Procurement and Innovation: Underpinning the debate

1

Procurement and Innovation:

Underpinning the debate

Background Paper

Forum organised within the UNDERPINN project.

21st

October 2011, Manchester, UK

Jakob Edler, Luke Georghiou, Elvira Uyarra, Jillian Yeow

Manchester Institute of Innovation Research

Manchester Business School, University of Manchester

http://research.mbs.ac.uk/innovation/

October 2011

i

Table of Contents

1 Background and Aim ............................................................................................................................................. 1

2 Procurement and Innovation – the Issues .................................................................................................... 2

3 The Database and Sample ................................................................................................................................... 2

4 The link Between Public Procurement and Innovation .......................................................................... 4

5 Innovation and Modes and Practices of Procurement ............................................................................ 8

6 Main Barriers to Innovation Procurement ................................................................................................ 10

7 Main Conclusions and Policy Issues for Debate ...................................................................................... 12

Annex .................................................................................................................................................................................. 14

Survey background .................................................................................................................................................. 14

Recommendations from first background paper ........................................................................................ 19

Public Procurement of Innovation UNDERPINN Forum - Background Paper

1 Manchester Institute of Innovation Research

1 Background and Aim

Across the OECD world, public procurement of innovation is becoming a cornerstone of

innovation policy. This is part of a move towards more demand based innovation policy to

tackle the grand challenges being faced by societies all over the globe.1 While the economic

downturn has changed the nature of the debate somewhat, the OECD wide trend in policy

development towards specific schemes to push procurement for innovation and towards

attempts to improve procurement capabilities and regulations more generally still continues.2.

The UK has long been regarded as a frontrunner in pushing the procurement agenda towards

innovation. However, the momentum for dedicated innovation procurement policy seems

somehow slowed down. The procurement agenda has turned towards efficiency and

capabilities, with some commentators arguing for a policy that is more focused on UK based

firms as suppliers. The recent House of Lords Report has confirmed the importance of using

procurement for innovation, but at the same has raised some doubts about the implementation

and effects of general innovation procurement practice and dedicated procurement schemes.3

So far, the policy debate on innovation procurement is largely based on conceptual

considerations and limited evidence from case studies and well documented public debates.

However, policy development is not as yet strongly enough underpinned by empirical

knowledge about the current state of play when it comes to procurement of innovation.

The FORUM “Public Procurement and Innovation” seeks to foster debate between practitioners

and academics, to bring together diverse perspectives and backgrounds to exchange about

bottlenecks and about bold ideas to improve innovation procurement. It is the second FORUM

in the context of the ESRC/BIS/NESTA/TSB funded UNDERPINN project4.

The major aim of this document is to underpin the current debate on procurement with

empirical findings. It provides some fresh evidence to underpin this debate and suggest a range

of policy recommendations. The evidence is based on a survey of 800 responding organisations

(private firms and third sector) that supply to public sector organisations in the UK at local and

national level across a range of policy areas. The results are tentative, and further analyses are

being conducted within the next two months. This survey to our knowledge is the first

systematic attempt to analyse the practices and attitudes of suppliers to public bodies with

regard to innovation effects of public purchasing..

1 OECD (2011): Demand Side Innovation Policy: Theory and Practice in OECD Countries, May 2011,

Paris; Izsak, K./Edler, J (2011): Trends and challenges in demand side policies in Europe, Brussels,

2011. 2 For example, the Polish EU Presidency organises a two days conference in Warsaw end of October to

discuss public procurement of innovation and demand side policies, and MIOIR is currently

conducting a study for the EU to explore pre-commercial procurement options at EU level. 3 House of Lords Science and Technology Select Committee (2011), Public procurement as a tool to

stimulate innovation, London, May 2011 4 More information on UNDERPINN can be found at the back of this document. The first FORUM

centred on the missing link between innovation procurement and green procurement and was held

in London on 7th April 2011. For those who are interested, recommendations of our first

background paper, that was geared towards procurement of eco-innovation, can be found in the

Annex.



The paper first summarises the critical issues as to procurement of innovation (section 2), then

presents the sample (section 3) and the analysis (section 4 to 6) and concludes with a summary

and policy issues to debate in the Forum.

2 Procurement and Innovation – the Issues5

The use of public procurement of goods and services to drive innovation is mainly based on two

considerations.6 Firstly, procurement of innovative products and services makes public

services more effective and more efficient, and thus society more innovative and creative.

While this, at first sight, might be connected to higher search and purchasing cost, it is still

compatible with achieving efficiency savings since one needs to consider life-cycle costing and

value for money (long term cost-benefit) as the basis of public purchasing decisions.

Secondly, public demand for innovation incentivises industry to invest in innovation, with

potentially substantial spill over effects. This can happen in two ways: Public procurement can

trigger innovations by formulating a new need, and set in motion new innovation cycles. It can

also be responsive to novel products and services produced by industry and thus send a signal

to industry that the UK market is a location in which innovative goods and services can be

introduced and diffused.

Public demand for innovation can also give suppliers in the UK a leading edge and – depending

on the nature of the product or service – potentially initiate further private demand. As public

needs are similar in many other countries, innovation procurement can also trigger export

opportunities, taking advantage of the UK being a lead market. Furthermore, there is a

particular benefit for innovative start-ups. Such firms often struggle to find the first customer

to begin their ‘reference list’. A public purchase helps to overcome this credibility gap and is

worth far more than a grant.

In sum, beyond improved public services the additional social benefits of public procurement

for innovation stemming from the market creation potential of the initial purchase of innovation

provides a further justification for the public buyer to invest in innovation. For many years

already, on the basis of largely qualitative empirical work, analysts have characterised

procurement policy as "..a far more efficient instrument to use in stimulating innovation than

any of a wide range of frequently used R&D subsidies"7.

3 The Database and Sample

Our sample consists of 800 responding firms and third sector organisations who supply to local

and central level of government and to the NHS within England. Given the absence of a

comprehensive and accessible database of suppliers across the public sector (see Annex), the

sampling frame chosen to construct the population is open data on public sector transactions

(except for the NHS). This data became available in the context of the transparency agenda of

5 This scene setting is a reminder, taken from Edler, J.; McMeekin, A.; Georghiou, L.; Uyarra, E. (2011): Closing the

Procurement Gap: The costly failure to mobilise sustainable procurement for innovation, Manchester, April. 6 Edler, J., Georghiou, L. "Public procurement and innovation—Resurrecting the demand side." Research Policy 36,

no. 7 (2007): 949-963. 7 Geroski, P.A. 1990. Procurement policy as a tool of industrial policy. In: International Review of Applied Economics

4(2), S. 182–198.



the coalition government, which required local and central government organisations to publish

their spending over a value of £500 and £25,000 respectively. Data for local and central

government was collated in the first two months of 2011. Published transactions were

downloaded and the names of the companies extracted and matched with commercial datasets

(FAME, Companies House). Supplier and spend data for the NHS was dealt with separately, as

the list of suppliers and associated spending was provided centrally by the NHS itself. Only firms

that were supplying to local and central government and NHS in 2010 were considered, and

only firms with a minimum value of total transactions of £25,000 (across all public sector).

Overall our population for the sample covered the public sector as follows:

• Local government (openlylocal.com): Supplier information data for 93 local authorities in

England. This is around a third of local authorities in England (not biased towards any one

type of authority).

• Central government (data.gov.uk): Data for central government covers 97 department

entities belonging to 25 central government departments (90% of the total).

• NHS (provided separately): Data for NHS trusts covers spend for 5 (South East, East of

England, East Midlands, North West, Yorkshire and Humber) of the 9 English NHS regions.

A population of 8198 firms was finally extracted across all levels of government and for which

contact information was available to conduct the survey. The survey was conducted using CATI

(Computer Aided Telephone Interviewing) technique with a target response rate of 10%.

Our sample shows the following characteristics (a full picture of the sample can be found in the

Annex):

• More than 80% of the respondents are private firms (N=649), 17.4% are social enterprises

(N=139).

• Almost half of the sample organisations are small companies (below 50 employees), one

quarter are large (24% of respondents have more than 250 employees), a slightly larger

proportion than that are medium-sized.

• There is spread in terms of the share of their sales to the public sector, with 22% supplying

mainly to private (less than 30% to public) and 28% supplying almost all their products and

services to the public sector.

• Out of six goods and service categories we classified, Works are represented most (18%),

Office equipment and IT least (7.6%).

• Respondents tend to be firms that have been suppliers for more than five years (93%), and

recognise they have long standing relations with the public sector.

• At least half of the respondents identified local government as their main client by volume of

contracting, the rest is almost equally distributed between NHS and central government.

• There are strong differences in the firms that supply to different parts of the public sector,

with professional services being dominant for the central government and construction and

social community care most important for the local level.

• In terms of innovation, 94% of all responding organisation report having had an innovation

within the last 3 years. Overall, our sample report more service and process innovation than

product innovation, and many firms conduct a combination of the three types of innovation.

Larger firms tend to be slightly more innovative than smaller ones; suppliers to the NHS are

slightly less often innovators, but have a higher share of product innovation.



4 The link Between Public Procurement and Innovation

A first major message is that public procurement does indeed spur innovation. 94% of the

respondents reported some form of innovation in the last three years. Out of those innovating

organisations, 67% indicate that bidding for or delivering contracts to public sector clients has

had some impact on their innovation activity. 25% of the innovating organisations claim that

all of their innovations have been the result of public procurement. Furthermore, 56% of

the sample reported that they won a public sector contract in the last three years because of

innovation.

The following figure highlights the differences according to different firm sizes, areas of

government and product categories (Figure 1). They show that suppliers to central

government bodies are more likely to produce innovation as a result of the bidding process

than NHS or local government, which is mainly due to the dominance of professional services at

that government level. Equally, large firms are also more likely to innovate because of public

procurement compared to medium or small sized firms. Public Procurement has a particularly

strong impact in construction and professional services and a significant weaker impact on

health care providers.

Figure 1: Public demand triggering innovation – level of government and size of organisation

Q.: Were innovations the result of bidding for or delivering to the public sector?

11

14

25

36

35

41

46

96

39

49

51

89

181

29

35

33

75

48

60

68

169

52

91

85

139

289

20

18

51

38

44

27

67

124

21

43

76

114

212

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Office equipment & stationery, …

Facilities & Management services

Healthcare equipment, supplies and services …

Professional services

Social community care, supplies & services

Works

NHS

Local

Central

more than 250

50-250

1-50

Overall sample

yes, all of them yes , some of them no, none of them



Related to (but not necessarily a condition of) the development of innovation is investment in

R&D. Figure 2 shows that 51.4% of companies in the sample that carried out R&D8 in the last

three years increased their spend on R&D because of delivering or bidding for public sector.

This share is higher for central government and NHS, and lower for local government. Further,

out of all R&D performing organisations, the large ones are more likely to invest more in R&D

as a result of procurement than smaller ones. Again, professional services are much more likely

to increase in research and development in their delivery to the public sector, as they tailor

their service to individual cases.

Figure 2: Increasing R&D as a result of public procurement

One basic economic effect outlined above is that public procurement can subsequently lead to

further benefits from innovations produced for the public and the private sector. Our data

8 In our survey, R&D refers to any activities undertaken to increase knowledge for innovation. Examples include making

prototypes, testing of a new design, developing new software or IT tools, conducting market research.

118

66

56

29

36

43

23

29

67

20

85

75

83

136

56

35

33

40

47

22

22

44

20

83

77

58

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Local Government

NHS

Central Government

Works

Healthcare equipment, supplies and services

(inc. dental & optical)


Facilities & management services

Office equipment & stationery,

computers & telecoms


Less than 10

Between 10-49

Between 50-250

More than 250

Yes No



shows that out of all firms that have had an innovation as a result of bidding for or delivering a

public sector contract in the last three years (n=507), more than three quarter report that

the innovation has helped them to win other public sector contracts, more than half

increased sales in the private sector and a smaller share of 29% report increased or enabled

overseas sales (Figure 3).

The experience with previous innovation is not uniform though. More than 40% of the sample

agree or strongly agree that having an innovation track record helps to win subsequent public

contracts. This confirms the findings of the figure below. However, one third of the sample

disagree or strongly disagree. Previous innovation does not always support subsequent

contracts.

Figure 3: The knock on effects of selling innovation to the public sector

Q: Innovations that resulted from bidding for or delivering public sector contracts have

subsequently helped to:

* Excludes those organisations who said that virtually all their sales in the last three years have been to the public

sector.

An important function of the buyer-supplier relationship is the input buyers have on the

innovation activities of the supplier. Innovation oriented interactions are crucial for the

innovation process, and productive interaction can be a key innovation benefit of public

procurement. Roughly half of our sample indicate that public sector customers are perceived

to be sources of innovation, more so than suppliers and slightly more so than private

customers (Figure 4). This also holds true for the group of suppliers who have clients in the

private and the public sector roughly at an equal measure.

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)*

These innovations subsequently helped us to:

Win other contracts in the public sector

(n=500)



Figure 4: Main sources for innovation

Q.: How important were the following sources for driving innovation within your organisation?

However, the effect on innovation could be much stronger, it seems. The relative importance for

public sector customers as source of innovation is not reflected in the subjective assessment

about their innovation Figure 5 shows that those firms that supply to public and private

customers roughly in equal measure – and thus can best compare – assess public buyers to be

less innovation friendly than private customers, i.e. to be less open to new ideas, less well

placed to buy an innovation, less risk taking and less likely to demand innovation in the first

place.

Figure 5: Assessment of public vs. private customers

Note: chart shows answers for those firms and organisations that supply 30-60% of their products and

services to public firms, as those are best placed to compare (N varies between 194 and 200).

276

424

325

330

531

540

581

249

256

178

153

178

179

160

188

103

78

89

70

71

45

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 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

(e.g. health & safety, environment)

Our public sector customers

Changes in the market

Very important Somewhat important Slightly important

1.5

5.1

5.7

22.1

9.2

12

12.9

42.6

25.5

22.2

28.9

17.9

37.2

32.9

29.4

9.2

26.5

27.8

23.2

8.2

0% 20% 40% 60% 80% 100%

Public sector customers are more open to new ideas

compared to our private sector customers

Public sector customers are more likely to demand an

innovative solution compared with our private client

Public sector customers are better placed to buy

innovation compared with our private sector

customers

Public sector customers are more reluctant to take

risks compared with our private customers

Strongly Agree Agree Neither agree nor disagree Disagree Strongly Disagree



5 Innovation and Modes and Practices of Procurement

To improve public procurement of innovation, a main question to answer is: which

procurement practices and modes most likely lead to innovation? We have two figures that

allow us to analyse this question. Figure 6 below gives the self-assessment of respondents as to

what practice supports or hinders innovation. Figure 7 shows actual practices and effects, it

indicates:

1) How important certain practices are, i.e. what share of respondents experience a certain

procurement practice frequently.

2) How innovation friendly the practices are, i.e. for each practice what share out of those

companies that experience it frequently actually have innovation as a result of

procurement.

Together those two figures allow a set of observations:

• If public procurers include innovation requirements in the award criteria of tenders or set

incentives for firms through profit-sharing contracts, they are more likely to get

innovation from suppliers.

• Early interaction with suppliers is crucial; the earlier the interaction, the better. Pre-

procurement communication and early interaction in the process are more important than

interactive modes during the process (negotiated tender, competitive dialogue).

• Intelligent or smart procurement practices (outcome specifications, full life-cycle costing,

incentive contracts etc) are more important for innovation than the choice of modes of

procurement (open, restricted). However, the latter is also not perceived as big a hindrance

as commonly assumed.

• Asking for sustainable products and services appears to be linked to innovation.

• Efficiency oriented forms of procurement, such as framework contracts, e-auction or e-

tendering, do not foster innovation, e-auction in fact appears to be an obstacle to

innovation.

• While PFI are – expectedly – not common, for those who have experienced it, the mechanism

appears to be strongly linked to innovation.

• IPR provisions, when set properly, can foster innovation (Figure 7), but in general are not

seen as used in a particularly innovation friendly action (Figure 6).



Figure 6: The influence of procurement modes and practices on innovation

Q.: Has the following encouraged or hindered innovation?

Note: only those respondents who experienced the practice are included

Figure 7: The use and meaning of procurement practices

Level of significance * 10%, ** 5% and *** 1% as to the difference in share of those reporting innovation as result of

procurement compared to whole sample; not sig = not significant

77

60

182

164

94

273

301

313

247

107

220

240

350

239

312

334

360

21

58

70

31

22

44

77

64

22

20

30

32

53

14

31

20

25

233

135

298

297

140

391

278

298

256

94

197

202

227

158

188

199

161

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

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 …

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 Hindered No impact

0 10 20 30 40 50 60 70 80 90

negotiated procedures (not sig)

E-auction (not sig)

Framework agreement (not sig)

Non-OJ tender procedure (not sig)

Competitive dialogue (not sig)

Open competitive tender*

Electronic submission of tender**

Restricted tender**

Early interaction with procuring organisations**

Emphasis on sustainabiltiy criteria**

Full life-cycle costing consideration*

Advanced communication of future needs**

Outcome based specifications***

Provisions related to intellectual property*

Incentive contracts such as profit sharing*

Innovation requirements in tenders***

Private finance initative**

% of respondents who experienced this practice frequently

% of respondents for which procurement has led to innovation out of those who have experienced this practice frequently



6 Main Barriers to Innovation Procurement

Much of the debate on public procurement of innovation has centred on barriers, based on

anecdotal and qualitative evidence. Our survey underpins this debate by asking about barriers

to innovation (Figure 8), and for an assessment of procurers’ abilities and characteristics

(Figure 9).

• Overwhelmingly, it is the emphasis on price rather than quality that firms complain most

about; 50% of the sample see this as a very significant barrier to innovation.

• A related, second most important bundle of barriers has to do restraining variety: the

disallowance of variants and too prescriptive specifications hinder innovation, as does the

lack of openness to unsolicited ideas which a majority of respondents report as well (Figure

14, annex).

• This is linked to a perceived risk aversion, poor risk management and lack of

capabilities (market and technological knowledge, tapping into supply chains) with

procurers. Further statistical analysis reveals that the market knowledge of procurers is

linked to the likelihood of innovation occurring (see also Figure 9 below).

• Supporting the findings above, suppliers see a lack of interaction with the procuring body

as a key hurdle to innovation. This is true despite the fact that our sample is characterised by

often very long lasting relationships (see Figure 14 in annex). This indicates that long lasting

buyer-supplier relationships in themselves do not support innovation activity, but rather

that it is fostered by accompanying interaction and communication of needs.

• A general lack of demand for innovation is an obstacle for two thirds of the company

(Figure 8), and our anecdotal and interview based evidence suggests that this is supported by

the current cost and efficiency based discourse in the public sector.

• The procurement process is also assessed to be overly complex and lacking useful

feedback (Figure 14, annex), both potential hindrances for innovative companies.

One issue of debate in the past has been the question of size and duration of contract,

whereby larger and longer contracts could work both for innovation (incentive to invest) and

against innovation (higher risks involved, capacity issues for small, innovative companies).

Indeed there is a split in the sample in relation to these questions, with a slight majority of

suppliers indicating that longer and bigger contracts are more likely to lead to innovation. This

however is clearly related to size, the analysis shows that small companies often see contracts

as being too large, while large companies much more often think contracts are not large enough.

While by and large the order of barriers is similar there are some further interesting

differences across different sectors and size groups. To highlight just a few at this stage9:

• Small companies and suppliers of healthcare products and construction works see the

emphasis on price and the prescription of tender specification as particularly problematic.

• Social and community care organisations complain about the fact that contracts are not long

enough.

• Large companies emphasis the lack of risk management in the public sector as a specific

hindrance.

9 More elaborate analysis on sectors and firm size will be delivered in subsequent analytical papers.



Figure 8: Significance of barriers

Q.: Based on your experience of public procurement, please tell us how significantly if at all

you perceive any of the following potential barriers to innovation to be?

Figure 9: Assessment of procurer characteristics

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

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

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

111

118

144

264

255

267

273

309

260

246

244

160

134

104

106

39

31

27

24

11

0% 20% 40% 60% 80% 100%

Public procurers are knowledgeable about the market

in which our product and/or service operates

Public procurers are able to make effective use of the

whole supply chain to achieve value for money and

innovation

Public procurers are knowledgeable about the technical

aspects of our product and/or service

Public procurers are willing to take risks involved with

purchasing innovative products and/or services

Strongly disagree Disagree Neither agree nor disagree Agree Strongly agree



7 Main Conclusions and Policy Issues for Debate10

The first analysis of our survey data gives clear indications as to the scope and nature of

innovation in public procurement and the barriers that stand in the way for more innovation in

public procurement. We have seen that public procurement does indeed drive innovation to

a large extent. More than half of the sample claim that an innovation has won them a public

contract in the last three years, public buyers respond to innovation and do trigger innovation,

and they are an important source for innovation – more important than private costumers or

suppliers. Much of this innovation is hidden, in service provision or in processes that might

not be apparent to the user or citizen. To supply innovation to public bodies has a catalytical

effect; it triggers further innovation and economic effect in the private and the public sector.

Public bodies are important first customers and in many cases (one third of exporting

companies) help to increase exports.

Overall, large firms tend to be able to generate and sell innovation for public clients slightly

more easily than medium and smaller ones, but the disadvantage of smallness is limited. In

general, the central level procurement tends to be slightly more prone to buy in innovation;

which however is linked to the nature of the services and goods demanded (professional

services largely).

There are many pre-conditions to make innovation a feature of public procurement. The most

important one is simple: there must be a commitment for innovation. Innovation must be

asked for or triggered by explicitly thereby allowing variety, by assessing tenders not solely on

price and by accepting risk. Innovation needs variety; it needs a signal that variety is allowed

and can be rewarded. At the same time, suppliers need some orientation that directs the variety

towards future needs. Early signals and pre-procurement interaction appear to be of paramount

importance for suppliers and the confidence they have to take the risk to innovate when

supplying to the public sector. The timing is important here, the late processes that spur

interaction during the actual tender or negotiation procedures are less important for innovation

than the early, more informal ones.

Thus, there is a clear need that public procurement processes are understood more

broadly, that they are extended much more systematically towards pre-procurement

activities. This involves that public bodies communicate and signal future innovation needs as

early as possible and are – more generally - more explicit about innovation needs. Further,

procurement should implement much broader what innovation procurement handbooks

suggest for years, i.e. enable variety, focus on outcome and whole life-cycle costing. The

trend towards more standardisation, framework contracts and efficiency oriented tender

process thus represents a clear challenge for the innovation agenda.

Despite this level of innovation, more appears to be possible as there are manifold barriers in

the system that hinder a broader demand for and roll out of innovation in public procurement.

The actual assessment of suppliers as regards procurer’s capabilities and practices is

generally poor, and certainly poorer than the private sector. While the risk aversion of public

procurers as indicated in the survey confirms case study evidence, the lack of market and

technological knowledge and the consequences for the lack of innovation are stronger than

10 In addition to these conclusions and issues for debate, we provide the recommendations of our first

background paper, that was geared towards procurement of eco-innovation, in the Annex.



expected. Importantly, there is no one lever across all company sizes or product categories. Our

data shows some influences and barriers that are specific across size, sector and type of

organisations.

The perceived lack of technical and market intelligence points towards the need for a general

improvement of capabilities within the procurement process. Especially in cases in which

the public body seeks to trigger a specific innovation to meet its specific needs, this could be

supported by a twofold strategy: First, those defining the need within public bodies should

drive the procurement process, as they the critical market and technology knowledge within

organisations (the users, the business case holders). Second, the buying organisations could

be helped to understand the market and clearly define the need; this can be done in a two-step

procurement processes (pre-commercial/design contests). These processes could be supported

by specialised organisations but owned by the buying organisation, with the aim of building up

the procurement expertise across the public sector more broadly.



Annex

Survey background

One obvious challenge when undertaking a study such as this resides in understanding the

sector under investigation, namely the firms that supply goods or services to the government.

One of the issues resides in quantifying the size of the sector. The limitations of procurement

statistics, the complexity and diversity of the sector, the lack of a common categorisation of

supply markets and the fragmentation of the public sector pose great difficulties in building a

comprehensive picture of the sector, and makes obtaining detailed information of the

population of firms that provide goods and services for the public sector a daunting task.

Many of the companies were in several of the datasets, as they supply goods and services to

several parts of the public sector. Some potential limitations of this sampling strategy are

summarised in Box 1.

Box 1. Potential limitations of the survey:

• Organisation type: the commercial datasets used to match the firms may have better

information of private sector than third sector organisations. However still 17% of

respondents identified themselves as social enterprises.

• Sector: An analysis of respondents and non-respondents (refusals) to the survey does

not show a bias towards any particular type of sector.

• Firm size: The survey would not include firms with small volumes of transaction with

the public sector. However small firms are 47% of the respondents to the survey and

micro enterprises (less than 10 employees) are 10%.

• Non-suppliers: The sample only contains firms that had effectively supplied to the

public sector during a particular year (2010). This would not allow us to fully assess the

situation of firms that have been unsuccessful in securing public sector contracts.

• Public sector: the survey may be less reflective of certain parts of the public sector

(parts of the education sector, police) or parts of the public sector that channel

procurement through professional buying organisations. However, Local authorities,

NHS and central government represent the lion’s share of the total procurement

expenditure in the UK, so the firms in our sample it can be considered representative of

the public sector supplier population.

• Geography: the sample is biased towards England, as it does not include local

authorities in Scotland and Wales, nor NHS trusts in Scotland and Wales.



Sample Statistics

Table 1: characterisation of the sample

Type Categories Frequency %

Size of the organisation (no of

employees)

Less than 10 82 10.2

Between 10-49 297 37.1

Between 50-250 226 28.2

More than 250 190 23.8

Total 795 99.4

Type of organisation Private 649 81.1

Social enterprise 139 17.4

Total 788 98.5

How long supplier to the UK

public sector

Less than 2 years 4 .5

Between 2 - 5 years 44 5.5

More than 5 years 751 93.9

Total 799 99.9

% of total sales to the UK public

sector

Less than 30% 177 22.1

Between 30% and 60% 222 27.8

Between 60% and 90% 221 27.6

More than 90% 165 20.6

Total 785 98.1

Main category of goods and

services supplied

Facilities & Management services 91 11.4

Healthcare equipment, supplies and services 116 14.5

Office equipment & IT 61 7.6

Professional services 159 19.9

Social community care, supplies & services 133 16.6

Other (incl. utilities, education, transport) 54 6.8

Works 145 18.1

Total 759 94.9

Main client NHS 195 24.4

Local Government 423 52.9

Central Government 121 15.1

Total 739 92.4

Figure 10: Size of firm by area of government (base: 735)

31

31

13

75

163

39

41

136

37

46

90

32

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

NHS

Local Government

Central Government

Less than 10 Between 10-49 Between 50-250 More than 250



Figure 11: Category of goods anod services by main area of government supplied (base: 716)

Figure 12: Size of firm by procurement category (base: 754)

0%

10%

20%

30%

40%

50%

Facilities &

Management

services

Healthcare

Office equipment &

IT

Professional

services

Social &

community care

Construction

NHS Local Government Central Government

7

11

4

30

11

8

26

42

27

55

49

54

20

29

15

42

47

36

18

32

15

31

24

47

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%100%

Facilities & Management services

Healthcare equipment, supplies and services

(inc. dental & optical)

Office equipment & stationery, computers & telecoms



Works

Less than 10 Between 10-49 Between 50-250 More than 250



Basic descriptive information about the innovation behaviour of different supplier types reveal

interesting differences across firm size and type, level of government and broad category of

procured goods and services.

Figure 13: Different types of innovation

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

product innovation

service innovation

process innovation

Type of organisationDominant market Size

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

product innovation

service innovation

process innovation

Area of government Categories



Further descriptive statistics

Figure 14: General assessment as to procurement practices

Q.: On a scale of 1 to 5 where 1 is ‘strongly disagree’ and 5 is ‘strongly agree’,

please tell me how much you agree with the following:



Recommendations from first background paper11

1. For the step change needed across government and within firms, sustainability procurement must be open to innovative solutions. This means taking up existing innovations in the market place and actively searching for further innovation opportunities. The first of these allows capture of the low hanging fruit in the sustainability agenda and sends signals to the market about innovation adoption. The second and more important step is to understand the leverage for the green and the economic agenda that lies in triggering innovation, asking the market for new solutions based on outcome specifications. More often than not, this will mean new forms of cooperation between buyers and suppliers. Research has shown that the latter is often the basis for successful sustainable procurement and more radical innovation, as it allows for a joint understanding of the challenges and opportunities, as well as, for integrated risk management. Structures for pre-tender interaction with suppliers are of overriding importance.

2. A more strategic approach to efficiency should be taken to create a win-win situation. The current focus on efficiency and centralisation in public procurement potentially exacerbates the challenge. There is a danger that efficiency is translated into lowest costs (input), while for many types of products and services the efficiency gains of long term investments need to be taken into account. The business case for each procurement project needs to include cost consideration and output efficiency. Further, cost efficiency is only one part of the equation. “More for less” does not only mean reduced costs, but better service provision – with all corresponding long term cost savings and welfare gains – and stimulus to firms. Public investments that link long term efficiency gains with the sustainability agenda are good candidates for being demanded in other markets as well, turning the UK into a lead market for green goods and services.

3. Centralised procurement needs to preserve and regain the intelligent customer characteristics found at lower levels of aggregation. The drive towards centralised procurement of commodities still holds opportunities for eco-innovation. Large scale demand, rising cross-government awareness and intelligent tender procedures can incentivise business to invest in next generation solutions in strategic areas. The challenge for procurement in centralised categories is to keep up and improve the capabilities and market intelligence within the public sector that allows eco-innovation orientation. This can be done through combining centralised and decentralised expertise.

4. Business also needs to take on the eco-innovation agenda as it procures from the supply chain. Research has confirmed the link between sustainability procurement and economic performance in firms, purchasing portfolios should include more systematically long term, eco-innovation strategies that actively search for next generation innovations and integrate supply chains as procurement partners. Large firms in particular can act as focal organisations for radical change.

5. Government should develop ways in which private procurement can be stimulated to demand more eco-innovation. There is a policy gap in terms of incentivising private procurement to demand more eco-innovation. Since the public and private sustainability agendas are highly complementary, in areas in which there is clear private demand, with the public buyer stimulating the market and triggering subsequent private demand, it is time to get serious with:

11 Edler, J.; McMeekin, A.; Georghiou, L.; Uyarra, E. (2011): Closing the Procurement Gap: The costly failure to mobilise

sustainable procurement for innovation, Manchester, April.



a. Catalytic procurement, whereby an initial public purchase then spills over to private market demand; and

b. Cooperative procurement, whereby public and private organisations identify similar needs; establish joint processes of market consultation; formulate joint demand and procure together, thus enabling critical mass even in areas of very advanced demand.

6. Government should consider radical new ways to support demand for innovation in the private sector including an insurance guarantee scheme for private buyers of socially desirable eco-innovations. This measure would directly address the major barrier faced by innovative SMEs seeking a first customer for an innovation. Government already mitigates the risk for buyers from firms that have benefitted from grant funding as these have passed technological and financial audits. Support can go further by providing a guarantee which effectively insures the purchaser against all or part of the additional risk incurred by purchasing from an innovative SME.

7. There should be a much more systematic reflection on, as well as, sharing and roll out of good practice across the public and private sectors, such as interesting models of pre-commercial procurement and forward commitment procurement in the public sector or advanced eco-innovation approaches of firms.

8. To improve procurement of eco-innovation, the government should support awareness and clarity in the procurement and user community by outlining more clearly what is possible within the regulatory framework. This also extends to influencing the wider regulatory framework, e.g. by having clear position vis-à-vis the on-going EU Green Paper on Modernisation of Procurement.


Underlying Research

Research Project: Understanding Public Procurement of Innovation (UNDERPINN)

This two year project funded by the ESRC, TSB, BIS and NESTA in the context of the UK

Innovation Research Centre initiative is led by Prof. Luke Georghiou and Prof. Jakob Edler, it

analyses empirically practices of innovation procurement in the UK on the basis of large scale

surveys and in-depth case studies across various government departments and various policy

levels. Results of this project are to be expected in late autumn 2011. For further information

see http://underpin.portals.mbs.ac.uk/

Research Team

Prof. Jakob Edler, Prof. Luke Georgiou, Dr. Sally Gee, Dr. Andrew James, Dr. Su Maddock, Prof.

Andrew McMeekin, Dr. Elvira Uyarra, Dr. Jillian Yeow

Related research: Sustainable Consumption Institute Flagship Project

The Sustainable Consumption Institute Flagship Project, “Driving Eco-Innovation through

Supply Chains” is led by Profs. Andrew McMeekin and Jakob Edler and Drs. Paul Dewick and

Chris foster. It is a two year research project looking at the potential for ‘focal organisations’

(large buyers with significant market share) to stimulate eco-innovation within and beyond

their existing supply chains. The main empirical component of this work looks at eco-innovation

in the food and drink sector, with cases on milk, beef, orange juice, bread and post consumer

food and packaging waste.


The Manchester Institute of Innovation Research (MIoIR) is the research centre of excellence in the

Manchester Business School (MBS) and The University of Manchester in the field of innovation and

science studies. With more than 50 full members and a range of associated academics from across the

University, MIoIR is Europe’s largest and one of the World’s leading research centres in this field.

The Institute’s key strengths lie in the linkage and cross-fertilisation of economics, management and

policy around innovation and science. Building on forty years of tradition in innovation and science

studies, the Institute’s philosophy is to combine academic rigour with concrete practical relevance for

policy and management. This includes broad engagement with and research for policy makers and

societal and industrial stakeholders in the Manchester City Region, across the UK and internationally.

MIoIR is also firmly committed to a range of teaching activities within and beyond MBS and integrates a

strong and successful PhD programme into its research activities. The Institute has a visitor programme

for academics and management and policy practitioners and provides a range of popular and high level

executive education courses on evaluation, foresight and S&T Policy.

For more information please visit http://research.mbs.ac.uk/innovation


The Manchester Institute of Innovation Research (MIoIR) is the research centre of excellence in the

Manchester Business School (MBS) and The University of Manchester in the field of innovation and

science studies. With more than 50 full members, a range of associated academics from across the

University and ca. 40 PhD students, MIoIR is Europe’s largest and one of the World’s leading research

centres in this field.

The Institute’s key strengths lie in the linkage and cross-fertilisation of economics, management and

policy around innovation and science. Building on forty years of tradition in innovation and science

studies, the Institute’s philosophy is to combine academic rigour with concrete practical relevance for

policy and management. This includes broad engagement with and research for policy makers and

societal and industrial stakeholders in the Manchester City Region, across the UK and internationally.

MIoIR is also firmly committed to a range of teaching activities within and beyond MBS and integrates a

strong and successful PhD programme into its research activities. The Institute has a visitor programme

for academics and management and policy practitioners and provides a range of popular and high level

executive education courses on evaluation, foresight and S&T Policy.

For more information please visit http://research.mbs.ac.uk/innovation

Procurement and Innovation: Underpinning the debate

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