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How Not To Spend It: 6 ways procurement blocks innovation

Across government and opposition parties there is a growing rush of optimism about procurement. Might the much maligned issue of procurement policy be about to save the day?

Shrinking departmental budgets means the government does not have the money to back all the things it would like to do. With few alternatives, politicians are looking at the procurement budget as a way of changing things. Boosting apprenticeships, local economic growth, saving the environment and promoting innovation are all objectives that can be pursued at the same time as carrying out procurement. The way that US defence and space industry procurement supercharged the ICT revolution has set a precedent that other governments are keen to follow.

There is a compelling logic behind this. Even in austere times, the public sector will continue to spend around £240bn a year on procured goods and services. The provides ministers with an obvious and controllable central lever- the government will be spending the money anyway - so why not use this spend in a way that achieves other policy aims at the same time? Add in that improving the way we procure is considered a relatively inexpensive process, and we have a huge potential upside: at such scale, even marginal gains are significant. There are typically three main wins:

  • Procurement can be the driving force of innovation in public goods and services, a common refrain in government policy statements in recent times.
  • Procurement can lever structural reform of the economy, such as the government commitment in the Plan for Growth for 25% of the value of all government contracts to go to SMEs, or as an instrument of a new industrial policy as Labour peer Steward Wood has argued.
  • Smarter procurement can yield huge public sector spending efficiencies, as the  Government Efficiency Review and Labour’s Zero Based Review have both argued (albeit in slightly different ways).

But if it sounds too good to be true, well, history suggests that it probably is. The last 30 years has seen a gradual shift in public spending towards externally purchased goods and services. This has opened the door for competition, and so the theory goes, potential for transformative innovation in public goods and services. But the reality has been a little different. The way we procure has generally been seen as a barrier to innovation, rather than a spur for it. As the House of Lords Science and Technology Committee ‘Public procurement as a tool to stimulate innovation’ Inquiry concluded, “this magnitude of expenditure provides enormous potential to influence the development of innovative solutions … Yet that potential is not being realised.”

One reason for this is simply that while the idea of killing two birds with one stone is an appealing one, it’s actually pretty hard to do in practice. As a starter for 10, here are six theories about why we think procurement has struggled to drive innovation:

  • Separation of design and implementation stages - The traditional two stage procurement approaches - one procurement to find an organisation to design a solution, and a second procurement to find an organisation to implement it – tend to leave little incentive to invest in design for most companies if they must surrender their IP and have no guarantee of being the eventual delivery partner. Progress has been made but we haven’t cracked the solution yet. SBRI has been welcome, but operates on the periphery of central government action. New EU rules on Procurement Partnerships may go some way to help this, but it is too early to tell yet if they will have the impact EU policy makers hope for.
  • Gulf between theory and reality - Procurement is stuck in a world of linear strategic planning, while the real world is dynamic and unpredictable (as social investment pioneer Toby Eccles has neatly argued here). The linear model assumes we can know everything about what a good or service will need to do before we start, and that the way to ensure value-for-money and manage risk is to place restrictive specifications on service delivery in advance of any delivery actually happening. The end result of this approach is to close down innovation in development, and stifle it once operational.
  • Lack of join up between policy-makers and procurers - Procurement is often treated as a financial or administrative task, and so strategic and policy functions and procurement teams are often located in different parts of an organisation. The result is a breakdown between what an organisation wants to procure and what it actually procures, often leaving innovation and strategic objectives out of the eventual purchased service or good.
  • A lack of incentives for innovation - There are no incentives built-in to a system for procurement professionals to risk buying innovative things from new companies, rather than traditional things from old companies. For instance, in the US, of the top 25 firms winning government contracts, the youngest firm was founded in 1969. The fear of getting something wrong is so high within procurement that it creates a bias favouring big contracts awarded to market incumbents, rather than smaller contracts for younger innovative companies.
  • Overly restrictive and complicated regulations - procurement professionals work within a labyrinthine framework of EU and domestic regulations about the processes they must adhere to in order to complete a legal procurement. Whether this is a problem of perception rather than excessive bureaucracy itself, it is arguable that innovation rarely strives in in environments of strict rules and the ever-present threat of legal challenge.
  • Lack of procurement skills across government – As Steve Reed MP has argued, the public sector struggles to attract and retain the best procurement professionals because the pay is low compared to going market rates. This leads to a lack of experience and skills, resulting in poor performance and sometimes even significant errors, such as the West Coast Mainline procurement failure.

With so much potential we think there is a real need to re-examine how procurement can drive innovation, and to look at some of the examples of innovations in the way procurement is done. If you have any thoughts on these themes  Please contact me ( [email protected] ) with any thoughts, questions or comments.

*NB - this blog was edited on 04/05/2017 to remove reference to a potential research project on procurement and innovation which was considered but did not progress.

Image credit: Darpa

Author

Tom Symons

Tom Symons

Tom Symons

Acting Head of Government Innovation

Tom is a Principal Researcher in the Policy and Research team at Nesta.

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