Is innovation through procurement just another magic formula that politicians love to have and which civil servants like to feed them? The importance of using public procurement to support economic growth is increasingly asserted by the European Union and the UK government. The new EU Procurement Directive puts emphasis on innovation through procurement. Also, there is an assumption that letting contracts with small to medium enterprises is more likely to deliver innovation than contracts with large companies. So, what is the truth?
Public sector procurement tends to be reactive, reacting to demands on it rather than promoting solutions to problems. For instance, public sector outsourcing tends to be driven by priorities of chief executives, senior officials and ministers. The initiative rarely comes from procurement.
Another issue is that innovations, even if made on the initiative of a procurement organisation, rarely travel well. The former leader of Tameside Council, Roy Oldham, devised a solution to replace street lamp posts, which meant that costs could be reduced by 50% and time from start to finish reduced to 40 minutes – from several weeks. At the time, about £50million a year was spent on street lamps by local government nationally. Oldham’s initiative could have saved possibly £20-25million a year nationally. However, the not invented here syndrome kicked in and the excuse of one engineer in another borough was ‘wrong type of rock’. Procurement’s influence was zero.
The NHS has some wonderful innovations, but transferring them from one hospital to others happens infrequently. A cynic might say that this is because the NHS always knows that if it shouts loud enough it will get more money. However, another reason may be that many hospitals do not have the capability to take on and implement innovation.
So, what can drive innovation in procurement? The water industry has a target to reduce its total cost of ownership by 18% in 5 years. To achieve this it needs and actively seeks out new suppliers with innovative solutions. Railtrack issues some first rate tender documents with great emphases on safety and innovation. For instance, it will ask bidders to tender against its own solution and then ask them to come up with three alternative and better solutions. This is driven by its business needs.
The Second World War gave a huge boost to innovation in the United States of America. However, the companies that benefited most tended to be the bigger ones, the ones that had the resources to switch to new products or innovate. This illustrates a problem for small to medium sized enterprises. Recent UK governments have advocated that suppliers should be asked to innovate in the tendering phase of the procurement. SMEs mostly do not have the capability to do this. Only the bigger companies can normally do so. So, the relationship between buying through SMEs and securing innovation can be quite tenuous. Even worse, there are many SMEs which do have innovative solutions to procurement requirements, but the procurement documentation is too complex for them and the specifications too restrictive. So, potentially great solutions can be eliminated from the outset. This can sometimes be the fault of procurement, but more often of the budget holder.
Arguably, the greatest innovations in public procurement stem from outsourcing and Private Finance Initiatives, which changed the way certain industries operate, requiring a constructor, financier and service provider to work together. There has been criticism recently of some of PFIs, but a major problem in letting them was that contracting authorities tended to let them independently, so knowledge on letting them wasn’t transferred.
A deterrent to innovation in the UK public sector is the fragmentation of its procurement management – 2000plus procurement operations. Few have the capability for procurement innovation, often struggling to ‘get by’. A coherent structure for public sector procurement will be necessary to overcome this, but which politician will have the courage to try to implement one?
So, in conclusion, innovation through procurement does occur and there are some wonderful examples. However, what really drives innovation is the business need. Given the Cabinet Office’s role in boosting the commercial capability of senior public sector staff, we can assume that there will be increased expectations on procurement, which will have to react accordingly. However, a real innovation driver would be for politicians to impose the sort of cuts the regulators are imposing on the utility companies? A further 18% by 2019 would concentrate minds.
Author: Colin Cram, Marc1 Ltd
Date: 18th March 2015