House of Lords - Public procurement as a tool to stimulate innovation

Public procurement as a tool to stimulate innovation - Science and Technology Committee Contents

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 processes.

65. The Government acknowledge that many of these barriers exist but say less about what they are doing to tackle them.[81]

Lack of capability, expertise and incentives

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 us:

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".[83]

68. The TSB stressed the importance of the government acting as an "intelligent customer":

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".[85]

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".[86] 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".[87] 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".[88] 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".[89]

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 benefit".[90] TfL 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 savings targets".[91]

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".[92]

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 customer".

Risk aversion

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:

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 procurers".[94]

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".[95]

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".[96] 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 reconsidered.[97]

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 solution".[98] With 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".[99]

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".[100]

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 approach:

101

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 departments;

(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"[102] 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.[103] 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;[104] 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.[105] 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)".[106] 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".[107] 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.[108]

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".[109]

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".[110] 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 objectives.

88. On the basis of the evidence which we have received, we recommend that departments, through the CSA, should either:

· 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 processes

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 a reference".[111] 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".[112] 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".[113]

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".[114]

92. In Francis Maude's view, this approach, together with a "decisive move towards procurement and commissioning based on outcomes and outputs",[115] would encourage and enable innovation to take place more effectively. Other witnesses, such as the TSB, also stressed the significance of outcome-based specification.[116]

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 £13bn—out 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".[117]

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

82 PP 16. Back

83 PP 02. Back

84 PP 21. Back

85 Evaluation of the Local Government Procurement Agenda, ODPM (2005).. Back

86 PP 21. Back

87 Q 36. Back

88 Ibid. Back

89 Commissioning and competition in the public sector, OFT (March 2011). Back

90 Ibid. Back

91 PP 25. Back

92 PP 01. Back