PIER),andidentifyingthataprojectoracquisitionisexcludedfromSAM4819.32.

[Purchasing05]StateofCaliforniaDepartmentofGeneralServices.“ProcurementPlanning,CertificateofCompliancewithStatePolicies,Chapter2:SectionC.”PurchasingAuthorityManuel,2.C7.2(Sept.2005).Asigned

certificationofcompliancewithStateinformationtechnologypoliciesisrequiredforallinformationtechnologyprocurementsvaluedat$100,000.00ormoreandareinsupportofadevelopmenteffort.Acertificationisnot

requiredforprocurementsforlessthan$100,000.00,procurementslimitedonlytomaintenanceservices,procurementsinsupportofpreviouslyapprovedefforts,andforprocurementsofservicestoconductafeasibility

studyreportprovidedtheservicesarelimitedtosupportingorconductingthefeasibilitystudyorpreparingtheFSR.Althoughacertificateofcomplianceisnotrequiredfortransactionvaluedatlessthan$100,000.00,

departmentspurchasinganyITgoodsand/orservicesarerequiredtoprovidedocumentationand/orwrittenjustificationastohowtheacquisitionisauthorized.AcceptableformsofdocumentationincludeapprovedFSR

transmittalfromDOFfornon‐delegatedprojectsorsignedbythedepartmentdirector,deputydirectorordirector’sdesigneefordepartment‐delegatedprojects,astatementintheprocurementfiledocumentingthatthe

purchaseisinaccordancewiththeDMCP,orPIERapprovalletter.

[Purchasing05]StateofCaliforniaDepartmentofGeneralServices.“CompetitiveSolicitations,DevelopingSupplierResources,Chapter4:SectionA.”PurchasingAuthorityManuel,4.A2.5(Sept.2005).Competitiveprocurements

conductedunderpurchasingauthorityforeithernon‐ITgoodsorITgoodsandservicesmaynotexceedthedollarthresholdsasauthorizedDGS/PDtotheindividualdepartment.Bidlistsshouldbeestablishedinphonebooks,

localtradeunions,chambersofcommerce,databases,etc.Sinceadvertisingisrequiredfornon‐ITgoodssolicitationsexceeding$50,000andforITgoodsandservicessolicitationsexceeding$100,000,bidlistsareused

forinformalsolicitationsbelowthosedollarlevels.Ifthedepartmentdeterminesthatonlycertainsuppliersand/orproductscanmeetitsneeds,acompetitivesolicitationcanbeconductedsolicitingonlythosepre‐determined

suppliersorproductswithoutpriorapprovalfromDGS/PD.

[Purchasing05]StateofCaliforniaDepartmentofGeneralServices.“CompetitiveSolicitations,AdvertisingRequirements,Chapter4:SectionA.”PurchasingAuthorityManuel,4.A3.5(Sept.2005).TheCaliforniaState

ContractsRegister(CSCR)wasestablishedtomaximizecompetitionthroughadvertisingStatepurchasingandcontractingopportunities.DepartmentsmustadvertisesolicitationsintheCSCR.Advertisingisrecommendedfor

non‐ITgoods$5000‐$50,000andisrequiredfornon‐ITgoodsinexcessof$50,000,ITgoodsinexcessof$100,000,ITservicesinexcessof$4999.99,andITgoodsandservicesexceeding$4999.99ontheserviceportiononly.

Departmentsmustadvertiseforatleast10workingdayspriortothebidduedate.GCsection14838.5eliminatestheadvertisingrequirementfortransactionsawardedtoacertifiedSBoracertifiedDVBEwhenconductinga

SB/DVBEOptionsolicitation.DepartmentsmaybegrantedanexemptionfromadvertisingiftheystatewhyITservicescannotbeadvertisedandincludealistofcontractorsthatwillbesolicited;aNCBcontractjustificationis

notrequired.

[Purchasing05]StateofCaliforniaDepartmentofGeneralServices.“CompetitiveSolicitations,DevelopingtheCompetitiveSolicitation,Chapter4:SectionB.”PurchasingAuthorityManuel,4.B2.5(Sept.2005).Informaland

formalsolicitationsareformats–fornon‐ITgoods,theinformalsolicitationis$50,000orless,and$500,000orlessforITgoodsandservices.Overtheseamountsareformalsolicitations;allformalsolicitationsmustbewritten.An

informalsolicitationmustbewrittenforanysolicitationadvertisedintheCSCR,fornon‐ITgoodsexceeding$50,000,forITservicesexceeding$4999.99,forITgoods$100,000.01to$500,000,forITgoodsandservices

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whereserviceportionexceeds$4999.99,andITgoodsandservicesvaluedat$100,000.01to$500,000.DepartmentsmustincludeTACPA,EXA,andLAMBRAprogramsrequirementsincompetitivesolicitationswithan

estimateddollarvalueof$100,000andover;thisisstronglyadvisedforadollarvalueof$85,000.

[Purchasing05]StateofCaliforniaDepartmentofGeneralServices.“CompetitiveSolicitations,Requestsfor

Proposal/QuotationsandInvitationtoBidforITandnon‐ITSolicitations,Chapter4:SectionB.”PurchasingAuthorityManuel,4.B3.0‐4.B8.3(Sept.2005).Themostcommonwrittensolicitationformatusedforinformal

competitivesolicitations(non‐IT)istheRequestforQuotation(RFQ).ContractawardresultingfromtheRFQprocesswillbetotheresponsiblebidderthatsubmitsaresponsivebidthatisthelowestcostafterapplicationof

anypreferencerequirements.

ThemostcommonwrittensolicitationformatusedforconductinginformalITcompetitivesolicitationsistheRFQ.

TheInvitationforBid(IFB)isawrittenprocurementmethodusedtosolicitbidresponsesfornon‐ITgoodsexceeding$50,000.Fornon‐ITgoodsprocurementsexceeding$50,000,theuseoftheIFBformatisrequired.

Contractawardresultingfromthisnon‐ITIFBprocesswillbetotheresponsiblebidderthatsubmitsaresponsivebidthatisthelowestcostafterapplicationofanypreferencerequirementsordiscounts.

TheInvitationforBidisawrittenprocurementmethodusedtosolicitbidresponsesforITgoodsaloneorforITgoodsandservicesexceeding$500,000wheresuppliersareaskedtoprovideabidtotheState’sknownand

detailedrequirements.Incontrast,RequestsforProposalsareusedwhentheState’srequirementsarewritteningeneraltermsdescribingaproblemtobesolvedoragoaltobeachieved.TherearetwoIFBformatsforIT

purchasesgreaterthan$500,000–ITgoodsonly(hardwareorsoftwarealone,lowrisk,lesscomplexpurchases)andITgoodsandservices(hardware,software,highriskorlargescalesystemsintegrationprojects).ForIT

solicitations,iftheevaluationcriteriaintheIFBprocessisbasedonthelowestnetcostmeetingallotherspecs,thencontractawardismadetolowestcostafterapplicationofbidpreferences;ifitisbasedonvalueeffectivecriteria,thenthecontractisawardedtobidthatscoresthehighestpoints.

AnRFPisrequiredforITgoodsandservicesexceeding$500,000.Itstatesthesolicitationrequirementsorspecificationsinamoregeneralnaturedescribingtheproblemtobesolvedorthegoaltobeachieved.Suppliers

“propose”abusinesssolutiontotheState’sdescribedneeds,incontrasttotheIFBwheresuppliersareaskedtoprovideacostbidtodetailedandknownrequirements.RFPrequirescosttobesubmittedinaseparatelysealed

envelope.Evaluationcriteriagoverningcontractawardisbasedonvalue‐effectivefactorsthatincludecost.Forallpurchases,certifiedsuppliers(SB/DVBE)canbesolicitedforpurchasesvaluedfrom$5000.01to$99,999.99

providedthedepartmenthasobtainedresponsivebidsfromtworesponsiblebidders.

[Purchasing05]StateofCaliforniaDepartmentofGeneralServices.“CompetitiveSolicitations,BidderInstructions,Chapter4:SectionB.”PurchasingAuthorityManuel,4.B9.4(Sept.2005).Regardingbidderinstructions,thesemust

beusedinallcompsolicitationsforbothnon‐ITgoodsandITgoodsandservicesexceptwhenconductingITover$500,000,whereyoushalluseDGS/PDdevelopedIFB/RFPSectionII;State’sGeneralProvisionsmustbeusedinall

competitivesolicitationsandpurchasedocsfornon‐ITgoodsandITgoodsandservicesinexcessof$4999.99;State’sITcontractmodulesmustbeusedinITsolicitationsinexcessof$100,000;AllcompetitiveITgoodsand

servicessolicitationsvaluedover$500,000shalluseIFB/RFPprocurementmethodology–State’sBidderinstructionscan’tbeused.

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[Purchasing05]StateofCaliforniaDepartmentofGeneralServices.“CompetitiveSolicitations,HowtoDetermineFairandReasonablePricing,Chapter4:SectionC.”PurchasingAuthorityManuel,4.C2.0(Sept.2005).Departments

mayacquirenon‐ITgoodsandITgoodsandservicesvaluedlessthan$5,000iffairandreasonablepricingcanbeestablishedw/oreceivingalternatequotes.Fairandreasonabledeterminedbypricecomparisons,historical

comparisons,etc.Fornon‐ITgoodsfrom$5,000‐$50,000,andITgoodsandservicesfrom$5,000‐$100,000,achievingcompetitionisdefinedasgettingtwobids,ifthesolicitationisnotadvertised.Whenevertheyare

advertised,solicitationmayresultinonlyonebidresponse;ifthesolebidisconsideredresponsibleandresponsivethenthecontractmaybeawarded.Inadditiontothissolebidresponse,forITgoodsandservices$100,000.01‐

$500,000,competitivesolicitationsconductedforITgoodsandservicesvaluedinthisrangeareconsidered“informal”butmustincludeaprovisionfornoticeofIntenttoAward.

Iftheestimatedvalueofatransactionisunder$5,000,buyersshallobtainatleasttwopricequotationsfromresponsiblesupplierswheneverthereisreasontobelievearesponsefromasinglesourceisnotafairand

reasonableprice.

[Purchasing05]StateofCaliforniaDepartmentofGeneralServices.“CompetitiveSolicitations,ResponsiveBids,ResponsibleBidders,EvaluationandAwards,Chapter4:SectionD.”PurchasingAuthorityManuel,Topics2,4,5

(Sept.2005).Iftherearenoresponsivebids,buyerhastwooptions–cancelsolicitationandrebidwhilemodifyingrestrictiverequirements,orcancelsolicitationandproceedwithNCB.Whencompetitionresultsinonlyone

responsivebideventhoughmultiplebidswerereceived,abuyermaydeclarethatcompetitionhasbeenachievedbecauseofnon‐participationduetothestate’ssocio‐economicrequirementsorduetothestate’sstatutory

requirements(DVBE,SB,etc.)Ifbuyerdeterminesthatthelowbidderwillnotbeawardedthepurchaseandthesolicitationisanon‐ITinformalsolicitation(lessthan$50,000)thebuyerhastodocumentindetailwhythelowest

bidderwasnoncompliant.Fornon‐ITgoodsmorethan$50,000,documentationmustbeforwardedtoDGSforconcurrencepriortocontractawardexceptifthisisaresultofbidpreferences.

ForITgoodsandservicesvaluedover$100k,DGSrecommendsdepartmentsevaluatebidbasedonvalue‐effective

methodologyinitsintenttoaward,whilethisisrequiredforallITgoodsandservicesover$500,000.

[Purchasing05]StateofCaliforniaDepartmentofGeneralServices.”Non‐CompetitivelyBid(NCB)Contracts,NCBContractandPurchasingAuthority,Chapter5.”PurchasingAuthorityManuel,5.1.6(Sept.2005).NCBcontractsare

limitedfornon‐ITgoodsandITgoodsandservicestoemergenciesandwhenproposedacquisitionofgoodsandservicesaretheonlygoodsandservicesthatmeettheState’sneed.Adepartment’sNCBcontractauthoritywillbe

authorizedatamaximumdollarthresholdnottoexceed$25,000.TherearetwomethodsforjustifyNCBcontracts–onanindividualbasis,orasaSpecialCategoryNCBrequest.NCBsrequiresignaturesfromtheiragencysecretary

anddepartmentdirectorornexthighest‐rankingofficial.

[Purchasing05]StateofCaliforniaDepartmentofGeneralServices.”Non‐CompetitivelyBid(NCB)Contracts,NCB

ContractJustificationProcess,Chapter5.”PurchasingAuthorityManuel,5.5.2(Sept.2005).Thedepartmentdeterminestheneedtoacquireaproductfromsupplierwhoisonlyknownsource,completesNCBcontract

justificationandsecuresappropriatesignatures;ifpurchaseisunder$25,000theymayproceedwiththepurchase;ifitexceedsNCBpurchasingauthoritybutiswithinthedepartment’spurchasingthreshold,theymustsubmittheir

requesttoDGS/PDforreviewandapprovalbeforepurchasing;ifitexceedsboth,DGSwillreviewandapprovedocumentationexecutepurchaseonbehalfofdepartment.IftheNCBisdenied,DGSwillcontactthedepartment

todiscusstheoptionsofeitheradvertisingthesolicitationcompetitivelyorcancelingthebid.ANCBisnotrequired

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forpurchaseslessthan$5000ofITgoodsandservices,non‐ITgoods,andLPAtransactionsiffairandreasonablepricinghasbeenestablishedanddocumented.

[Purchasing05]StateofCaliforniaDepartmentofGeneralServices.”Non‐CompetitivelyBid(NCB)Contracts,ProprietarySoftwarePurchases,Chapter5.”PurchasingAuthorityManuel,5.5.0(Sept.2005).Forexistingsoftware,

ifpurchaseiswithinthedepartment’sITpurchasingauthority,noNCBisrequired.Ifitexceedstheauthorityordepartmenthasnopurchasingauthority,theymustsubmittoDGStoconductprocurementandexecutecontract.

Fornewsoftware,ifpurchaseiswithinthedepartment’sapprovedITpurchasingauthority,aNCBnotrequiredfor$250,000orless,butisrequiredifgreaterthan$250,000andmustbeapprovedbyagencydirectoryand

departmentdirector.DGS/PDwillconductprocurementifitexceedsthedepartment’sITpurchasingauthorityorifthedepartmenthasnoauthority.

[Purchasing05]StateofCaliforniaDepartmentofGeneralServices.”Non‐CompetitivelyBid(NCB)Contracts,

PurchasesExemptfromtheNCBContractProcess,Chapter5.”PurchasingAuthorityManuel,5.6.1(Sept.2005).Somepurchasesmaybeexemptbystatuteorpolicyfromneedingadvertisingorcompetitivebidding,suchas

proprietarysubscriptions,publicationsandtechnicalmanualsupto$250,000,andpostagemeters.

[STATEADMIN04]THESTATEADMINISTRATIVEMANUAL(SAM)

[StateAdmin04]TheStateAdministrativeManual(SAM).Chapter4800:FeasibilityStudyReportSection4819.35,Dec.2004.ThemechanismforapprovinginformationtechnologyprojectsistheFeasibilityStudyReport(FSR).TheFSRestablishesthebusinesscaseforinvestmentofstateresourcesintheprojectbysettingoutthereasonsfor

undertakingtheprojectandanalyzingitscostsandbenefits.If,duringprojectdevelopmentorimplementation,theagencyfindsthatprogramrequirementscannotbeadequatelysatisfiedbythecourseofactiondescribedinthe

approvedFSRandthatanalternativecourseofactionismoreappropriate,aSpecialProjectReport(SPR)shallbeprepared.TheFSRmustbesubmittedtoFinanceandtotheOfficeoftheLegislativeAnalyst.Inaddition,theFSR

mustbesubmittedtotheDepartmentofGeneralServiceswhenthecontracttotalexceedstheagency'sdelegatedpurchasingauthority.TheFSRmustprovideanaccuratesummaryoftheresultsofthefeasibilitystudy.Aswiththe

studyitself,thescopeoftheFSRmustbecommensuratewiththescopeandcomplexityoftheproblemoropportunitybeingaddressed.EnoughtechnicaldetailmustbeincludedintheFSRtoshowthattheproposed

responsetotheproblemoropportunityisworkableandrealistic.TheFSRmustprovideabasisforunderstandingandagreementamongprojectmanagement,executivemanagementandprogrammanagement,aswellassatisfy

theinformationrequirementsofstate‐levelcontrolagencies.

INTERVIEWEXCERPTS

CALTRANSEMAILINTERVIEW.30JANUARY2007.

Wewerediscussingwith<formerdivisionchief>thefactwecouldnotgetasolesourceoutinlessthanthree

years,andhementionedtheexampleonhowhemanagedtospeedupthesolesourceprocessbymakingapublicannouncement,twoyearsinadvance,sothatwhenhedidgetonlyonebid,itwasacceptedbecauseall

manufacturershadbeengiventwoyearstoprepareforthebiddingprocess.

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CALTRANSEMAILINTERVIEW.27FEBRUARY2007.

WhenanRFPresultsinonlyonecompetitivebid,whatelseispossibleotherthantheNCBProcess?

Answer:usuallytheCaltransengineerswillhavetoredotheplansandspec(assuminganengineeringjob)andre‐advertiseagain.

Whatothermethodshaveyoutried(forotherprojects)tocutdownonthelengthyback‐and‐forth(liketheone

thathappenedwithARDVAC)?

Answer:ItriedasimilarprocessthroughUCDavis,theirprocurementprocessgaveusmoreflexibilityandweacquiredtwoprototypemachinesanddidtechnologytransfertothemanufactureallatonce.

Aretherisksoflawsuitssignificantwhenhavingonebid?

Answer:Yes,othercompaniesmayfeelthespecsmaynothaveallowedthemtobidandcouldfilealawsuit,butmyexperiencehasshownthattheriskofgettingthewrongcompanyincreases.

OtherthanthelengthyapprovalprocessbytheSecretaryofBusiness,Housing,andTrans.,wherearetheother

bottlenecksingettingtheprojectapproved?

Answer:State‐ownedintellectualpropertyhasbecomeadelay,suchasinthecaseoftheBalsibeam.Theother

delayisCaltransnewproductacceptanceprocess,whichisverylengthy,veryslowwithalotoflayersredtapeandnotresourcedproperlywithinCaltrans.Oneofthebigproblemsmaybethefactthattheseprojectsarenotvery

"high‐priority"forthesecretarysincetheofficehasotherpressingmatters.

Whatwouldyoursenseofthevolumeoftransactionsbe?Inotherwords,roughlyhowmanyofthesegreatinnovations'fallthroughthecracks'becauseofthehold‐upintheNCBprocess?

Answer:Itishardtotellfrommysmallperspective.Ihaveexperiencewithtwobiginnovations,onewasaportable

laserremovalofgraffiticontractthatdiedafterAgencyrejecteditandthelongdelayoftheARDVACcontract.

CALTRANSEMAILINTERVIEW.15MARCH2007.

Imeantthelackofbids,thelackofhavingvariouscompaniesabletoprovideyouwithanewwidget,increasesthechancesofsomethinggoingwrong.TheARDVACorderwasdelayedbecausetheonlyonecompanyhadtheexclusiverighttomanufactureit,CleanEarthInc.,declaredChapter11,intheRemoteControlFront‐endloader

project,UnmannedSolutionscloseddown.IntheIntelligentHerbicideApplicatorSystem(IHAS)project,UConlytalkedtoonecompanytomanufacturetheIHAS,thatcompanydidnotpassourauditreviewanddefaulted,etc.

etc.

Myapologiesforthedelayingettingbacktoyou,butwetriedfindingmoredocumentationonotherprojectsandwerenotsuccessful.

PERSONALINTERVIEW,DRIEMPLOYEE.12OCTOBER2006

Inthisinterview,wecollectedvariousthoughtsonthechallengesofdeployingnewtechnologieswithinCaltrans.

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• PurchasesattheDivisionofResearchandInnovation(DRI)aretypicallysmallandperformedusingstatecreditcards.

• Materialspurchasedareusuallyforresearchandareofsmallquantities.

• HardcopiesofresearchreportsaregiventoDRI’s“customers,”orotherdivisionswithinCaltrans.

• DRIemployeesmeetpotentialvendorsatconferencesandnetworkingcommences;vendorsthengivepresentationsoftheirproductstootherDRIemployees.Iftheirproductappearsfeasibledowntheline,

theyarecontactedfortrialtesting.

• Fieldoperationstestingisconductedeveryfiveorsixyearswithfederalfunds.Thesetestsresultin

promisingproductsthatarenotpursued.

• Newtechnologyisdefinitelypresent,butthereneedstobealeadertotakeinitiativetobringthistechnologytopractice.

• Thereisaneedforaparadigmshifttoviewnewtechnologyaspositive,becauseveteranemployeesmay

notbecomfortablewithnewtechnologiesandmanagersmaybereluctanttorisktheirlimitedbudgets.

• Allocatingfundsforthesenewproductsmayhelpresolvethisissue.

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APPENDIXD:PRIMERONINNOVATIONTYPESANDCATEGORIES

Historically,theconceptofinnovationcategorieshasbeenstudiedmanytimesoverthelast75years.Viewpoints

aredocumentedheretoserveasarepresentativesampleforinnovationliterature.Inparticular,weaddressthefollowingviewpointshere:

1. Acceptedterminology:Continuous,Discontinuous,Radical,andIncremental.

2. TechnologyMaturationViewpoint–ThreedominantphasesinindustrystructureareProductInnovation,

ProcessInnovation,andFinancialDomination.(Utterback)

3. NewProductCategoryViewpointwithDisruptiveandSustainingTechnologyandBusinessmodels(Christensen)

TERMINOLOGY

Besidestermsusedintheabovereferences,someinnovationsareconsidered“continuous”ordiscontinuousinamarketadoptionsensedependingonthedifficultyofnewuserstoadopttheinnovation.“Continuous”meansthat

usersdonothavesignificantbarrierssuchaslearninghowtousethenewproduct.ColorTVvs.blackandwhiteisacontinuousinnovation.Anothercommontermusedinliteratureisincrementalvs.radicaltocharacterizethe

technicalmethodthatisemployed.Anewcompletelynewtechnologywouldbeconsidered“radical.”

TECHNOLOGYMATURATIONVIEWPOINT

AstudybyUtterbackin1987alsoillustratedinSteele,ManagingTechnology,explainsthatindustriestendtodevelopandmatureinthreephases.Thefirstphaseisdominatedbyproductanddesigninnovationwherealarge

numberofcompetingfirmsofferproductvariationsinapotentialnewmarket.Throughaprocessofmarketselection,manygooutofbusinessorareacquiredbycompetitors,resultinginaconsolidationoftheindustry.As

theindustrybeginstoconsolidate,asecondphaseofprocessinnovationbeginsbecomedominantandfirmswithabilitytomanufacturequalitymoreefficientlydominate.Inthefinalstage,thosefirmsthatcancompetebasedon

economiesofscaleandcapitalintensitydominatetheindustry.

Figure5–IndustryMaturationofProductandModelDiversity

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Figure6‐IndustryReferences(Credit:JamesM.Utterback)

Figure7‐TechnologyMaturation

NEWPRODUCTDEVELOPMENT:DISRUPTIVEVS.SUSTAINING(CHRISTENSEN)

FromInnovator’sDilemmaandInnovator’sSolution,Christensenfindsthatexistingfirmsoftenfailtoinnovateandkeepmarketleadsnotbecauseoftheirtechnicalinability,butbecauseoforganizationandstructuraldynamics

withinthefirm.Heshowsthatexistingfirmsaregenerallytheleaderatintroducingsustainingtechnologieswhichincreasetheperformanceofproductsincapabilitiesthatalreadyexisted,suchas,increasingtheaccesstimeor

densityofaharddiskdrive.Howevernewvaluessuchassmallersize,improvedeaseofuse,andincreasedmobility,areoftenintroducedsuccessfullybynewentrantseventhoughtheproductisnotbetterinallaspects.In

hisexample,theintroductionofaharddiskdrivesizedappropriatelytoallowthecreationofnotebookcomputer,wasmoreexpensivepermegabyte,slowerinaccesstime,andcouldnotbesoldintotheexistingmarketfor

desktopcomputing.Christensenexplainsthattheoldtechnologycapabilityincreasesataratefasterthanthemarketrequiresresultinginover‐servedmarketsandcommoditization,whilenewentrantsfinddisruptive

markets.Aftersometimetheproductqualityimprovestoapointwhereithasbecomesuitablefortheexistingmainstreammarketanddefeatsthepastmarketleader.

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Figure8‐TheImpactofSustainingandDisruptiveTechnologicalChange

Christensenalsoprovidedtwosubcategoriesfordisruption:1)Lowenddisruption,wherealowercostbusinessmodelisusedtoaddressover‐servedcustomers(Wal‐Martvs.DepartmentStores),and2)New‐MarketDisruption,

wherenewmarketsorcustomerswilluseaproductthatwaspreviouslynotusefultothem.Forexample,cellphones,Ink‐jetprinters,Canondesktopcopiesdigitalcamerashaveallchangethebasisoncompetitionby

introducingmobility,easeofuse,etc,tocreatenewmarkets.

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