Chapter 5: Tightening the link between
innovation and procurement|
95. During the course of this inquiry a number
of issues emerged which impact on the link between innovation
and public procurement. Some involve fundamental aspects of the
Government's approach to governing, such as the current localism
and efficiency agendas. Others involve mechanisms such as the
SBRI and the FCP. We also consider the role of SMEs and the TSB.
96. Some witnesses expressed concern about the
diffuse character of procurement budgets. Professor Georghiou,
Professor Edler and Dr Uyarra told us that "the procurement
landscape in the UK is fragmented and complex. The OGC estimates
that there are over 40,000 points of procurement across the public
sector, with complex layers of policy, regulation, best practice
and partnerships, as well as a multitude of buying organisations
and consortia that seem to compete with each other over similar
geographies or service offerings".
Colin Cram argued that:
"Public sector procurement, despite improvement
and some excellent examples of procurement organisations, is fragmented
and expertise varies hugely. Its structures are a legacy of its
past and a prisoner of the way the public sector is structured.
Its structures are therefore inward and not outward looking. Overall,
it is not fit for the purpose of delivering value for money for
the tax-payer. Expecting it overall to deliver 'higher level'
objectives is wishful thinking, though some individual organisations
are able to do so."
97. Despite this diffusion, we received some
evidence of communication between national and local authorities.
Ginny Clarke gave us an example of how information is shared between
the HA and local authorities under the UK Roads Liaison Group:
"we use that forum for sharing knowledge, and I need to acknowledge,
some local authorities have given us ideas; it is not always about
the HA generating ideas. Looking at, particularly, challenges
on climate change, I think is very much all of us looking for
the best approach that can be identified however that is".
98. Professor Collins, however, was critical
of the current state of the dissemination of information to local
authorities and confusion over responsibilities for procurement
at different levels. In his experience, he said, local authorities
found it difficult to access information on the innovation potential
available to them. He told us: "I think we need to re-examine
the governance issue in a political sense ... of how we manage
the balance between national, regional, local and cities".
What was needed, he said, was "an open debate about how we
construct a different governance mechanism from the one we have
at the moment, which allows more innovation to be more likely
Birmingham Science City also commented on the absence of connectedness
between different levels of government:
"One obstacle comes from the organisation
of both national and local government into a series of stand-alone
silos. This means that it is difficult to develop a common approach
to procurement at the level of a city council or local authority
and this difficulty is replicated throughout Whitehall as well
as the European Commission. Overcoming this difficulty requires
a strong steer on behalf of the national government that public
procurement should be considered as a valuable tool to enhance
local economic development."
99. In this context we asked Francis Maude MP
how a commitment to innovation would be promulgated to all levels
of government and the public sector. We were surprised by his
answer. He said:
"Well, we can just say and promote it. We
will not seek to mandate how local government procures. ... We
will be quite mandatory about central government ... but we will
not seek to impose that on local government nor on the increasingly
mixed economy in the NHS."
100. The Government's laissez faire
approach to the dissemination of best practice in procurement
from central to local government appears to be overly optimistic.
We recommend that the Government should put in place a system
whereby examples of procurement of innovative solutions can be
shared across central and local government. The Government should
set out what steps, and when, they will take to implement a system
of dissemination and indicate how they will assess its effectiveness.
101. The relationship between innovation and
efficiency is complex. Some of the evidence we received suggested
they were in conflict with the effect that, in the current economic
climate, innovation would be driven out by the need to save money.
TfL said: "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
Sally Collier, the Director of Procurement Policy and Capability
at the CO, told us that "there is an absolute driverthere
has been since the new administrationon using public procurement
to seek value for money".
Professor Georghiou feared that the current demands for efficiency
and short-term cash savings "could take us to the lowest
common denominator and towards off-the-shelf goods rather than
102. The Manchester Institute of Innovation Research,
however, suggested that one of the justifications for using public
procurement to stimulate innovation was that the procurement of
innovative solutions made public services more effective and efficient.
They argued that "the current austerity budgets may at first
sight go against this rationale, as the entry cost of innovations
tend to be higher than when procuring an established product or
service" but this, they pointed out, would be to fail to
take appropriate account of "life-cycle costing and enhanced
benefit (long term cost-benefit)".
The Association of Independent Research and Technology Organisations
(AIRTO) advocated "more comprehensive economic comparisons
involving whole-life costing".
They suggested that "potential suppliers are competing on
immediate price against offers that do not embody the same innovation
and functionality and this price tends to be an over-riding consideration,
rather than whole-life cost".
103. When we asked Frances Maude MP about the
apparent tension between savings and innovation, he took a positive
view: "in order to drive the much better value for money
that is essential in the current fiscal climate we need to enlist
innovative solutions ... that is a kind of basic proposition that
we have to articulate clearly much more vividly than we have done
104. We welcome the Government's recognition
that efficiency and innovation can be complementary and that this
message should be communicated throughout the public sector, including
local government. Getting this message across is part of the wider
issue of a need for a root and branch cultural change in attitude
towards adopting innovative solutions to which we have already
referred in this report.
The role of SMEs and large companies
in stimulating innovation
105. "There are 4.7 million SMEs in the
United Kingdom, constituting 99.9% of all businesses; they employ
59% of the private sector workforce and are responsible for 52%
of business turnover."
Many witnesses commented on the positive contribution that SMEs
make to the economy and their important role in encouraging innovation.
Some witnesses however felt that the Government has placed too
great an emphasis on their role in stimulating innovation within
106. In November 2010 the Government published
a document entitled Backing Small Business
which outlined how they intend to promote small business to drive
competition and innovation in markets. The package of improvements
supports the Government's aspiration that 25% of government contracts
should be awarded to SMEs. The recently published Blueprint
and the first report of the Growth Review, The Plan for Growth
(see paragraph 21 above) include further commitments
to use procurement as a lever to support innovation in new technologies
by continuing investments through the SBRI and other measures.
107. Andrew Wolstenholme, Director of Innovation
and Strategic Capability at Balfour Beatty, told us that "many
of the great inventions have come from SMEs with only half a dozen
David Connell also emphasised the importance of SMEs in stimulating
innovation: "new markets are rarely large enough to attract
the ... attention [of large corporations]. I would point also
to data on patenting, job-creation, high technology employment
and exports from the United States Small Business Administration.
... This data shows that small firms play a pivotal role as agents
of innovation in the US".
108. Colin Cram, however, argued that "we
have had a preoccupation of SMEs in Government policies, wrongly
... we've focused on SMEs when we should have been focusing on
innovation, because SMEs are possibly one vehicle for innovation".
He added that "there is little evidence to support assumptions
that greater use of SMEs will lead to more innovation. The Government's
target for use of SMEs has probably been exceeded for many years,
but this has not necessarily brought the anticipated benefits".
Work commissioned by Colin Cram on local-level procurement showed
that that "the proportion of public sector contracts let
to SMEs is unlikely to be less than 30% ... it seems that this
percentage has remained reasonably stable for many years".
109. In 2008 the then Chancellor of the Exchequer
set up an advisory committee, led by Anne Glover, to report on
action needed to reduce barriers to SMEs when competing for public
sector contracts. In November 2008, the committee published its
report, Accelerating the SME economic engine: through transparent,
simple and strategic procurement (the "Glover Report").
Professor Georghiou, a member of the advisory committee, told
us that "there is not very strong evidence that SMEs are
more innovative than large firms, it needs to be said. I think
we cited some data in the Glover Report that they spend a smaller
proportion on their R&D, for example, but they do have a slightly
bigger percentage of new products and services in their turnover:
9% compared to 7%". He went on to say that "where we
thought [SMEs] were important and why it is important to stimulate
innovation in that sector is that they do give us a greater variety
and competition that should, in itself, support innovation, and
they are willing to go into smaller niche markets that large firms
might neglect. But it's not an overwhelming case to say that they
are more innovative, and therefore schemes that encourage all
sizes of firms to get involved in innovation through procurement
are very welcome".
110. With regard to the Government's 25% aspiration
for SME contracts, Professor Georghiou commented that "our
conclusions were ... that there should not be a quota. We believe
that this would distort certain sectors and in fact be very difficult
to measure, and if you count supply chains we might already be
over the quota that is currently proposed".
Intellect supported this view: "our SME members (in accordance
with the results of the Glover Review) have stated that they prefer
to not have such market distortions and simply desire a level
playing field on which to compete. The UK government therefore
needs to ensure clarity of information and opportunities and make
the procurement process as fast and cheap as possible".
111. Although there were differences in opinion
about the relative importance of SMEs in stimulating innovation,
there was general agreement that, at present, there were significant
barriers to SMEs taking part in procurement which needed to be
addressed. They include lack of transparency and availability
of contract opportunities, and an overly bureaucratic, complex
and costly bidding process. The Glover Report suggested that opportunities
should be transparent, the process as simple as possible, and
that a strategic approach to procurement should encourage innovation.
The previous Government accepted the recommendations in full,
including the main recommendation that there should not be a quota
of government contracts awarded to SMEs.
112. SMEs and large companies both have a
role in developing innovative solutions. However, given the conflicting
evidence about the contribution of SMEs in promoting innovation,
we invite the Government to explain their current policy on SMEs,
particularly the aspiration that 25% of government contracts should
be awarded to SMEs.
OPPORTUNITIES FOR SMES TO INNOVATE
THROUGH THE SUPPLY CHAIN
113. Particular issues arise for the significant
number of SMEs which sub-contract to government through larger
companies. These were highlighted in the Glover Report.
114. Andrew Wolstenholme told us that for large
infrastructure projects "delivery partners [contracts] are
normally awarded to large organisations able to draw on resources
from large pools and with a depth and breadth that would be able
to demonstrate experience of projects of a similar scale and nature''.
The challenge was therefore to allow SMEs to interact with these
companies. Mr Wolstenholme noted that "it is still possible
to design a procurement strategy that accommodates both large
and small companies to deliver innovationeven on large
He added that
"if you go down into the layers of supply
chain then you'll come across companies of all different shapes
and sizes. You'll be surprised by how many SME organisations are
there to support with good ideas, innovation and value. I think
the constraint here is to create a project environment where you
have open innovation through the vertical slots of the supply
chain and to create the opportunity where those companies with
good ideas can get to the surface."
115. However, Professor Georghiou, Professor
Edler and Dr Uyarra, in their submission, said that "despite
existing OGC guidance on these issues, contracting authorities
tend to lack the more sophisticated approach to supply chain management
which could promote innovation. Again, this is especially pertinent
for SMEs, which tend to suffer unfavourable terms and conditions
when operating within the supply chain".
116. Happold Consulting noted that "currently
procurement only engages with the principal supplier with whom
the client will enter into the contract. However, a great deal
of service is delivered by the supply chain and much of the innovation
is driven by these specialists sub-contractors. If these lower
tier suppliers were actively engaged ... from an earlier stage
in the process then more innovative solutions can be brought out
and incorporated into the contract".
117. TfL told us that "a possible way forward
is in public sector buyers managing their supply chain so that
SMEs get the chance to pitch to tier one suppliers (prime contractors).
TfL use the web-based portal CompeteFor to advertise lower value
opportunities to SMEs and are requiring tier one suppliers to
do the same".
118. The Government should set out what support
they are giving to SMEs acting as sub-contractors, and what they
are doing to improve contract management across the supply-chain
to encourage innovation.
The role of the Technology Strategy
119. The TSB describes itself as "the prime
channel through which the Government incentivises business-led
It was established in 2004 as an advisory board to government
on business research, technology and innovation priorities for
the UK, including the allocation of funding across priorities.
Currently the TSB operates as a non-departmental public body with
BIS as its sponsor. The TSB is a business-focused body. Its mission
is "to promote and support research into and development
and exploitation of science, technology and new ideas for the
benefit of business, in order to increase sustainable economic
growth and improve the quality of life".
The TSB fulfils its mission by a combination of collaborative
research and a range of networking programmes such as Knowledge
Transfer Partnerships (KTP) and Knowledge Transfer Networks (KTN).
120. KTNs were set up to improve the transfer
of knowledge within and between specific technology areas. KTNs
are funded by government, industry and academia. According to
a 2008 survey conducted by the TSB, "the most highly rated
functions of KTNs, [were] monitoring and reporting on technologies,
applications and markets; providing high quality networking opportunities;
and identifying and prioritising key innovation related issues
121. Fergus Harradance of BIS told us that the
Government envisage a wider role for the TSB: "the Technology
Strategy Board will assume the functions of the Regional Development
Agencies (RDAs) and will become, in effect, the innovation agency
for the UK. It will not be the only public sector agency responsible
for innovation, but it will be the only one with a cross-economy,
entirely cross-sectoral remit, covering the whole United Kingdom.
I see it playing an increasingly pivotal role within the innovation
Juice Technology, a company which provides innovative solutions
to manufacturers of LED lighting, thought that this move was a
positive step that was already yielding results: "the centralisation
of [the RDAs] innovation function within the TSB has already shown
improvement and will move further other the coming years".
122. However, Fergus Harradance acknowledged
that the TSB has been given responsibility for an increasing number
of high-profile Government initiatives and cautioned "we
need to ensure that we equip the TSB with the wherewithal to deliver
the programmes that we're asking them to deliver for us".
123. The TSB has an important role in innovation
and that role is about to be expanded. We invite the Government
to explain how the TSB will discharge its extra responsibilities
within current resources and also what steps they will take to
ensure that the work of the TSB is used by government departments
to improve their capabilities for innovation procurement.
Schemes designed to promote public
procurement as a tool to stimulate innovation
124. Two public procurement mechanisms which
have been used to stimulate innovative solutions were drawn to
our attention by several witnesses. They are the SBRI and FCP.
THE SMALL BUSINESS RESEARCH INITIATIVE
125. The SBRI enables innovation in products
and services through the public procurement of R&D. It was
launched in 2001 but the uptake was very poor. It was subsequently
re-launched in April 2009 following recommendations by the Sainsbury
review. It is a pre-commercial procurement process which provides
100% funded R&D contracts. It does not involve state aid.
The SBRI process comprises the following stages: identifying a
challenge where existing solutions are not available or not good
enough; communicating the challenge through TSB channels following
which an open competition is run; those companies with promising
solutions are awarded R&D contracts to test the feasibility
of their solutions (phase 1 funding); companies passing the feasibility
test can then apply for further funding to develop a working prototype
(phase 2 funding); finally, the resulting commercial product or
service is taken to market and open to competitive procurement.
The scale of the SBRI is relatively small: the total value of
SBRI competitions has been running at less than £25m a year
in the context of a total public sector spend of £236 billion.
Examples of procurement through the SBRI
· In July 2009 the DfT and the HA ran a
competition through the SBRI programme to explore ways in which
synthetic environments (virtual reality) could be applied in the
transport industry to model and manage complex traffic problems
on motorways. Nine viable competition entries were received and
three companies were awarded £100,000 contracts to develop
a prototype model. One of the prototypes produced was a simulator
which combines a traffic flow model of a 17km section of the M42
with a virtual reality version of the route. The behaviour of
lorries, cars, vans and motorcycles are simulated for a range
of scenarios including different weather conditions, lane closures,
speed limits, road debris and accidents with a view of managing
congestion and incidents. This prototype has been identified as
a practical and innovative solution with potential for further
· In April 2009 the Home Office and the
Design Council ran a competition to develop innovative and marketable
solutions to make mobile phone handsets and the data stored on
them, harder or less desirable to steal. A total of £400,000
was offered to winning teams of designers and technology specialists
to develop their products. Three different solutions have been
found: innovative encryption systems; a key card associated to
the mobile telephone to make payment transactions; and a blue
tooth device that helps protect against physical loss of an electronic
device. "As a result of the competition Proxama, one of the
successful companies, is now working closely with both MasterCard
and Visa, who believe that the mobile phone will eventually be
used as a wallet where multiple cards are kept. This has obvious
security implications. The work with Visa also focuses on the
forthcoming Olympics, where they are expanding the wallet concept,
so that vouchers and tickets to events can be sent to mobile phones."
126. Despite its very small scale, witnesses
have generally been positive about the SBRI. David Connell, for
example, commented that the SBRI was "the only procurement-based
innovation policy that is systematically producing tangible results,
albeit at modest expenditure levels ... [Departmental] budgets
are focused on delivery and value for money and there is little
incentive for officials to get involved in funding innovative
technology other than as a component of large scale systems procurements".
NESTA said that the SBRI "has played a vital role in stimulating
innovation in the procurement process ... departments and agencies
are learning how to communicate their needs more effectively to
the private sector with genuinely interesting solutions going
to market that would not have been reached by other means"although
they also suggested that it would "be most effective as part
of a comprehensive framework for leveraging demand for innovation
to pull new technology to market".
Colin Cram similarly acknowledged that the work of the SBRI: "it
does support some innovation and it is measurable", but also
noted that "50% of its support has been for companies supplying
to the MoD and 25% to the NHS. I am not sure that this bias was
the intention behind the initiative".
127. The current scheme has been in operation
for less than two years and, given the long lead times for some
of the projects, has yet to be evaluated. Professor Georghiou
and Professor Edler, however, called for a rigorous evaluation
because "much of the present debate is founded upon anecdote
and vignettes." "An important starting point" was,
they said, "to address the capacity of the SBRI to affect
the UK's innovation performance in terms of its scale. The issue
here is that with the most optimistic budget forecasts it will
still be a small effort, particularly when compared with the enormous
scale of procurement of goods and services".
128. In the EU the UK is seen as a leader in
implementing the SBRI model and the UK actively participates in
EU projects designed to adopt a more strategic approach to innovation
(see Appendix 5).
FORWARD COMMITMENT PROCUREMENT
129. The FCP model involves providing the market
with advance information on future needs in outcome terms, early
engagement with potential suppliers and the incentive of a forward
commitment: "an agreement to purchase a product or service
that currently may not exist, at a specified future date, providing
it can be delivered to agreed performance levels and costs".
Initially developed in partnership between DIUS (now BIS) and
the OGC to address the particular barriers to market faced by
environmental innovations, the approach is also suitable for the
procurement of innovative solutions in other markets.
BIS told us that it is difficult to estimate the size of the FCP
in terms of yearly investment. However, "to date FCP has
been has been operating on a much smaller scale than SBRI with
most projects yet to reach the procurement stage. The only completed
FCP project is the HM Prison Service procurement of a fully managed
Zero Waste Mattress system" (see Box 3 below).
Examples of Forward Commitment Procurement
· HM Prison Service used this model in 2007
to procure a mattress and pillow solution that avoided disposal
of waste mattresses and pillows into landfill and incineration.
HMPS articulated their unmet need and consulted the market to
find a solution. The result was innovative new covers that will
reduce turnover and a fully recyclable mattress with cost savings
estimated to be in the region on £5 million over the life
of the contract. In addition, there is an opportunity of adoption
across the wider public sector, for example to the NHS.
· Another example which was drawn to our
attention is the Ultra Efficient Lighting project, part of a seven
year programme of ward reconfiguration by the Rotherham NHS Foundation
Trust aimed to procure a highly efficient, smart lighting system
that could deliver carbon reduction in a cost effective way and
contribute to a pleasant and healthy environment for patients
and staff. The solution offers biodynamic lighting
with local and intuitive controls with a forecast energy consumption
saving of 30% and maintenance savings of 88%. The project is now
in the final stages of the procurement process and a demonstration
unit will be built at Rotherham hospital in 2011.
130. In November 2008, DIUS launched an Innovation
for Sustainability Competition with the aim of increasing awareness
of FCP across government and launching pilot projects. A number
of projects were chosen and are receiving support and advice.
Completion of these procurement projects is expected in 2011.
The aim of the competition was to develop in-house FCP capability
in the private sector.
131. Johnson Matthey believed that "expanding
the use of FCP across the public sector will more effectively
stimulate innovation within industry than conventional procurement
The Institution of Engineering and Technology was also positive:
"FCP is small in scale but has proved effective. Through
FCP, government has created a credible procurement process to
develop and buy innovative products and services".
132. Cundall, a multidisciplinary consulting
engineering practice, is one of the bidders involved in the Rotherham
energy efficiency project (see Box 3). They were enthusiastic
about FCP. Through FCP, they said,
"we were no longer bound by technical specifications
that might not deliver what the customer actually wanted, but
were free to suggest innovative solutions that could meet this
outcome-based requirement ... we clubbed together with other members
of the supply chain so that we could offer an optimal and innovative
solution ... we believe FCP has been totally revolutionary. Rotherham
NHS Trust has been offered a solution that delivers energy savings,
carbon savings and a 'step-change' in patient and staff experience."
133. BIS is planning an evaluation of SBRI
and FCP in 2012. Professor Georghiou and Professor Edler told
us that such an evaluation would be challenging. The Government
should ensure this review is robust and takes into account the
issues raised by Professor Georghiou and Professor Edler. We look
forward to seeing the outcome of the evaluation.
118 PP 16. Back
PP 31. Back
Q 22. Back
Q 56. Back
Q 58. Back
PP 05. Back
Q 182. Back
PP 25. Back
Q 11. Back
Q 37. Back
PP 16. Back
PP 12. Back
Q 182. Back
Accelerating the SME economic engine: through transparent,
simple and strategic procurement, HM Treasury (November 2008). Back
Backing Small Business, HM Government (November 2010). Back
Technology Blueprint, op cit. Back
The Plan for Growth, HM Treasury and BIS (March 2011). Back
Q 128. In the UK an SME is defined as having 250 employees or
less. In the USA a small company is defined as having less than
500 employees. Back
PP 13, PP 38. Back
Q 132. Back
PP 31. Back
Q 44. Back
PP 19. Back
Ibid, Q 44. Back
PP 34. Back
Q 128. Back
PP 16. Back
PP 14. Back
PP 25. Back
PP 21. Back
Q 31. Back
PP 03. Back
Q 34. Back
PP 18, PP 21. Back
PP 37. Back
PP 13. Back
PP 41. Back
Ibid. Proxama has grown from four to 12 people in the last year-which
it attributes to the SBRI competition. This has also involved
the recent takeover of a Cambridge-based company working in a
related technical area. Back
PP 13. Back
PP 07. Back
PP 35. Back
PP 32. Back
PP 18. Back
PP 41. Back
This is a light that changes in level and colour over the course
of the day or night based on scientifically
predetermined programs. Back
PP 15, PP 18. Back
Forward Commitment Procurement: practical pathways to delivering
innovation, BIS (November 2008). Back
PP 10. Back
PP 24. Back
PP 11. Back