Innovative procurement – why, what and how?

PREST, Manchester Business School, University of Manchester

Supply and Demand

Imagine trying to cut a piece of paper with just one blade of a pair of scissors. It’s near impossible. Yet that is what we try to do with innovation policy. We rely on supply side measures to push technology. We neglect the critical role that demand and markets play in pulling innovation through. We need to use both blades of the scissors.

Two Reports in Policy Domain

http://ec.europa.eu/invest-in-research/action/2006_ahogroup_en.htm

http://www.nesta.org.uk/informing/provocations/index.aspx

Importance of markets for innovation

• Central position of market friendly to innovation– EU 2005 Survey of R&D Trends shows:

• Market demand for new products & services most important factor influencing level of R&D investment

• Market access is most important factor influencing mobile R&D investments

– Another study showing that changing customer needs were 3 times more important than other factors in creating innovation opportunities for firms

– Innovative small firms often fail to get a foothold in the market even if they have superior product ir service because no-one takes the risk to be first user and give them credibility and a reference list

Importance of innovation for public services

• Public services characterised or caricatured as bureaucratic, penalising failure but not rewarding risk-taking for success

• Yet many key innovations came from public sector – the internet, medical advances, social innovations such as e-voting, congestion charges…

• Public finances today cannot meet citizen’s expectations for services – the only way forward is to improve productivity

• There are real problems in– Capturing and spreading innovation– Providing incentives and rewards– Placing responsibility for innovation in government– Recognising that most service innovation comes from outside

and requires open minds and systematic scanning

What role for policy?

• Markets are often fragmented abnd prospective buyers are unable to coordinate or standardise their demand because they lack knowledge of future innovation

• Government can help to articulate and standardise demand

• In any case governments are major purchasers in many markets and also structure markets through regulation and other actions

Three types of procurement policy

• Public procurement of innovative goods and services

• Pre-commercial procurement

• Cooperative or catalytic procurement

Lead markets for innovations

• Customers willing to pay premium for particular characteristics of innovation

• High degree of customer intelligence– Anticipatory knowledge

• Compatible infrastructure• Scale sufficient to warrant costs of innovation

– Could still be microscale depending on innnovation

• Sufficiently generic to avoid to allow expansion into wider markets as costs fall and/or scale increases

• General conditions favourable to innovation– Regulatory structure, secure IPR etc

Procurement of innovative goods and services: the basic argument

• Public procurement potentially powerful instrument to drive research and innovation by providing ‘lead markets’ for new technologies

• Firms given incentive to spend money on research knowing that an informed customer is waiting for the resulting innovations and thus the risk of investing in R&D is reduced

• Competition shifted from sole focus on price to provision of solutions, which offer greatest advantage to users over whole life use of purchase

• Opens up opportunities to improve quality and productivity of public services through deployment of innovative goods and services

Pre-commercial procurement

• Defined as procurement of goods or services for which R&D still needs to be done– Technological risk shared between

procurers and potential suppliers– Procurement is an R&D service contract

with multi stage process from exploraryion & feasibility to prototyping field tests with first batches and finally commercialisation

– SImilar to US ARPA/DARPA approach

Cooperative or catalytic procurement

• Stimulation of private demand where government acts as launch customer for goods which are intended to be diffused more widely

• Market transformation programmes used for energy efficiency objectives – helping consumers to aggregate demand and initiate technology procurement process

Functional specification a core element

• Procurement for innovation means purchase of goods or services that do not yet exist or require new features, and hence require research and innovation to realise the requirement.

• Such goods or services should be specified by their functionality and not in a prescriptive manner that prevents innovation.

New opportunities opened up by new EU directives

Key changes

• Negotiated procedures and competitive dialogues, which can be used to structure procurement process in certain situations and to facilitate critical element of dialogue between customer and supplier;

• Technical dialogues in the preparation phase before tenders sought;

• Equal footing now given to technical specifications made in terms of functional or performance-based requirements, and to references made to standards;

• Options to submit variants• Conditions that allow transfer of intellectual property to

the supplier.

Intelligent customer

• Combination of knowledge (human capital), organisational arrangements and job structuring that facilitates the performance of procurement tasks

Some characteristics

• Be aware of trends in technology and markets across wide range of sectors.

• Have external networks to help specify functional, cost and quality requirements

• Able to design & manage flexible contracts• Access to testing capability to verify contract

performance• Capability to manage risk and uncertainty

OGCFramework

ProcurementLife-cycle

Gearing up for procurement

• Foresight and technology strategy

• Aggregating demand

• Intelligent customer and the procurement professional

Contract tendering and award

• Embed innovation in the tender

• Award criteria – whole life costs– Acquisition costs– Operating costs– Disposal costs

• MEAT – Most Economically Advantageous Tender

Contracting for innovation

• Treatment of intellectual property– Giving supplier ownership or rights so as to

allow use elsewhere

• Liability conditions

• Contract duration

Example: Procurement planning

• Electronic file management system procurement• In its 2003 Government declaration the Austrian government announced

an e-Government-Offensive to come to a modern and service-oriented public service. As part of this offensive the introduction of an electronic government file system was a high priority to allow for digital and on-line services. The electronic file enables a comprehensive e-government approach, as in most cases, e-government is electronic for the citizen, but physical (on paper) for the official files in ministries.

• This move was made possible because the Austrian government had already started preparing for a procurement procedure in 2001, when it had concluded that an electronic government file system would be a central part of e-government. Due to the timely preparation the government was able to conclude the installation within the timeline foreseen. The operational rollout of the system started in February 2004 with about 800 users and was finished at the beginning of 2005 with about 8.500 users in all Federal ministries.

Example 2

• Energy Saving Procurement• The Italian procurement agency CONSIP has adopted a strategy

to save energy in public administrations across the country via energy performance contracts. The basic idea is that the supplier of the energy services is motivated and encouraged to optimise energy consumption and resource management to improve his profitability by making him company responsible for the energy costs.

• One of the selected firms said the frame contract triggered innovations in two main operational areas: First, innovations for the modernisation of the plants in order to comply with the requirements of the contract and the national regulation. Second, technological innovations that improved further the performance of the plants and facilitated the monitoring and maintenance operations. These innovations include low temperature plants and incorporation of burn control, thermo - regulation control and wireless control features.

Key recommendations

• Challenge of coordination at centre of government– Purchasing ministries not the same as innovation

sponsoring ministries

• Need to identify and reinforce lead markets• Public procurement of innovative goods and

services best suited to areas of high public spending eg health, transport, information systems

• Also addressing challenge of improving public services

Key recommendations (2)

• Need to overcome risk aversion and to motivate procurement professionals

– Manage risk and uncertainty– Bring in innovative SMEs– Shift risk-reward spectrum with high profile awards for innovative

procurement– Collect proper statistics on demand-side innovation

• Use pre-commercial procurement for more local targetting of innovation support

• Use catalytic procurement as part of initiative towards more innovative society

• Create a culture that allows lead markets to form– Instilling the same desire for change and improvement and having best

among consumers of services– Instil sense that it is better to try and fail than to accept a slow cycle of

decline• Reward is a deeply rooted culture of innovation offering better goods

and services to citizens and a sound base for a productive economy