“Procurement can be Innovative.” Right?

By Peter Marshall, Professional Services Director, Commerce Decisions

“It absolutely does matter; the goal of any business must be to improve the quality of service to its customer base and turn a profit or, in the case of the public sector – to do more with less.” 

Innovation can broadly be described as the implementation of new ideas, methods, processes and products. On the one hand innovation leads to efficiencies, cost reduction and quality/productivity gains, and on the other enables new products, services or technologies to be developed for profit.

In the context of procurement, innovation can almost certainly be seen from two perspectives:

1. How the procurement team operates within the organisation and with its peers.
How it is structured, what are the mission statement and strategy and what is the appetite for evolution and transformation.
This perspective is all about internal positioning of the procurement ‘brand’ to meet company objectives. This largely determines the internal perception of the procurement function and whether it is seen as a forward thinking enabler of profit generation or as a transactional ‘order placing’ function.

2. How a procurement team approaches its engagement with suppliers.
Procurement teams must articulate the requirement and appetite for innovation in order to benefit from this engagement. Ensuring fair and objective supplier selection and not stifling innovative bids can ultimately lead to better contracts. This may positively impact bottom line profits and/or free up cash flow that can be ploughed back into front line services.

There are a huge number of innovative procurements being undertaken right now across the UK. A particularly intriguing concept is that of Local Authorities providing new services to plug gaps in local markets. Without wishing to coin a phrase, “in-sourcing” allows teams to be established to ‘make’ rather than ‘buy’ solutions or capability. For example, some local councils are setting up holding companies to provide services to the community such as care homes, facilities management and property consultancy. Not only does this correct a market failure but also an innovation that has proven to be a revenue generator. A ‘for profit’ trading arm is forward thinking, adding useful income to the more traditional cost reduction bias and can lower risk by providing cross-sector services and goods. Increasingly there are significant efficiencies being generated by collaboration across departments and authorities. In Wales, the Efficiency and Innovation Board was set up in 2010 to explore how the Welsh public sector could improve services against a backdrop of reduced budgets. A report entitled ‘Buying Smarter in Tougher Times’ outlined the conclusions and recommendations resulting from this investigation. One of the recommendations that emerged from this report was the potential for the development of a National Procurement Service which would be responsible for ensuring common and repetitive commodities were only procured once for Wales. The National Procurement Service (NPS) for Wales was announced by the Ministers on 12 March 2013. Its remit is to secure in the region of £1bn worth of goods and services in common and repetitive spend. This represents 20% – 30% of the Welsh public sector spend. The National Procurement Service won the 2015 CIPS Award for the Most Improved Procurement Operation – Start Up as a result of the excellent progress made to date.

So why innovate? Does it matter?
This necessitates the improvement of service to other business stakeholders internally and externally. Why is it then, that I often hear from these very stakeholders that “procurement hinders innovation”? Could it be that the way procurement teams approach the market is at fault – the RFx exercise, specifically the criteria and the evaluation process?

This would certainly seem to be the case in more complex, high risk, strategic procurements. In Commerce Decisions’ experience, complex projects select their suppliers largely on the basis of compliance with a defined Function and/or Performance Specification (FPS). These FPSs are often comprised of many thousands of requirements which, when combined, appear on the surface to be an end solution. While requirement-driven approaches to acquisition may work for simple services or Off-The-Shelf products, they are much less applicable when the solution required is new, bespoke, complex or in need of significant modification.

What if there was a solution which met the goals of the procurement or delivered the required capability but didn’t fit within the confines of the defined requirement? One could ask for variant bids or could offer to evaluate innovative proposals, but how will these be compared with compliant solutions in the defined procurement process? In most cases, no matter how valued these approaches might be, the buyer’s hands are tied to select the solution based solely on those that meet the stated requirements.

It’s important to note that requirements are still relevant! But they are not the best basis for supplier selection criteria. Where suppliers are evaluated on their ability to meet requirements, they often feel the need to meet all requirements; score as many points as possible or meet a minimum level to be compliant. Clearly a focus on evaluating compliance with requirements will have an influence on how innovative the supplier will be with his/her solution and whilst this method makes it easy to evaluate who can provide a capability, it creates a number of problems:

The solutions frequently look very alike
The winner is too often believed to be the supplier with the cheapest compliant solution.
It doesn’t look at the ability of the supplier to actually deliver.
A focus purely on requirements can stifle innovative approaches to meeting the need.

There are numerous times when a project team has procured a capability but has failed to investigate some of the support, documentation, intellectual property rights and training elements that enable a capability to be delivered. For one recent example look at France’s national railway operator SNCF, which now has an additional £50 million in costs after hundreds of new trains were built too wide to fit in over 1300 rail stations. Forgetting to investigate the project in all its nuances ultimately introduces significant risk and is often the cause of projects failing to meet expected results or suppliers failing to deliver on time or on budget.

To reflect this, Commerce Decisions advocates that the procurement process be focussed on the evaluation of key criteria. Criteria are the questions which will be used in the proposal evaluation process – when executed effectively they focus on the purpose of the project (what is the end goal and what benefits and/or indirect improvements are we looking for?) and the factors that will ensure the goals and benefits are realised (where are the risks?). Ultimately we want to explore a supplier’s ability to deliver a great solution within a specific timeframe at an acceptable price. The crucial point here is to differentiate between suppliers’ solutions, not confirm what they all have in common. As a result, we can reduce the risk of failure to deliver project outcomes and assure the best value for money.

In order to ensure innovation is sought effectively, the criteria need to be carefully arranged and articulated such that all stakeholders (buyers and suppliers) can engage with it effectively. By focussing on criteria rather than only on requirements the buyer is able to compare different solutions on a fair and equal basis. This allows suppliers to think ‘outside of the box’ and to come up with innovative solutions or provide tangible cost savings to meet an organisation’s overarching needs.

The humble RFx, despite forward thinking in many aspects of modern procurement seems to remain rooted in ‘box ticking’ requirements, many of which could form part of a contract, or managed during the contract, rather than being part of the assessment exercise. For something to be worth evaluating it should be of high impact and high likelihood as evaluation brings with it a cost for both supplier and buyer. Get the contract right and we contribute to the improved customer service that defines a great procurement function.