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What would happen if all procurement became innovation-friendly, and all innovation processes in the public sector became procurement-friendly? In this article, Lina Svensberg, Innovation Manager at DigitalWell Arena, examines and analyses the range of concepts that exist at the intersection of innovation and procurement.
Introduction: The concepts at the intersection of public procurement and innovation are many – and often poorly defined. We talk about innovation procurement, innovation-friendly procurement, innovation in procurement, innovation-enhancing procurement – but what do they actually mean, and how do they relate to each other?
This article has several purposes. Partly, I want to facilitate discussions by clarifying key concepts, reasoning about their interrelationships, and proposing definitions. I also want to organise the concepts across three levels: purposes, approaches, and procedures.
But the purpose is also to open up a shift in perspective. I would therefore like to introduce the concept of procurement-friendly innovation processes as a complement to innovation-friendly procurement processes.
All opinions in this article are my own, though naturally shaped by the work within the ecosystem around DigitalWell Arena. Where I refer to official definitions, I cite the source. I of course welcome input and other perspectives – this is an ever-ongoing journey of exploration.
Public procurement can be used as a strategic tool to achieve various goals in societal development. The EU describes three main areas within strategic procurement[1]:
These categories are not always strictly separate but can overlap in practice. A procurement can, for example, both promote innovation and have a positive social impact. It is therefore important to understand these categories as different perspectives on how procurement can be used strategically.
Beyond these three areas, procurement can be used to achieve additional strategic aspects, for example[3]:
An important first step in understanding these concepts is to distinguish between why we use procurement as a strategic tool (purpose) and how we conduct procurements to achieve those purposes (approach). This distinction is central to avoiding conceptual confusion and will form the basis for the definitions that follow.
Innovation procurement is a central part of strategic procurement, with the potential to shape markets and support the development and diffusion of innovative solutions. In the European Commission’s Guidance on Innovation Procurement (2021)[4], innovation procurement is defined as follows:
“Innovation procurement” refers to any procurement that has one or both of the following aspects:
What does innovation mean in this context?
To understand innovation procurement, we need to begin by defining innovation. The Guidance on Innovation Procurement refers to the following definitions of innovation:
According to Article 2(22) of EU Directive 2014/24/EU:
“the implementation of a new or significantly improved product, service or process, including but not limited to production, building or construction processes, a new marketing method, or a new organisational method in business practices, workplace organisation or external relations inter alia with the purpose of helping to solve societal challenges or to support the Europe 2020 strategy for smart, sustainable and inclusive growth”
According to the OECD’s Oslo Manual (2018):
“a new or improved product or process (or combination thereof) that differs significantly from the unit’s previous products or processes and that has been made available to potential users (product) or brought into use by the unit (process).”
What these definitions – and most other definitions of innovation – have in common is that innovation is about new and useful value creation. This means that the innovation must be applied in a market or in society for its utility to be determined.
What does “buying the outcomes of innovation” mean?
In the Guidance on Innovation Procurement, the concept is defined as follows:
“the public buyer, instead of buying off-the-shelf, acts as an early adopter and buys a product, service or process that is new to the market and contains substantially novel characteristics.”
And the concept of “early adopter” is defined as follows:
Early adopters refer to the first 20% customers on the market that are buying a new or significantly improved product, service or process. This includes procurements of products, services or processes that have already been demonstrated on a small scale and may be nearly or already in small quantity on the market, but that have not been widely adopted by the market yet. This also includes existing solutions that are to be utilised in a new and innovative way.
Reflection
According to this definition, innovation procurement is not limited to solutions that do not yet exist on the market. It also includes early adopters, which the EU defines as the first 20% of customers in the market. This is interesting in relation to how the term “innovationsupphandling” is often used in Sweden. Generally, we use it to mean procurement of solutions that have not previously existed on the market. From a diffusion perspective, however, it is essential that new solutions are used by more than just the first customer.
PPI is an approach described by the European Commission (Research and Innovation) as a process in three well-defined steps[5]:
Pre-Commercial Procurement (PCP) is a way for public authorities to procure research and development services (R&D) to drive the development of new solutions, while avoiding state aid issues. In the PCP communication[6] that the European Commission (Research and Innovation)[7] refers to in its description of PCP, the following is stated:
“This Communication addresses the concept of ‘pre-commercial procurement’ which concerns the Research and Development (R&D) phase before commercialisation. For the purpose of this communication ‘pre-commercial procurement’ is intended to describe an approach to procuring R&D services other than those where ‘the benefits accrue exclusively to the contracting authority for its use in the conduct of its own affairs, on condition that the service provided is wholly remunerated by the contracting authority’ and that does not constitute State aid.”
PCP is characterised by three main elements[8]:
I have tried to find a clear definition of how the European Commission defines innovation-friendly procurement, but in the official EU documents I have reviewed, the terms used are rather “innovation-friendly procurement practices” and “innovation-friendly tools for all types of procedures” in the same Guidance on Innovation Procurement mentioned earlier. (If there are documents where the specific term “innovation-friendly procurement” is defined, I would be grateful to have them sent to me!)
Under the heading “innovation-friendly practises“, the following activities are described:
Furthermore, under the heading “Specific innovation friendly procurement processes” the following processes are described:
The Swedish concept of “innovationsupphandling” has its origins in the Swedish government inquiry Innovationsupphandling (SOU 2010:56). Here I encountered something interesting! Both the Swedish Patent and Registration Office (PRV) and the National Agency for Public Procurement (UHM) refer to the inquiry in the following definition: “Innovationsupphandling: procurement that promotes the development and adoption of innovative and sustainable solutions, innovations.“
However, in the inquiry itself, this definition does not appear, as far as I can see. Instead, the following is written as the definition of innovationsupphandling:
“The directive states what is meant by innovation procurement. It states that ‘innovation procurement refers to the procurement of previously unknown solutions to a defined problem or need for which a market has sometimes not yet been established.”
The inquiry does, however, propose a broader interpretation to also encompass untested solutions:
“We would like to broaden the perspective to include, in addition to unknown solutions, solutions that are untested and therefore not fully known.”
This could be a minor curiosity, were it not for the fact that there is a crucial difference between the definitions. The inquiry does state that it wants to broaden the directive’s definition to also include untested solutions. But in the formulation “Innovationsupphandling: procurement that promotes the development and adoption of innovative and sustainable solutions, innovations” one could also include solutions that have been tested but on a smaller scale – and this would be much closer to the European Commission’s definition, which also includes early adopters, as I describe in an earlier reflection.
The inquiry emphasises the importance of considering the following parallel approaches:
Under the heading “Innovation-friendly procurement” the following is stated[9]:
“The most important aspect is that in principle all public procurement should become innovation-friendly. By innovation-friendly, we mean that in normal procurement, it is important that the procurement is conducted so that new innovative solutions are not excluded or disadvantaged. The inquiry has found that there is a concern, primarily among innovative companies but also within the public sector, that many procurements are almost routinely designed so that the contracting authority requests the same solution as in the most recent procurement. Within the framework of the standard procurement procedures under LOU/LUF, there are good conditions for making procurements more innovation-friendly. This is largely about how the authority describes its needs and which alternative solutions the authority is prepared to consider. The use of functional procurement can also be innovation-friendly.”
The inquiry states the following:
“Of course, the perception of need is to a large extent a subjective concept that is also influenced by changes in the general level of technology or knowledge. Thus, a change in knowledge can make an authority aware of its need. The fact that innovation procurement is a demand-driven innovation process is not in itself an obstacle to an innovator in some cases raising the question of whether an authority has a need for which the innovator believes it has a solution. There is therefore no reason to always prescribe a kind of strict causality where the need must always be clearly documented and evaluated before an authority can have discussions with an innovator.”
The above passage aligns well with my own experience in the field – strictly separating demand-driven innovation and business-driven innovation means that the nuances in the interplay between them are lost.
For example, a school counsellor may identify in their professional role that sociograms are an effective method for preventing social exclusion in school classes. At the same time, the method is time-consuming to carry out manually with pen and paper. To solve this, the counsellor starts a company and develops a digital solution, which is subsequently purchased by several municipalities. Is this a demand-driven or business-driven innovation?
Another example is an innovation procurement where a municipality and a company co-create a digital guidance service. After being developed for the municipality’s specific needs, the company later sells the service to other municipalities. In some of those municipalities, new features are co-developed. Is this a demand-driven or business-driven innovation?
A central part of every innovation process is the interaction with the innovation in all its forms, which leads to insights for both those who use and those who develop the innovation, further blurring the categorisation into business-driven and demand-driven innovations. The goal should therefore be to create situations where the driving forces of business actively contribute to meeting the needs of users in the public sector, rather than trying to categorise the process as either demand-driven or business-driven.
I believe there are several levels that we need to clarify before we can proceed with defining concepts.
First, I would like to build on the innovation procurement inquiry’s assertion that “the most important aspect is that in principle all public procurement should become innovation-friendly”[10]. By innovation-friendly, it means that in normal procurement, it is important that the procurement is conducted so that new innovative solutions are not excluded or disadvantaged.
This means I would like to see innovation-friendly procurement as an umbrella concept, which means that a procurement, regardless of its specific purpose, approach, or procedure, can be innovation-friendly if it is designed so that it does not exclude or disadvantage potential innovative solutions. In this way, one could even see innovation-friendly procurement as an even broader concept than strategic procurement, and the strategic purposes mentioned below – innovation-friendly procurement does not say that the purpose is to procure innovative solutions, only that they should not be excluded or disadvantaged.
This harmonises, in my view, with the European Commission’s use of the concepts innovation-friendly tools/processes – an innovation-friendly procurement could thus be a procurement where some form of innovation-friendly tools/processes are used – that is, approaches to ensure that new innovative solutions are not excluded or disadvantaged, as a minimum level.[11]
The strategic purpose of the procurement – what do we want to achieve? – “Why”
As the European Commission highlights in its discussion of strategic procurement, the procurement instrument can be used to drive development in various strategically important areas, beyond meeting users’ immediate needs.
The three main areas highlighted are:
Beyond these areas, several other aspects of purpose can be identified at this level, such as:
Key aspects to consider at this level:
The approach describes the methods and processes used to achieve the strategic purposes, and I choose to categorise them as follows, including proposals for brief definitions. This is not an exhaustive list, and new approaches are continually being developed.
Functional requirements
Describing what is to be achieved rather than how, which opens the door for innovative solutions. Procurements where functional requirements are used are sometimes called functional procurement.
Needs analyses and market dialogues
There are a variety of ways to conduct needs analyses and market dialogues for the purpose of designing procurements in an innovation-friendly way, or to achieve other strategic purposes, including innovation.
Opening up to innovation and development during the contract period
An area that frequently comes up in discussions with procurement professionals, which falls outside the definition of innovation procurement (as defined below) but is nevertheless a way of opening the door for innovative solutions to develop.
Public Procurement of Innovation (PPI)
PPI is an approach consisting of three well-defined steps, where public buyers first gather sufficient purchasing power (one or more buyers), then express the intention to purchase solutions with a certain functionality if the market is willing to develop them, and then procure the solution through one of the standard procedures.
Pilots and tests
The purpose here is to create insights by testing a solution in a small part of the organisation, as a basis for designing a potential future larger procurement. Tests and pilots are often (but not always) directly procured.
Demand Acceleration procurements
Procuring according to the Demand Acceleration framework is an example of an approach aimed at driving business development and differs clearly from the others. This specific approach is based on investment logic, entrepreneurial business development (venture development and entrepreneurial discovery), and placing the innovation process at the centre[12]. Traditional funding logic vs. investment logic concerns how tenders and results are evaluated in the process. Traditionally, tenders and results are assessed solely from a customer perspective, while investment logic places the tender/result in a market perspective. The offering’s market potential, the scalability of the business model, and the company’s ability and willingness to exploit the potential are decisive criteria for selecting the supplier (while the delivery/value proposition must of course meet the needs that triggered the procurement). Entrepreneurial business development (venture development and entrepreneurial discovery) means, among other things, that processes are designed to handle unpredictability, through for example staged processes based on the principle of affordable loss.
Pre-commercial procurement (PCP)
Procuring R&D services in the form of pre-commercial procurement (PCP) (instead of grants or subsidies) is an approach for funding R&D.
Procedures are the formal methods used to implement the approaches. The National Agency for Public Procurement describes the following procedures:
I would like to see the choice of procedure as an administrative consequence of:
Procurement conducted in a way that does not exclude or disadvantage new innovative solutions. This can be achieved in a variety of ways. In principle, all procurement can be innovation-friendly.[14]
Inspired by the EU’s definition of innovation procurement, we can define innovation procurement as either:
And I would like to add a dimension that I consider missing from the EU’s definition:
To navigate reasoning about innovation and procurement, it is essential to separate different aspects of the concept of “procurement,” which I find are often conflated:
When we discuss assertions such as “procurement is a barrier to innovation” or “procurement is not a barrier to innovation” (I hear both assertions frequently), there is a significant risk of talking past each other if we do not clarify which aspect of procurement we mean. Internal procurement processes may very well hinder innovation – but there is really nothing to suggest that the principles of public procurement themselves hinder innovation; their purpose is to stimulate competition.
At the same time, many innovation processes and innovation projects where companies and public buyers collaborate are conducted “outside” the principles of public procurement. In those cases, “procurement becomes a barrier,” as suppliers may have gained undue competitive advantages. This could have been avoided if the principles of public procurement had been followed from the outset. At the same time, it can be difficult for, say, innovation managers to get support from people with procurement expertise in the organisation before the “procurement process” has started.
In my view, there is a fundamental difference between innovation processes and procurement processes as they are typically designed. Where innovation is an inherently unpredictable process, procurement processes are normally built on predictability – evaluating tenders against predefined requirements. This means there is a fundamental difference between integrating innovation into a procurement process and integrating procurement into an innovation process. Starting from an innovation process logic also provides a different flexibility in cases where it is not known in advance whether a procurement will take place, or if so, of what or by whom – while at the same time wanting to create good conditions for procurement where it is relevant for driving the process forward[15].
Just as all procurement can be innovation-friendly, I want to flip the concepts and highlight a different problem. Today, I see far too many innovation processes where public buyers and companies do not take into account the fundamental principles of procurement, leading to solutions that are neither procured nor implemented effectively.
The separation between procurement processes and innovation processes is, in my view, a major problem. There are many innovation managers in the public sector who have limited knowledge of how procurement works, while too many innovation projects fail to take into account the actual market conditions under which public customers operate.
If we truly want procurement to drive innovation to a greater extent, we need to lift our gaze. It is not enough to merely integrate innovation into procurement processes – we must also explore how procurement can be integrated into innovation processes. This is, in my view, a large and almost entirely undeveloped area with enormous potential. I would therefore like to advocate for one more concept:
Innovation processes that include both public-sector demand owners and businesses, and that are driven with the purpose that the solutions the process generates can be procured, implemented, and used. This strengthens the link between innovation and procurement processes and contributes to the long-term use of results.
In the perfect world, not only would all procurement be innovation-friendly – all innovation processes where public buyers and businesses meet would also be procurement-friendly – that is, conducted in accordance with the five fundamental principles of public procurement.
Footnotes and references:
[1] https://single-market-economy.ec.europa.eu/single-market/public-procurement/strategic-procurement_en
[2] I have chosen throughout to use the original English texts, to avoid questions about how concepts are translated.
[3] The description of these aspects is developed further later in the paper.
[4] https://ec.europa.eu/docsroom/documents/45975
[6] https://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2007:0799:FIN:EN:PDF
[7] https://research-and-innovation.ec.europa.eu/strategy/support-policy-making/shaping-eu-research-and-innovation-policy/new-european-innovation-agenda/innovation-procurement/pre-commercial-procurement_en
[8]Innovationsupphandling (SOU 2010:56)
[9] Emphasis in original.
[10] Emphasis in original.
[11] With the reservation that there may be a definition of innovation-friendly procurement that I have not found.
[12] I develop the concept of “the innovation process at the centre” at the end of the paper.
[13] Described as a procedure on the National Agency for Public Procurement’s website, but I believe it could be argued that it is rather an approach that can be realised through different procedures.
[14] Innovation-friendly procurement could perhaps be equated with how the EU defines “innovation-friendly procurement” but I have not found any such documentation.
[15] A more developed reasoning on this, in relation to driving circular transition with procurement as an instrument, can be found in this report: https://vaguiden.se/2024/06/ny-forstudie-ska-framja-ytterligare-innovation-och-cirkularitet-i-helsingborg/
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