Chapter 4: Barriers to innovation|
64. In this chapter we consider the barriers
which generally inhibit the promotion of innovation through public
procurement and explore possible solutions. They can be grouped
into the following broad categories:
· lack of capability, expertise and incentives;
· risk aversion;
· need for more effective engagement between
procurers, suppliers and academia; and
· overly prescriptive and burdensome procurement
65. The Government acknowledge that many of these
barriers exist but say less about what they are doing to tackle
Lack of capability, expertise
LACK OF CAPABILITY AND EXPERTISE
66. A number of witnesses commented on the lack
of capability and expertise in procurement departments in public
sector organisations and at the local level in particular. The
Manchester Institute of Innovation Research, for example, told
"Procurement has a low profile in many public
sector organisations, particularly at the local government level,
limiting the ability of procurers to make strategic decisions,
engage with the market and ensure compliance with guidelines and
strategic decisions within their organisations. Decentralised
procurement settings are characteristic of many parts of the public
sector, meaning that many procurement decisions are taken without
involvement or even knowledge of the procurement professionals.
Besides a poor use of procurement skills which could be employed
to promote innovation, additional shortcomings include poor internal
communication, lack of compliance and inconsistent standards.
In many parts of the public sector, we cannot speak of reliable
customers, let alone intelligent customers."
67. The term "intelligent customer"
refers to the combined capability of procurers and commissioners
to understand the business and needs of the organisation and to
articulate those needs to suppliers competently with a view to
procuring the best solution. As Lord Bhattacharyya put it, "to
be an 'intelligent customer' you have to understand the technology
and potential added value opportunities as well as effective procurement
processes and financial rigour".
68. The TSB stressed the importance of the government
acting as an "intelligent customer":
"When government behaves as an intelligent
lead customer, engaging with business in the pre-commercial stages
of product development, it can not only generate more effective
and efficient solutions to its own issues, but can also support
economic growth, working with business to develop globally competitive
products and services. In an ideal situation, Government acting
as an intelligent lead customer, would engage with business, widely
articulating unmet and emerging needs, specifying challenges at
a system level and focusing on desired outcomes rather than specific
products. Government would also be willing and able to engage
in the product creation process providing input, guidance, test
and validation of the solution and ultimately be part of the market,
or an enabler of the market."
69. A survey report of the local government procurement
agenda published by the Office of the Deputy Minister in 2005
found that formal procurement training remained rare for both
corporate and departmental procurement staff, and that "just
50% of authorities [had] any staff with the most commonly held
qualification, the Chartered Institute of Purchasing and Supply
... graduate diploma".
70. The TSB commented that "public sector
organisations ... rarely have the in-house expertise to be able
to keep abreast of the latest technologies and innovations or
reach beyond the normal supplier base".
Professor Georghiou observed that "even among the professional
community their expertise tended to be honed in the art of procurement,
on recent developments such as e-procurement and so on, and not
necessarily in how to handle innovation".
However, he also distinguished between the expertise necessary
for procurement professionals and the capability of commissioners
because, as he put it, "the process starts before the procurement
professionals come in. It starts with those who are commissioning
the innovations, and their expertise and involvement is important
as well". A
recent report by the Office of Fair Trading (OFT) stated that
it was "vital" that "commissioners and procurers
in the public sector are competent and strategic buyers, fully
aware of market dynamics".
LACK OF INCENTIVES
71. In addition to the lack of capability and
expertise, a lack of incentives to take risks and seek innovative
solution is a barrier. The TSB argued that "greater recognition
and incentives are required that reward investment for longer-term
claimed that "there is currently very little incentive for
the public sector to use procurement as a means to stimulate innovation.
Public sector buyers are not rewarded for procuring innovation.
Generally, the focus is upon savings or doing more with less.
Innovation can be a way of achieving both of these goals, but
this is often not explicit and there is conflict with short-term
72. But Dr Charles Wessner of the US National
Academy of Science warned that "changing the incentives in
procurement to accept greater risk is more difficult than is commonly
believed ... career incentives for procurement officers tend to
support the selection of established products rather than promising
prototypes whose production at scale, timely delivery, and quality
assurance may be problematic".
73. The Government's capacity to act as an
"intelligent customer" is limited by the level of procurement
skills and knowledge in departments and the absence of incentives
to procure innovative solutions. Providing training courses is
not good enough. Departments need to recruit procurement staff
with demonstrable expertise and experience. We invite the Government
to set out what further steps they intend to take to take to bring
about a marked change in their capacity to act as an "intelligent
74. There is a widely-held view that officials
working in government departments are risk averse; and evidence
suggests that there is a perception within government departments,
including the DfT, that choosing an innovative, as opposed to
a tried and tested, solution is risky. For this reason, there
is an inevitable tendency within government departments against
adopting innovative solutions.
75. Lord Bhattacharya observed:
"There is ... a public sector 'risk aversion'
issue to deal with. Civil servants do not wish to be seen to 'gamble'
on innovation, and so cannot anticipate future developments as
well as those in the private sector. There is a need for culture
change that supports those who make breakthrough changes, not
financially but through career/recognition."
76. Engineering the Future made a similar point:
"specific actions are required to increase technical knowledge
in the civil service and to reduce risk aversion amongst government
77. Iain Gray of the TSB thought that the problem
was getting worse: "I think that one of the issues around
the professionalism and skills side of it is the whole issue of
the understanding of risk and aversion to risk. I think in the
climate that we operate in at the moment there is an increasing
aversion to risk".
78. It is not only external observers who recognise
a culture of risk aversion in the public sector. The view is shared
by officials and ministers as well. Martin Rowark, Head of Procurement
at Crossrail, for example, put the question "when you are
trying to buy a programme of the scale of Crossrail do you want
innovation at every turn?" His answer: " ... not necessarily,
because with innovation you do import risk".
TfL identified risk and risk aversion as factors which inhibit
innovation both within the transport industry and within the public
sector more generally and proposed that the traditional approach
whereby risk is allocated heavily to the supply side should be
79. Francis Maude MP, the Minister, referred
to "a risk-averse culture" as a result of which there
was a tendency for potential bidders to have to show that they
had a track record of providing the product or service being procured.
He told us that "unless you have shown that you have done
almost exactly this kind of thing before in the public sector
you don't even get on to the bidding list", thereby excluding
"new suppliers who do not have a track record but who nonetheless
may be the source of a very innovative, may be groundbreaking
regard to the DfT specifically, Mike Penning MP, Parliamentary
Under-Secretary of State at the DfT, recognised risk aversion
as a problem within the department and conceded that "it
has been very difficult to establish how we get away from the
risk-averse attitude" because "it is much simpler to
just do what you have always done before".
DEALING WITH RISK AVERSION
80. Some witnesses stressed the importance of
sharing the risks and rewards of procurement activities and the
need to incentivise those working in procurement to take appropriate
risks. In the example in paragraph 51 above from the HA, within
the Area 2 EMAC contract, the risks and rewards of the procurement
were shared by both the supplier and the procuring body, providing
incentives to the supplier to find innovative solutions, which
resulted in significant improvements in the service provided.
Balfour Beatty told us that "the majority of our major infrastructure
projects incorporate incentives in the form of pain/gain share
arrangements in the contract".
81. Ginny Clarke from the HA also gave us an
example of how a specific fund can help to incentivise the consideration
of innovation and to spread the risks and rewards of an innovative
"We have a research and development budget
from the department, we use that to run trials effectively. So
we can offer the thing they [suppliers] can't do. They can't trial
it on the road without us being involved, so our money usually
goes into offering the trial opportunities for those sorts of
things. That evidence is then shared within the industry; that
is the rule we have to have. If we're going to do it with one
supplier, we need to share and they have to buy into sharing that
knowledge. Then effectively that knowledge is passed back out
into the supply chain and then it's for the commercial activity
to take over."
82. Ministers recognise that risk aversion
inhibits both the commissioning, and offering, of innovative solutions,
but it is not clear how this recognition is being translated into
action. The Government should identify what steps they will take:
(a) to offset risk aversion within government
(b) to ensure that the balance between
risks and rewards in procurement contracts is properly managed
and shared to encourage innovation where it is warranted (for
example having an element of the procurement budget set aside
for innovation); and
(c) to show how they intend to demonstrate
the success of this policy and the timeframe in which they anticipate
achieving that success.
Effective engagement between
procurers, suppliers and academia
83. According to the Design Council, "the
development of relationships between suppliers, clients and stakeholders
has been acknowledged as a key driver of innovation"
because early engagement and dialogue with potential and current
suppliers could help to improve the design of procurement specifications
and procurement outcomes, enabling Government to act as an intelligent
customer. In their
submission, Professor Georghiou, Professor Edler and Dr Uyarra
made a similar point: "industry needs a clear communication
of needs" from government to enable suppliers to plan for
procurements and to come forward with more innovative solutions;
and, on the supply side, industry and academics needed to communicate
how advances in technologies could be of value to procurement
professionals now and in the future.
They also referred to the need for "the public sector [to]
much more systematically collect and allow for pro-active unsolicited
proposals, i.e. firms that approach the public sector with an
innovative idea (one example being the 'right to bid' in DWP)".
This idea was supported by Colin Cram and the TSB, who suggested
that the NHS National Innovation Centre or the MoD Centre for
Defence Enterprise could be built on and extended to the rest
of the public sector so that "suppliers with innovative ideas
could have them assessed and if considered suitable could be promoted
in the public sector".
The TSB suggests that "similar structures in other parts
of central government might remove some of the fragmentation and
lack of ownership that exists in some areas" and that the
TSB could play a larger role in such activities across government.
84. The Government have made some effort to improve
communication with key suppliers. Francis Maude MP has been leading
a programme of negotiation with government suppliers to develop
a Memorandum of Understanding and, although the primary objective
has been to save money, the Government argue that the resulting
improvement in relationships "will permit far more open dialogue
about innovative approaches than have happened before".
85. As regards the DfT in particular, its IPP
sets out various ways in which the department engages with suppliers
at departmental level. These include an annual Commercial Stakeholders
Event with top suppliers which is intended to encourage early
supplier engagement and allows suppliers an opportunity to "suggest
improvements and innovation".
This is accompanied by more detailed engagements between different
directorates within DfT and stakeholders of specific markets.
In addition, the DfT is a partner in two Innovation Platforms
run by the TSB, to develop low carbon vehicles and intelligent
transport systems and services. The platforms bring together representatives
of policy, business, government procurement and research and resource
perspectives to generate innovative solutions to meet policy objectives.
86. Notwithstanding the example above from DfT,
we are concerned by the apparent lack of connectivity between
industry, government and the academic community and, in particular,
the lack of effort to identify developments in science and technology
of relevance to departmental procurement needs.
87. We recommend that CSAs should have responsibility
for encouraging engagement with industry (including both suppliers
and potential suppliers) and academic communities with a view
to promoting the procurement of innovative solutions. In particular,
CSAs should ensure that mechanisms are in place to develop a stronger
connection between the department and the science base so that
procurement officials are better informed about the availability
of innovative ideas. This role should be incorporated into departmental
88. On the basis of the evidence which we
have received, we recommend that departments, through the CSA,
· set up a mechanism similar to the MoD's
Centre for Defence Enterprise or the NHS National Innovation Centre,
to encourage the submission of proactive unsolicited proposals
from industry or academia; or
· ask the TSB to play a more active role
in such activities within their departments.
Prescriptive and burdensome procurement
89. We received a range of evidence about the
complexity of government procurement processes. Colin Cram,
for example, suggested that "new and innovative suppliers
are deterred by unnecessarily complex tendering procedures, anti-innovative
specifications and can be discriminated against by not having
done previous business in the public sector that can be used as
This comment reflects those made by Ministers when describing
the risk adverse culture of the civil service (see paragraph 79
above) where the tried and tested is given greater priority over
the innovative. The TSB suggested that "the bid process can
be complex and time consuming especially for SMEs and the selection
criteria and due diligence can often count against SMEs".
We discuss SMEs further in Chapter 5.
90. In March 2011, the OFT reported that "over-complex
and burdensome procurement policies and processes can disadvantage
suppliers, or suppliers with less experience of supplying to the
public sector. ... This can dampen competition in the market and
potentially reduce innovation".
91. Francis Maude MP agreed that the procurement
process was overly burdensome: "the very process-heavy approach
to procurement has resulted in massively highly specified tender
documents with prequalification that has been very demanding".
He explained that the newly formed ERG, based in the CO, was focusing
on this issue with a view to developing "an approach to procurement
that is much simpler, where the overwhelming objective is to procure
effectively and with an emphasis on value for money".
92. In Francis Maude's view, this approach, together
with a "decisive move towards procurement and commissioning
based on outcomes and outputs",
would encourage and enable innovation to take place more effectively.
Other witnesses, such as the TSB, also stressed the significance
of outcome-based specification.
93. Simplifying the procurement process must
be a helpful development, and we are encouraged that the ERG has
been charged with this task. Colin Cram, however, put the impact
of the ERG in perspective. He noted that the ERG was concerned
"with central government only and thus the spend being addressed
amounts to £13bnout of a total public sector procurement
spend of over £200bn a year. The 25% savings target would
thus equate to £2.6bn if achieved. However, this would represent
a saving of little more than 1% of public sector purchase spend,
which is well short of what is needed overall".
94. We note that the ERG is charged with simplifying
the procurement process and we welcome this development. We invite
the Government to explain when this simplification will be achieved,
by what criteria they will judge its effectiveness and whether
it will impact, by example, other areas of public sector procurement.
81 PP 18. Back
PP 16. Back
PP 02. Back
PP 21. Back
Evaluation of the Local Government Procurement Agenda,
ODPM (2005).. Back
PP 21. Back
Q 36. Back
Commissioning and competition in the public sector, OFT
(March 2011). Back
PP 25. Back
PP 01. Back
PP 02. Back
PP 24. Back
Q 54. Back
Q 151. Back
PP 25. Back
Q 178. Back
Q 183. Back
PP 34. Back
Q 33. Back
PP 29. Back
PP 19, PP 29, PP 14, PP 16, PP 25. Back
PP 16, PP 30. Back
PP 13, PP 25. Back
PP 16. Back
PP 31. Back
PP 21. Back
PP 18. Back
Innovation Procurement Plan,DfT, op cit. Back
PP 31. Back
PP 21. Back
Commissioning and competition in the public sector, OFT,
Q 176. Back
PP 21. Back
PP 35. Back