The document discusses the findings of a study on public procurement of innovation, emphasizing the challenges and opportunities faced by suppliers in the UK public sector. It highlights that 94% of surveyed firms innovate, with public procurement significantly impacting their innovation capabilities, especially in larger firms. It also identifies barriers to effective innovation procurement and suggests that policy support is crucial for enhancing innovation outcomes within public sectors.

1. Public procurement of innovation:
Evidence and policy implications from the UNDERPINN study
OECD, Paris, December 5 2013
Jakob Edler
Manchester Institute of Innovation Research
(full team: Luke Georghiou, Elvira Uyarra Sally Gee, Andrew
James, Su Maddock, Jillian Yeow)
Manchester Institute of Innovation Research, Manchester Business School 1

2. 1. Survey evidence
I. Procurement and Innovation
II. Barriers
2. Understanding and supporting procurement of innovation –
main messages from cases
3. The role of policy
4. Conclusion
2
Structure
Manchester Institute of Innovation Research, Manchester Business School

3. Survey details
• The focus of the survey was to
understand the elements that act as
barriers and drivers to stimulating
innovation in the procurement
process.
• Target population: suppliers of UK
central government, local authorities
(England only) and English NHS
• Data source: Public sector
transactions 2010. 8198
organizations were identified across
the three areas of government
• CATI survey. 800 responses
organisations (~10% response rate)
Public sector
transactions for Local &
central government
(data.gov.uk - Jan 2011)
Extract Procurement
related transactions for
2010
Identify core suppliers
(over £25,000 treshold)
Match with commercial
databases (FAME)
Central
government
suppliers 22%
NHS
suppliers
49%
Local
government
suppliers
30%

4. Product innovation
(432)
Process
innovation (540)
Service innovation
(605)
Respondents have
introduced a mix of
product, process
and service
innovations in the
last three years
(N=800)
200
73
246
62
Suppliers innovate, but it is a very
heterogeneous picture - much is hidden
 Larger companies slightly more innovative
 Service providers more innovative
 Product innovation more common among NHS supliers

5. Public Procurement can lead to innovation
and broader economic effects
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6. Innovation is a result of bidding for or
delivering public sector contracts
800 firms in the sample
94% report some form of innovation
67% reported that public
procurement has had an impact on
innovation
25% of the firms attribute all their
innovations to procurement
The influence on innovation stronger among
larger firms, among central government
suppliers and in the supply categories of
More than 50%: works and professional services
innovation has won us a contract
source: UNDERPINN Survey
Manchester Institute of Innovation Research, Manchester Business School 6

7. Public Procurement can foster R&D
800 firms in the sample
65% report having invested in
R&D in the last three years
33% (or half of those investing in
R&D) reported that procurement
led to additional or renewed
investment in R&D
source: UNDERPINN Survey
Manchester Institute of Innovation Research, Manchester Business School 7

8. Public clients are important sources for innovation
Importance of sources for driving innovation
276
424
325
330
531
540
581
249
256
178
153
178
179
160
188
103
78
89
70
71
45
0% 20% 40% 60% 80% 100%
Our own suppliers (of equipment,
materials, services, etc)
Our competitors
Our private sector customers
Our internal R&D department
Changes in government policy and
regulation…
Our public sector customers
Changes in the market
Very important Somewhat important Slightly important
Manchester Institute of Innovation Research, Manchester Business School 8
source: UNDERPINN Survey

9. Innovation through public procurement
support exports
Innovations that resulted from bidding for or delivering public sector
contracts have subsequently helped us to ….
Yes
Yes
Yes
0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
enable or increase overseas sales
(n=315)
increase your sales in the private sector
(n=452)*
win other contracts in the public sector
(n=500)
* Excludes those organisations who said that virtually all their sales in the last three years have been to the public sector.
source: UNDERPINN Survey
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10. …but
a range of barriers and frustrations
Manchester Institute of Innovation Research, Manchester Business School 10

11. 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 80.00%
Provisions related to intellectual property
E-auctions
Restricted tender
Non-OJ tender procedure
Private finance initiative
Electronic submission of tenders
Framework agreement
Open competitive tender
Negotiated tender
Incentive contracts such as profit-sharing arrangements
Competitive dialogue
Full life-cycle costing considerations
Emphasis on sustainability criteria
Advanced communication of future needs
Outcome-based specifications
Early interaction with procuring organisation
Innovation requirements in tenders
encouraged innovation (% out of those that experience it)
Which practices encourage innovation?
source: UNDERPINN Survey
Manchester Institute of Innovation Research, Manchester Business School 11

12. 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 80.00%
Provisions related to intellectual property
E-auctions
Restricted tender
Non-OJ tender procedure
Private finance initiative
Electronic submission of tenders
Framework agreement
Open competitive tender
Negotiated tender
Incentive contracts such as profit-sharing arrangements
Competitive dialogue
Full life-cycle costing considerations
Emphasis on sustainability criteria
Advanced communication of future needs
Outcome-based specifications
Early interaction with procuring organisation
Innovation requirements in tenders
encouraged innovation (% out of those that experience it) frequently experienced
Mis-Match: innovation friendly practices
not very common
source: UNDERPINN Survey
Manchester Institute of Innovation Research, Manchester Business School 12

13. Barriers to innovation in procurement
57
86
111
154
194
200
235
250
279
290
291
344
453
152
180
169
215
293
243
279
257
256
264
254
247
209
515
344
434
359
235
290
209
207
204
173
173
155
102
Contracts too long
Inadequate management of IPR
Contracts too large
Contracts not large enough
General lack of demand for innovation
Contracts not long enough
Poor management of risk
Low capabilities of procurers
Specifications too prescriptive
Risk aversion of public procurers
Variants not allowed
Lack of interaction with procuring body
Too much emphasis on price
Very significant Moderately significant Not at all significant
source: UNDERPINN Survey
Manchester Institute of Innovation Research, Manchester Business School 13

14. Supplier Assessment:
Risk aversion and lack of knowledge
 Majority rates public procurers as:
 not willing to take risk
 not knowledgeable enough
 about technical aspects of product or service
 about the relevant markets
 not able to make effective use of supply chain
 much less able and willing to ask for and buy
innovation than private clients
source: UNDERPINN Survey
Manchester Institute of Innovation Research, Manchester Business School 14

15. 2. Understanding and supporting
procurement of innovation.
Main messages from case work
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16. Basic Challenges for Public Bodies
 Demands for public bodies
– Markets for innovation (in principle) not established
– Novel and often ill-defined needs
– New solutions from suppliers, no established business case for buyer
– Iterative interactions needed (“co-adaptation”, “co-construction”)
– Joint risk challenge
– High learning and adoption costs at different levels
 Public organisations often overwhelmed by such demands
 Challenges differ
– asking for something new
– adopting innovations offered
– Level of „novelty“
Manchester Institute of Innovation Research, Manchester Business School 16

17. Adopting an innovation.
Intra-organisational change and co-construction.
Example: Adopting Managed Print Service
 Efficiency gains through buying printing service package instead of hardware
 Public sector was lagging
 Radical organisational innovation for the client, large savings made
 Snr Mgt support and responsibility, strong motivation
 Adaptation / co-generation of the solution
 Pilots and pre-contract ‘flexible’ period
 Longer term, close relationship with supplier (both commit resources)
 Joint learning
 Client (need audit, change mgt)
 Supplier (business models, tailor solution, standardised procedures, new IT and
hardware)
 Conducive Frameworks needed (flexibility, relationships)
 Trend to commodification and centralisation problematic
Manchester Institute of Innovation Research, Manchester Business School

18. Asking for something new: Support in a 2 step process
Example: Blood Donor Chair (NHSBT)
Manchester Institute of Innovation Research, Manchester Business School 18

19. Nature of innovation
Incremental Radical / disruptive
Buying an
existing
innovation
Asking the
market to
produce
something
new
Manchester Institute of Innovation Research, Manchester Business School 19
Understanding challenges
…and the need for policy support
 Internal communication and
coordination challenge.
 Adjustment of user
capabilities
 Business case: Understanding
the reliability and added value
of the new solution
(assessment of (alternative).
 As left, but more basic, plus:
 Build up capabilities for the understanding and use
of the innovation.
 Internal coordination to prepare for change at all
levels.
 Sound business case (secure financing and reliability)
 Learning loops with suppliers and (potentially) with
citizens.
 Risk management (adoption risks)
As above, plus:
 Sophistication in understan-ding
one’s (future) need and
market options.
 Internal coordination challenge
to understand and implement
the change demanded,
 Pro-active interaction with
(existing) suppliers to modify
As above and as left, plus
 Systematic internal process to formulate need and to
feedback on early solutions through all organisational
levels;
 stronger interaction with market place to communicate
iteratively in innovation generation and adaptation
process (feedback or even co-generation)
 Risk management (generation and adoption risk)

20. 3. The role of policies to support
public procurement of innovation
 Range of instrument exist(ed) to tackle specific challenges
 Organisational capabilities (innovation strategy, procurer skills):
 IPP (UK), NL PIANO Network, EU Lead Market procurer networks,
TEKES subsidy or additional procurement costs
 Lack of communication and signalling
 Innovation Partnerships (EU, Innovation Platforms (UK, Flanders)
 Risk financing, new functionalities
 PCP schemes (SBIR, SBRI (UK)) and specialised agencies (D)
 Risk management and commitment
 Forward Commitment Procurement
 Insurance schemes (Korea)
 But poor roll out
 Poor evidence of what policy works
Manchester Institute of Innovation Research, Manchester Business School 20

21.  Innovation and Procurement and tight budgets can go together
 Do not simply charge procures with innovation policy
 But support
– Leadership and local initiative
– Aligned incentives and capabilities along the whole spectrum:
 risk management
 long term signals, market intelligence, interaction, modes of procurement
 Need definition, organisational change, intra-organisational interaction
– Variety, openness to smaller players
 Establish strong supporting / enabling organisations
 Re-think standardisation, commodification
 Roll out existing instruments
 Support, engage and commit other policy domains
4. Policy Conclusions
Manchester Institute of Innovation Research, Manchester Business School 21

22. Thank you for your attention
22
CONTACTS
Jakob Edler, Professor of Innovation Policy and Strategy, Executive Director MIoIR ,
jakob.edler@mbs.ac.uk,
Project: https://underpinn.portals.mbs.ac.uk/
Publications: https://underpinn.portals.mbs.ac.uk/Publications/tabid/1580/language/en-
GB/Default.aspx
Manchester Institute of Innovation Research (MIoIR)
https://research.mbs.ac.uk/innovation/
Manchester Business School ,University of Manchester,
Harold Hankins Building, Manchester, UK M13 9PL
0044 (0) 161 275-0919 (secr. 5924)
Manchester Institute of Innovation Research, Manchester Business School

23. Asking for something new: Support in a 2 step process
Example: Blood Donor Chair (NHSBT)
 No suitable market solution, bespoke design needed, resistance
 Two step procedure: (1) prototype, (2) tender
 Specialist organisation (National Innovation Centre (NIC)):
– Stakeholder workshop to identify, validate, rank clinical needs
– Check of technical requirements and state of the art
– due diligence, help with IP issues, PCP advice, link to the market
– design competition; prototype selected/tested in-house, learning loops
 Project manager: testing phase, business case, link internally/externally
 Learning in the buying organisation
– Test environment centre set up to facilitate testing of the prototype,
established test environment for the organisation for future kit
– NIC model used subsequently in NHSBT to procure other equipment
 Lead Market potential?
Manchester Institute of Innovation Research, Manchester Business School 23

24.  Policy maker in the relevant sectoral department(s):
 risk of failure to deliver service, initial costs (acceptance of high entry costs)
 Innovation Policy makers:
 Who benefits (economic spill over to other countries)
 Specialised public procurer:
 risk of buying a less certain, more costly solution with no rewards for better service,
capability
 Finance ministries, actors responsible for budgets:
 costs, failure to appreciate benefits
 Internal, administrative end users:
 risk of failure to learn and adapt or to manage new interface
 Supplier: Market risk –spill over to broader, private market?
Challenge: mis-alignment of risk/reward
Manchester Institute of Innovation Research, Manchester Business School 24
(Tsipouri et al 2010)

25. Policy: Challenges and Support instruments I
25
Policy Category Deficiencies addressed Instrument types Examples
Framework
conditions
i) Procurement regulations
driven by competition logic
at expense of innovation
logic.
ii) Requirements for public
tenders unfavourable to
SMEs
i) Introduction of
innovation-friendly
regulations
ii) simplification & easier
access for tender
procedures
2005 change in EU
Directives including
functional specifications,
negotiated procedure etc.
2011 proposal in EU to
introduce innovation
partnerships
Paperless procedures,
electronic portals, targets
for SME share
Organisation &
capabilities
i) Lack of awareness of
innovation potential or
innovation strategy in
organisation
ii) Procurers lack skills in
innovation-friendly
procedures
i) High level strategies to
embed innovation
procurement
ii) Training schemes,
guidelines, good
practice networks
iii) Subsidy for additional
costs of innovation
procurement
UK ministries Innovation
Procurement Plans 09-10
Netherlands PIANOo
support network, EC Lead
Market Initiative networks
of contracting authorities
Finnish agency TEKES
meeting 75% of costs in
planning stage
Source: Georghiou/Edler/Uyarra/Yeow (2013)
Manchester Institute of Innovation Research, Manchester Business School

26. Policy: Challenges and Support instruments II
26
Policy Category Deficiencies addressed Instrument types Examples
Identification,
specification &
signalling of needs
i) Lack of communication
between end users,
commissioning &
procurement function
ii) Lack of knowledge &
organised discourse
about wider possibilities
of supplier’s innovation
potential
i) Pre-commercial
procurement of R&D to
develop & demonstrate
solutions
ii) Innovation platforms to
bring suppliers & users
together; Foresight &
market study
processes; Use of
standards & certification
of innovations
i) SBIR (USA, NL &
Australia), SBRI (UK),
PCP EC & Flanders
ii) Innovation Partnerships
& Lead Market Initiative
(EC), Innovation
Platforms (UK,
Flanders); Equipment
catalogues (China to
2011)
Incentivising
innovative solutions
i) Risk of lack of take up
of suppliers innovations
ii) Risk aversion by
procurers
i) Calls for tender
requiring innovation;
Guaranteed purchase
or certification of
innovation; Guaranteed
price/tariff or price
premium for innovation
ii) Insurance guarantees
i) UK Forward
Commitment
Procurement; China
innovation catalogues
(to 2011); Renewable
energy premium tariffs
(DE and DK)
ii) Immunity & certification
scheme (Korea)
Source: Georghiou/Edler/Uyarra/Yeow (2013)
Manchester Institute of Innovation Research, Manchester Business School

27. Type Categories %
Size (employees) Less than 10 82 10%
Between 10-49 297 37%
Between 50-250 226 28%
More than 250 190 24%
Age <5 years 32 4.0%
between 5-10 years 147 18.4%
between 10-25 years 231 28.9%
between 25-50 years 117 14.6%
> 50 years 33 4.1%
Type of organisation Private 649 81.1%
Social enterprise 139 17.4%
Main category of goods
and services supplied
Facilities & Management services 91 11%
Healthcare equipment, supplies
and services
116 15%
Office equipment & IT 61 8%
Professional services 159 20%
Social community care, supplies &
services
133 17%
Other (e.g.education, transport) 54 7%
Works 145 18%
Main client NHS 195 24%
Local Government 423 53%
Central Government 121 15%
Profile of respondents

28. Profile of respondents
sector frequency %
Primary act (Agriculture, hunting and
forestry; fishing; mining) 9 1.13%
Manufacturing 92 11.50%
Electricity, gas and water supply 2 0.25%
Construction 123 15.38%
Wholesale and retail trade 12 1.50%
Hotels and restaurants 4 0.50%
Transport 26 3.25%
Financial intermediation 8 1.00%
Business activities 277 34.63%
Public administration and defence 4 0.50%
Education 25 3.13%
Health and social work 119 14.88%
Other community and social work 52 6.50%

29. Main Case Studies
 Pre-commercial procurement of blood donation chair, NHS
 Integrated waste management PFI , Greater Manchester
Authorities (GMWDA)
 The procurement of “closed loop” recycled paper, HMRC
 Adoption and diffusion of Oesophageal Doppler Monitor, NHS‘
 Managed Print Services’, Lancashire County Council, Kirklees
Council and Lincolnshire Hospitals NHS Trust
 Some insights into defence procurement and role of SME
Manchester Institute of Innovation Research, Manchester Business School