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01.06.12

'Innovation needs variety'

Source: Public Sector Executive May/June 12

The Manchester Institute of Innovation Research, at the University of Manchester, has been investigating ways that public sector procurement policies can foster innovation, creating positive knock-on benefits for both the supplier and customer. The work was led by Professor Jakob Edler, the institute’s executive director. Adam Hewitt reports.

The relationship between efficiency and innovation is a complex question for public sector procurement managers to contemplate. Innovations by suppliers can result in better outcomes, and long-term efficiencies, but with budget pressures as they are, it is often shortterm efficiencies and cost pressures that count when they are awarding contracts.

Research by The Manchester Institute of Innovation Research (MIoIR) suggests that this may be the wrong approach, and that procuring for innovation unlocks untold benefits, if approached in the right way.

A report, ‘Procurement and Innovation: Underpinning the debate’,1 was produced as part of the UNDERPINN initiative (Understanding Public Procurement of Innovation), a two-year academic project funded by the ESRC, TSB, BIS and NESTA, and led by Professors Jakob Edler and Luke Georghiou. A conference discussing the issues was held in Manchester in late March.

The paper was based on a survey, with a sample of 800 responding firms and third sector organisations who supply to the central level of government, local government and to the NHS within England, limited to those who did at least £25,000 worth of business with the public sector in 2010.

The report says: “A first major message is that public procurement does indeed spur innovation. Of the total organisations that have innovated in the last three years, 67% indicate that bidding for or delivering contracts to public sector clients has had some impact on their innovation activity. 25% of the innovating organisations claim that all of their innovations have been the result of public procurement. Furthermore, 56% of the sample reported that they won a public sector contract in the last three years because of innovation.”

Many suppliers who innovated in some way in supplying to the public sector found that further benefits arose from this, according to the research – such as it helping them win more public and private sector work.

But there are definite benefits to the public sector as customer, too. As the report says: “Procurement of innovative products and services makes public services more effective and more efficient, and thus society more innovative and creative. While this, at first sight, might be connected to higher search and purchasing cost, it is still compatible with achieving efficiency savings since one needs to consider life-cycle costing and value for money (long term cost-benefit) as the basis of public purchasing decisions.

“Secondly, public demand for innovation incentivises industry to invest in innovation, with potentially substantial spill-over effects. This can happen in two ways: Public procurement can trigger innovations by formulating a new need, and set in motion new innovation cycles. It can also be responsive to novel products and services produced by industry and thus send a signal to industry that the UK market is a location in which innovative goods and services can be introduced and diffused.”

Buyers have a vital input into the innovation activities of the supplier, the research suggests – but buyers don’t always make the best use of this fact.

Suppliers credited public sector buyers for driving innovation, more than their own R&D departments, private sector customers, competitors, or their own suppliers. But, as the report says: “Those firms that supply to public and private customers roughly in equal measure – and thus can best compare – assess public buyers to be less innovation friendly than private customers, i.e. to be less open to new ideas, less well placed to buy an innovation, less risk taking and less likely to demand innovation in the first place.”

There are well-rehearsed reasons for this conservatism among public sector procurers – a narrow definition of value-for-money, incentives that punish failure far more than they reward success, and sometimes cultural values along the lines of ‘that’s what we’ve always done’.

Chris Chant, who was until his recent retirement a senior Cabinet Office civil servant, and who PSE hears from on page 33, has urged public sector managers to ‘say it as they see it’. He told website The Register recently: “People need to believe in their own capabilities and view of things and say it as they see it…We shouldn’t be frightened about who will think [what] or who will say what or ‘what will happen to me if I say it as it is’. That’s [a] lesson we all need to learn.”

But unfortunately such attitudes remain endemic, and the UNDERPINN research shows clearly that the effects – such as a riskaverse emphasis on price over long-term value – are a real barrier to procuring innovation: “Overwhelmingly, it is the emphasis on price rather than quality that firms complain most about; 50% of the sample see this as a very significant barrier to innovation.

“A related, second most important bundle of barriers has to do with restraining variety: the disallowance of variants and too prescriptive specifications hinder innovation, as does the lack of openness to unsolicited ideas which a majority of respondents report as well. This is linked to a perceived risk aversion, poor risk management and lack of capabilities (market and technological knowledge, tapping into supply chains) with procurers. Further statistical analysis reveals that the market knowledge of procurers is linked to the likelihood of innovation occurring.

“Supporting the findings above, suppliers see a lack of interaction with the procuring body as a key hurdle to innovation. This is true despite the fact that our sample is characterised by very long lasting relationships. This indicates that long lasting buyer-supplier relationships in themselves do not support innovation activity, but rather that it is fostered by accompanying interaction and communication of needs.

“A general lack of demand for innovation is an obstacle for two thirds of the companies, and our anecdotal and interview based evidence suggests that this is supported by the current cost and efficiency based discourse in the public sector.”

If public sector buyers do want to procure for innovation, the report makes a number of key suggestions: for example, by making this clear early in the process and by including innovation requirements in the award criteria, and through the use of intelligent or ‘smart’ procurement practices, such as outcome specifications, full life-cycle costing, and incentive contracts.

Some common procurement processes are much less helpful; e-auctions, for example, “appear to be an obstacle to innovation”. This is no doubt because of the emphasis on price competition alone. Overly complex procurement processes, offering little useful feedback, also harm innovation. The report says: “Innovation needs variety; it needs a signal that variety is allowed and can be rewarded.”

But it adds: “Much of this innovation is hidden, in service provision or in processes that might not be apparent to the user or citizen. To supply innovation to public bodies has a catalytical effect; it triggers further innovation and economic effect in the private and the public sector.

“Thus, there is a clear need that public procurement processes are understood more broadly, that they are extended much more systematically towards pre-procurement activities. This involves that public bodies communicate and signal future innovation needs as early as possible and are – more generally - more explicit about innovation needs. Further, procurement should implement much broader what innovation procurement handbooks suggest for years, i.e. enable variety, focus on outcome and whole life-cycle costing. The trend towards more standardisation, framework contracts and efficiency oriented tender process thus represents a clear challenge for the innovation agenda.”

Using limited budgets in an intelligent way

Professor Edler told PSE: “Our research has shown that the public sector indeed can be a source for innovation. Unfortunately, there are a whole range of barriers to fully exploit the potential.

“What we assumed from anecdotal evidence we now can say on a much more robust basis. The most important consequence out of these findings is that the public sector must not be pushed into a corner of low cost purchase for reasons of efficiency. Instead, incentives and capabilities in the public sector commissioning and purchasing must be further developed to use limited public budgets in an intelligent way that encourages and allows firms to innovate and use the public sector as a springboard for innovation and competitiveness.

“Efficiency and innovation must not contradict, but reinforce each other.”

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