Unleashing the power of public procurement

Understandably given the pressure on budgets, the focus is often on procuring public services at the lowest possible cost.  But there is a growing recognition of the potential to use public procurement more imaginatively to promote innovation and promote a range of broader social purposes.  In Wales we spend around £6 billion pounds annually on public procurement, which amounts to about a tenth of all economic activity, and there have been increasing calls to harness the power of this expenditure to deliver environmental objectives, promote local firms and stimulate innovation. This raises important questions about what we wish to achieve through public procurement as well as what is stopping this from happening.

The Wales Centre for Public Policy recently published two reports calling for sustainable approaches to public procurement that maximise public value.  In this blog we briefly summarise some of the lessons learnt emerging from the fast growing literature on how the public sector can use its spending power to promote innovation and tackle some of the most pressing economic and societal challenges.

As Mariana Mazzucato powerfully puts it in her book The Entrepreneurial State, the State is a market-maker “whose ability to take bold, risky bets is critical for economies to grow at the global cutting edge”.  One of the implications is that governments needs to become more adept at using procurement to encourage innovations than stimulate new economic activity and better outcomes for those who depend on public services.

Broadly put, innovation is the introduction of new or improved products or services.  It may provide opportunities for cost savings, generate new economic activities, and/or improve services. Our focus here is on how public procurement might serve to strengthen the development of new or improved products or services. One of the powerful arguments put forward for promoting innovation through procurement is the potential to drive forward a more innovative economy; one that can support higher quality jobs paying higher wages. Another is the suggestion that through innovation the public sector can realise efficiency gains and can promote higher levels of productivity. Equally, through its leadership abilities the public sector can create new markets for goods and services that the private sector might not introduce itself. In Wales, for example, a good example is the Welsh Government’s commitment to creating a low-carbon society.

Overcoming the barriers to promoting procurement for innovation needs institutional change rather than technical solutions. Three features stand out:

  • The need for effective leadership. Procurement practices begin at the top and it is crucial that leading politicians and senior managers signal their support for approaches that stimulate innovation.
  • Clarity of purpose. Alongside leadership we have to be clear about the outcomes that we want to achieve. Focusing on functional specifications (as opposed to technical specifications) can help. Conversely, narrowly defined invitations to tender limit the opportunities for providers to be innovative.
  • Encouraging an appreciation of risk. A long-standing critique of traditional procurement practices is that the desire to minimise risks leads to a culture of compliance – summed up in the apocryphal saying that ‘no-one was ever fired for buying IBM’. It is important for the public sector to become better at allowing staff to take appropriate risks knowing that not all of these will pay off.

We know that for many local authorities, the everyday pressures of the job limit the scope to think more strategically about longer term objectives. The (in)ability of local firms to respond to more innovative specifications may also inhibit attempts to promote innovation. This reinforces the need for leadership and a clarity of purpose. Successful approaches are grounded in local context and realistic in their (initial) ambitions – the key questions to be addressed focus on innovation for what and innovation by whom. Public procurers can then balance competing desires to support local suppliers and promote the introduction of more innovative products or services.

Herein lies one of the real challenges for those wishing to stimulate innovation through public procurement – in Wales and elsewhere. Is our aim to promote innovative products and services to the benefit of residents or is it to stimulate the innovative capacity of local firms and the local economy? In an ideal world it would be both, but in reality there will sometimes need to be trade-offs. Another challenge is that procurement activities are often fragmented. There has to be scope for health boards, local authorities and others to collaborate in order to secure better value and stimulate innovation through joint procurement.  However, many exciting experiments are also taking place in organisations with small procurement budgets.

The evidence of using public procurement to stimulate innovation is growing, especially when in the case of services (as opposed to goods). Positive procurement policies can help firms to win future contracts from private as well as public sector clients (Edler et al, 2011) and evidence from Sweden suggests that this can be achieved without adverse effects on collaboration and competition.

Evidence on whether smaller or larger firms are more likely to respond to procurement policies which seek to promote innovation is mixed. But some studies suggest that they have a more marked effect on smaller firms and this could be important in Wales. Aschhoff and Sofka (2008), for example, conclude that public procurement has the greatest immediate impact on innovation outputs if small firms – especially in economically challenged regions – are aware of them and the procurement exercise itself is designed in a manner that recognises the more limited skills, resources and experience of smaller firms.

There is, then, growing evidence that public procurement can stimulate innovation, and a range of admirable practices and initiatives are already underway. Too often though there is still a lack of awareness of what others are doing and limited opportunities to share experiences. Establishing ways to learn from each other and encourage a more collective and concerted action, has to be high on the list of actions for those who are looking to unleash the power of public procurement to build greater innovation capacity in Wales.