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Innovative procurement: using public procurement to boost innovation

Procurement processes in public organisations should be geared to encourage or even require innovation. However, leveraging this opportunity requires a better understanding of the interaction between public organisations and their suppliers

by Carter Bloch
Danish Centre for Studies, University of Aarhus, Denmark

There has been increasing interest in public procurement as an innovation policy tool. Public procurement is part of the so-called "demand-side policies", aimed at promoting innovation through demand and conditions. The idea behind the innovative procurement is to use public procurement actively to promote innovation in business. It focuses on procurement practices, how public organisations plan and carry out their purchases, and also on laws and regulations regarding public procurement. However, if public procurement is to be used effectively to encourage innovation, policy must both consider procurement procedures themselves and interplay between organisations and private businesses.

To ensure that public procurement leads to more innovation, it is natural to investigate the procurement process and how it can be more innovative. An expert group established by the European Commission (Public procurement for research and innovation - developing procurement practices favourable two R & D and Innovation, 2005) highlighted a number of areas:

  • Systematic approach in which innovation is incorporated into all procurement
  • Intelligent consumers - purchasers must possess the necessary knowledge to demand innovative solutions
  • Dialogue with suppliers (what opportunities are there and how are projects designed)
  • Form of tender documents and contracts
  • Interaction with suppliers during the project

In other words, the entire procurement process in public organisations should be geared to encourage or even require innovation. Laws and regulations relating to procurement will also play a big role here as the backdrop for what each organisation can do in this area.

However, it is important to note that there are two dimensions to the relationship between public procurement and innovation. As mentioned above, public procurement can promote innovation among companies, but it can also be a major source of innovations in the public organisation itself. Examples might include purchasing new IT equipment in connection with implementation of new administrative processes or as part of a new service, consulting or research which forms the basis for development and implementation of public innovation; or evaluations and user surveys.

To promote innovative public procurement, more knowledge is needed about the interaction between public organisations and their suppliers. Until recently there has been no systematic data on innovation activities in public.The Nordic MEPIN project has attempted to fill this gap by developing an international measurement system for public innovation. Results from the Nordic pilot study help to illuminate several aspects of the relationship between public procurement and innovation. For example, around two thirds of innovative public organisations purchased research and development or consulting services from businesses in connection with their innovation activities. However, this is generally not a passive purchase of innovations from suppliers. Only about a tenth of organisations with product innovations have had an innovation which was primarily made by others, suggesting that it may be difficult to develop public innovations without any active participation of the public organisation. This view is also supported by the results that between 51% and 84% of innovative organisations had collaborated with others to develop their innovations.

These results relate primarily to innovation in the public organisation. An innovation for the public organisation may not be an innovation for the supplier if, for example, the solution already exists on the market. An important question is to what extent public organisations consciously incorporate innovation potential in their procurement decisions. Respondents to the Nordic pilot study were asked if they (in the period 2008-2009) had made purchases that contributed to the development of products or processes which had not existed before or assumed new properties. Overall, there were between 40% and 50% of organisations who said that this was the case.

All in all, the general impression is that it is relatively rare that public sector organisations completely outsource their innovations. A public organisation is therefore better characterised as an active partner in the development of innovations rather than as a passive buyer. This has important implications. It is not enough to focus on procurement practices and rules, although these are important, too. The interaction between the public organisation and suppliers must also be evaluated; how this cooperation can be promoted, the importance of an ongoing cooperation for the design of contracts and project, and any provisions of copyright for the use of innovations.