The idea of using public procurement to stimulate innovation or new markets is not new. For example, governments and NGOs have previously tried to make certain markets more attractive to suppliers through legally binding commitments to purchase certain goods according to predetermined specifications; such ‘advance market commitments’ are often used to spur the creation of innovative vaccines or other medicines, where businesses may otherwise be deterred by the combination of high up-front development costs and uncertain market conditions.

However, major hurdles remain, including risk-averse public agencies; a necessary focus on value for money, often combined with overly restrictive and complicated regulations; a lack of procurement skills across government; gulfs between the procurement and innovation functions of many organisations; and various other reasons. Small firms and not-for-profit organisations are particularly disadvantaged when it comes to accessing public procurement opportunities.[1] To tackle these problems, public leaders are experimenting with new approaches to ‘hack’ public procurement for innovation.

Subscription model of procurement

In September 2018, US Food and Drug Administration Commissioner Scott Gottlieb endorsed a subscription model for the purchase of antibiotics. Described in the Journal of the American Medical Association as a 'Netflix model', this approach involves health providers paying a flat rate for access to an antibiotic, regardless of volume. The model is similar to the way in which Netflix subscribers can watch box sets for a flat fee each month.

This subscription model can be used to spur innovation in antibiotics because companies still get paid for the new medicines they develop, even if these are being saved as a last line of defence against drug-resistant infections. At present, new antibiotics are often held back for bugs that cannot be otherwise treated. While this is important in reducing antibiotic resistance, it means drug patents can expire before medicines are widely used, so companies cannot so easily profit from the new drugs they develop.

In July 2019, the UK government announced a trial of a subscription payment system for antibiotics. This follows similar moves by the US State of Louisiana, which announced a subscription approach to payment for hepatitis C drugs earlier in the year. Australia has been using this model for hepatitis C for some time and one analysis showed that it reduced costs.

What is particularly interesting about the subscription model is that it is part of a wider movement de-linking reward for pharmaceutical innovation from drug prices, which ‘has been widely endorsed as a way to both support innovation and access’. While a novel approach to procurement is unlikely on its own to solve drug resistance, when used alongside measures such as reducing misuse of antibiotics and improved sanitation, it could be part of the solution.

Brokering procurement

A challenge for those procuring innovation is identifying potential providers beyond the usual suspects. Public sector procurement is frequently criticised for favouring a handful of large, known providers rather than other, less well known – but perhaps more innovative – options. Simultaneously, new providers often experience difficulty navigating procurement opportunities and regulations. In both cases, innovation brokers that connect people, organisations and ideas can help. Digital technologies such as machine learning, blockchain and virtual reality can also make this process easier. For example by making it easier for vendors to find contracts through machine learning assisted searches.

One example of digital innovation brokerage in procurement is CityMart's BidSpark tool that allows cities to market procurement opportunities to vendors who themselves can be notified about suitable contracts. Bidspark enhances innovation by increasing opportunities for new vendors with novel solutions.

The emerging field of digital innovation brokerage (that will be described in a forthcoming report by Nesta) presents tools that could potentially be harnessed to improve the management and support of innovation for procurement. For example, Collaboration.AI could be used to analyse data about procurers and vendors to recommend who would be the best match. Brokerage might form part of more fundamental changes to the procurement system to increase transparency and accountability as demonstrated by the work of the Dutch agency PIANOo whose work on sustainable procurement includes monitoring.

Startups in Residence

Another (pre)-procurement tool for innovation launched in Amsterdam city is the Startups in Residence programme – a cohort-based pre-procurement programme (which has scaled all over the US) that co-locates civic innovators within government. The most viable solutions are then awarded government contracts. In San Francisco, where this model originated, the method has offered three benefits. Firstly, problem-based rather than requirement-based sourcing means providers are not tied to a particular type of solution. Secondly, it provides a more user-friendly application process. And thirdly, it offers the ability to move directly into contract negotiation once the programme ends.

The use of some types of procurement as an innovation method can be seen as one way of government bringing in the technological and business expertise from outside organisations, which arguably has overtaken its own. This process has been described by William Eggers, Executive Director of Deloitte’s Center for Government Insights, as 'reverse tech transfer' or 'spinning in', to help the public sector tap into commercial innovation. It sits in contrast to the past where governments fostered technological leaps such as space flight, GPS and vaccines.

Procurement can be a major blocker to innovation. But, as these examples show, when procurement is seen as a tool for supporting and purchasing new ideas, some public agencies can effectively hack public procurement for innovation.

[1] Uyarra, E, Edler, J., Garcia-Estevez, J., Georghiou, L., & Yeow, J. (2014). Barriers to innovation through public procurement: A supplier perspective. Technovation, 34(10), 631-645.