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Innovation and procurement: tracking down the Holy Grail

Procurement offers a means to channel billions to the UK’s most innovative businesses. Stian Westlake, executive director of UK innovation foundation, Nesta, explains not only why it is critical, but how to make it happen.

The debate about Plan A or Plan B rages now as fiercely as it did in 2008. But the prospects for economic recovery in the UK look uncertain at best. Nesta’s recent report ‘Plan I’ – for innovation-led growth – argues that if we want sustainable growth, the government needs to put in place policies to foster innovation.

One important but neglected tool at the government’s disposal is public procurement. Used effectively, this can channel unprecedented amounts of investment into the UK’s innovative, high-growth businesses at no cost to the taxpayer.

A £24bn innovation shortfall

Businesses in the UK are investing far less in innovation than they used to. That means less R&D, less investment in designing new products, less training of staff to deliver new services: less of the investment that our businesses need to put them ahead of the competition both at home and abroad. The shortfall in 2011 was as much as £24bn, four or five times what the UK government spends on scientific and technological research in a year. It is not government’s job to fill this hole entirely. However, through smart use of the £220bn procurement budget, government can help encourage business investment.

It is often argued that just a small proportion of the procurement budget would make a big difference in the quest to innovative businesses.

If 1% of government procurement (approximately £2.2 billion) was spent with business, encouraging them to innovate, this would still be ten times the total amount currently invested by venture capitalists in the UK. This is because in 2011, total early stage financing stood at £224m.

Many investors argue that a contract is better for a company than an investment in any case – meeting the needs of early customers keeps businesses on their toes and helps them refine their products. Great innovative businesses like Autonomy – the rapid growth UK software company sold for upwards of £6bn to Hewlett- Packard – identified some of their most successful products by doing bespoke work for clients and hitting upon things that worked – the so-called ‘soft company’ model. In Autonomy’s case venture capital investment came much later.

A dividend for government

Innovation also delivers a dividend for government. We know that we face a long-term and intractable productivity problem in our public services.

The public sector needs to deliver better services for less money. The Office for National Statistics’ landmark study of public sector productivity showed it fell throughout the last decade, even while productivity in the rest of the economy was rising faster than in any rich country. Innovation holds the key to this. Nesta’s Innovation Index showed that innovation has been responsible for two-thirds of productivity growth in the UK in the last 20 years. Doing more with less inevitably means innovating.

The appeal of using procurement to encourage innovation is that it is involves no direct extra cost to the tax-payer. But there are rules. The most important is to know when to procure for innovation and when other concerns – such as good old-fashioned value for money – should take precedence.

Adding innovation as a criterion to each and every contract, or trying to make officials balance innovation against an ever-growing roster of metrics is a recipe for poor value for money. The history of procurement is littered with examples of expensive, unreliable products purchased instead of reliable, cheap ones in a mistaken effort to be innovative.

Lessons from the USA

The way to get around this is to identify a relatively small number of projects where government needs new approaches. These will often involve wicked issues, or new problems that a department is unused to dealing with. Potential suppliers can then be invited to propose solutions to the problem. To see how this can work, look to the United States: its Small Business Innovation Research (SBIR) programme channels around $2.5bn a year into innovative small businesses to help meet the American government’s emerging requirements.

SBIR contests look more like prizes than procurements, and involve several rounds. It has been running since the late 1970s, and has backed scores of businesses that went on to become world beaters, including 3G leaders Qualcomm and biotech firms Amgen and Genzyme.

The UK has since 2002 had a similar scheme – the Small Business Research Initiative. But it remains small-scale. With a few notable exceptions, departments have been reluctant to use it, preferring to take the safe option of traditional procurement methods. This is a great shame. If we want to bring more innovative ideas into government, and if we want to see procurement used to drive innovation, the UK’s Small Business Research Initiative should be many times bigger. The other second rule of innovation procurement is openness. Procuring interesting ideas from the outside world requires awareness of new developments which can be hard to obtain from within Whitehall. Once again, we can learn from the US. The US Defense Advanced Research Projects Agency (DARPA) helped develop the internet, the graphical user interface, the Global Positioning System (GPS) and self-driving cars.

DARPA is a remarkable organisation not only for its technical expertise but also for its porosity; its project managers typically come from outside the US Government and rarely stay at DARPA for more than five years. Rapid exchange between DARPA, US universities and US businesses helps keep the organisation at the centre of networks of innovation, and makes it better at identifying useful innovations for the US defence establishment.

An ‘Innovation Engine’

All of this points to two clear lessons.

First of all, if we want more innovation in the UK’s economy, government procurement has an important role to play – channelling 1% of government procurement to innovation should be our goal.

Second, to accomplish this we need to use the right techniques and the right institutions. A significant expansion of programmes like the UK’s Small Business Research Initiative, supported by an effective multidisciplinary organisation with experience of the world beyond government, will provide a genuine ‘Innovation Engine’ for British businesses and a vital injection of innovation and productivity into our public services.

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