Investment Abnd Risk Investment - PowerPoint

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					Innovative procurement – why, what
             and how?

  PREST, Manchester Business School,
       University of Manchester
                Supply and Demand
Imagine trying to cut a piece of paper with
  just one blade of a pair of scissors. It’s
  near impossible. Yet that is what we try
  to do with innovation policy. We rely on
  supply side measures to push
  technology. We neglect the critical role
  that demand and markets play in pulling
  innovation through. We need to use both
  blades of the scissors.
                     Two Reports in Policy Domain
     Importance of markets for innovation

• Central position of market friendly to
   – EU 2005 Survey of R&D Trends shows:
      • Market demand for new products & services most
        important factor influencing level of R&D investment
      • Market access is most important factor influencing mobile
        R&D investments
   – Another study showing that changing customer
     needs were 3 times more important than other
     factors in creating innovation opportunities for firms
   – Innovative small firms often fail to get a foothold in
     the market even if they have superior product ir
     service because no-one takes the risk to be first
     user and give them credibility and a reference list
         Importance of innovation for public
• Public services characterised or caricatured as
  bureaucratic, penalising failure but not rewarding risk-
  taking for success
• Yet many key innovations came from public sector –
  the internet, medical advances, social innovations
  such as e-voting, congestion charges…
• Public finances today cannot meet citizen’s
  expectations for services – the only way forward is to
  improve productivity
• There are real problems in
   –   Capturing and spreading innovation
   –   Providing incentives and rewards
   –   Placing responsibility for innovation in government
   –   Recognising that most service innovation comes from outside
       and requires open minds and systematic scanning
            What role for policy?

• Markets are often fragmented abnd
  prospective buyers are unable to coordinate
  or standardise their demand because they
  lack knowledge of future innovation
• Government can help to articulate and
  standardise demand
• In any case governments are major
  purchasers in many markets and also
  structure markets through regulation and other
   Three types of procurement policy

• Public procurement of innovative goods
  and services
• Pre-commercial procurement
• Cooperative or catalytic procurement
         Lead markets for innovations
• Customers willing to pay premium for particular
  characteristics of innovation
• High degree of customer intelligence
   – Anticipatory knowledge
• Compatible infrastructure
• Scale sufficient to warrant costs of innovation
   – Could still be microscale depending on innnovation
• Sufficiently generic to avoid to allow expansion into
  wider markets as costs fall and/or scale increases
• General conditions favourable to innovation
   – Regulatory structure, secure IPR etc
               Procurement of innovative goods
               and services: the basic argument

• Public procurement potentially powerful instrument to
  drive research and innovation by providing ‘lead
  markets’ for new technologies
• Firms given incentive to spend money on research
  knowing that an informed customer is waiting for the
  resulting innovations and thus the risk of investing in
  R&D is reduced
• Competition shifted from sole focus on price to
  provision of solutions, which offer greatest advantage
  to users over whole life use of purchase
• Opens up opportunities to improve quality and
  productivity of public services through deployment of
  innovative goods and services
      Pre-commercial procurement

• Defined as procurement of goods or
  services for which R&D still needs to be
  – Technological risk shared between
    procurers and potential suppliers
  – Procurement is an R&D service contract
    with multi stage process from exploraryion
    & feasibility to prototyping field tests with
    first batches and finally commercialisation
  – SImilar to US ARPA/DARPA approach
    Cooperative or catalytic procurement

• Stimulation of private demand where
  government acts as launch customer for
  goods which are intended to be diffused
  more widely
• Market transformation programmes used
  for energy efficiency objectives – helping
  consumers to aggregate demand and
  initiate technology procurement process
   Functional specification a core element

• Procurement for innovation means purchase
  of goods or services that do not yet exist or
  require new features, and hence require
  research and innovation to realise the
• Such goods or services should be specified by
  their functionality and not in a prescriptive
  manner that prevents innovation.
New opportunities opened up by
      new EU directives
                      Key changes
• Negotiated procedures and competitive dialogues,
  which can be used to structure procurement process
  in certain situations and to facilitate critical element of
  dialogue between customer and supplier;
• Technical dialogues in the preparation phase before
  tenders sought;
• Equal footing now given to technical specifications
  made in terms of functional or performance-based
  requirements, and to references made to standards;
• Options to submit variants
• Conditions that allow transfer of intellectual property
  to the supplier.
            Intelligent customer

• Combination of knowledge (human
  capital), organisational arrangements
  and job structuring that facilitates the
  performance of procurement tasks
            Some characteristics

• Be aware of trends in technology and markets
  across wide range of sectors.
• Have external networks to help specify
  functional, cost and quality requirements
• Able to design & manage flexible contracts
• Access to testing capability to verify contract
• Capability to manage risk and uncertainty
      Gearing up for procurement

• Foresight and technology strategy
• Aggregating demand
• Intelligent customer and the
  procurement professional
      Contract tendering and award

• Embed innovation in the tender
• Award criteria – whole life costs
  – Acquisition costs
  – Operating costs
  – Disposal costs
  – Most Economically Advantageous Tender
        Contracting for innovation

• Treatment of intellectual property
  – Giving supplier ownership or rights so as to
    allow use elsewhere
• Liability conditions
• Contract duration
         Example: Procurement planning
•   Electronic file management system procurement
•   In its 2003 Government declaration the Austrian government announced
    an e-Government-Offensive to come to a modern and service-oriented
    public service. As part of this offensive the introduction of an electronic
    government file system was a high priority to allow for digital and on-line
    services. The electronic file enables a comprehensive e-government
    approach, as in most cases, e-government is electronic for the citizen,
    but physical (on paper) for the official files in ministries.
•   This move was made possible because the Austrian government had
    already started preparing for a procurement procedure in 2001, when it
    had concluded that an electronic government file system would be a
    central part of e-government. Due to the timely preparation the
    government was able to conclude the installation within the timeline
    foreseen. The operational rollout of the system started in February 2004
    with about 800 users and was finished at the beginning of 2005 with
    about 8.500 users in all Federal ministries.
                          Example 2
• Energy Saving Procurement
• The Italian procurement agency CONSIP has adopted a strategy
  to save energy in public administrations across the country via
  energy performance contracts. The basic idea is that the supplier
  of the energy services is motivated and encouraged to optimise
  energy consumption and resource management to improve his
  profitability by making him company responsible for the energy
• One of the selected firms said the frame contract triggered
  innovations in two main operational areas: First, innovations for
  the modernisation of the plants in order to comply with the
  requirements of the contract and the national regulation. Second,
  technological innovations that improved further the performance
  of the plants and facilitated the monitoring and maintenance
  operations. These innovations include low temperature plants
  and incorporation of burn control, thermo - regulation control and
  wireless control features.
           Key recommendations

• Challenge of coordination at centre of
  – Purchasing ministries not the same as innovation
    sponsoring ministries
• Need to identify and reinforce lead markets
• Public procurement of innovative goods and
  services best suited to areas of high public
  spending eg health, transport, information
• Also addressing challenge of improving public
                 Key recommendations (2)
•   Need to overcome risk aversion and to motivate procurement
     – Manage risk and uncertainty
     – Bring in innovative SMEs
     – Shift risk-reward spectrum with high profile awards for innovative
     – Collect proper statistics on demand-side innovation
•   Use pre-commercial procurement for more local targetting of innovation
•   Use catalytic procurement as part of initiative towards more innovative
•   Create a culture that allows lead markets to form
     – Instilling the same desire for change and improvement and having best
       among consumers of services
     – Instil sense that it is better to try and fail than to accept a slow cycle of
•   Reward is a deeply rooted culture of innovation offering better goods
    and services to citizens and a sound base for a productive economy

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