Good Practice
Using Innovation Partnerships To Develop a Challenge to a Monopoly Supplier

One of the more interesting new ideas in the 2014 latest EU procurement directives is the “Innovation Partnerships” procedure, which provides a relatively flexible route for the contracting authority to work with a supplier or suppliers to develop innovative goods, services and works. The directives are being transposed into national legislation in most countries now, and some will certainly try to give more detail on how they see this procedure being used.

As Abby Semple says in her recent book, (reviewed here), A Practical Guide to Public Procurement, “It is an application of the competitive procedure with negotiation to set up a partnership with one or several operators, with additional rules regarding the structure and phasing of contracts”.

Innovation partnerships allow for a phased engagement with suppliers, potentially with payment for different stages or deliverables. The contracting authority can start with multiple “suppliers” and narrow that down based on performance and progress towards the development of the “innovation”. The initial work might turn into a prototype or a pilot phase of work, and eventually into a real, live delivery contract. Indeed, that is an attraction of the procedure; the development phase can lead to a meaningful contract without the need for further competition once the innovation is proven.

We saw a real life possibility for the procedure last week when talking to a UK government executive. He is responsible for managing a contract which is unusual in some aspects. The “supplier” is actually a charitable (third sector) organisation, which was set up specifically to develop an idea and then deliver it, using public money. But this is a unique activity – it is something where the public sector is the only “buyer” (a monopsony). So there was no existing market, which means the current supplier is a de facto monopoly, and there is little to tempt others into the market. Incidentally, a monopsony buyer facing a monopoly supplier brings some interesting dynamics in any case.

Now that incumbent organisation is doing a very good job, by all accounts, so there is not great pressure at the moment to change the situation. In any case, how can another supplier enter the market, when the existing one has 100% of that market?

But the executive concerned was thinking like a good contract manager, and was considering both the risk and contingency situation (what would happen if something went wrong with the current provider), and the importance of developing some sort of competition. If nothing else, that should keep the incumbent “on their toes”. But how can other suppliers be encouraged to enter the market in some sense when there is no immediate business for them and even future prospects are uncertain?

Our conversation turned to Innovation Partnerships. If more suppliers are to get involved, it would be useful for them to try approaches that are somewhat different to the incumbent. It makes sense for the new organisations to seek and develop innovation and innovative ideas. So the Innovation Partnership route may give the opportunity for the contracting authority to fund some different approaches – using relatively small amounts of money given this is speculative work. If a number of options are pursued, that could then be narrowed down as the ideas are developed.

With some luck, that might all mean that in two or three years time, the best of the new organisations and ideas could perhaps be tried on a pilot basis, without the need for another lengthy procurement process. Not only does this potentially lead to innovation, it would mean that there is some other supplier in the market (at least in the development phase), so that if there was a problem with the current monopoly supplier, the authority is not starting absolutely from scratch in terms of finding another provider.

Now there are some drawbacks and issues to consider with Innovation Partnerships. As Semple says, “it may still prove difficult to define requirements and select appropriate partners at the outset for what will often be long-term projects …”

Other issues to consider include intellectual property ownership rights and state aid rules. Our two public procurement legal heroes, Pedro Telles and Albert Sánchez Graells, who are blogging about every UK regulation (closely related to the directives of course) have expressed some doubts and concerns about such partnerships (their material is well worth reading here and here).

However, although the new procedure may always be of minority interest, the example above might just be the sort of area where they could bring real value. But what do you think? And we are particularly interested to feature any real-life examples of Innovation Partnerships once contracting authorities get to grips with just how they might work!

 

Voices (3)

  1. Peter Stuttard says:

    What a curious article.

    I support the idea of innovative contracting routes in order to encourage innovation. At present, in my experience, it is near impossible to contract for a staged development process, the normal method of managing innovation risk. Why? Because the client will insist that a new competition is held at for each phase of the development process, and this generally means throwing away the majority of any progress made in the previous phase. Why do they adopt this self defeating posture? Because they are afraid that an incumbent will take advantage of their position, however this something that is highly unlikely, particularly so if dealing with a smaller company, companies understand that they need to establish and maintain a strong, long term relationship with their clients.

    The author however seems to regard the approach outlined as a mechanism by which a company with a unique service or product can be deprived of their hard won market advantage. It reminds me of conversations I have had with Government procurement teams, which went along the lines of,” we like your product, but we can’t buy it because you are the only company selling it, therefore we can’t have a competition. There are two options, take the idea to “our Prime” (the key Prime Contractor supporting this particular procurement team) or we will have to find a mechanism whereby we can encourage some other companies to develop a similar offering that can compete with yours. This from an organisation that claims to encourage innovation.

    Note that there is rarely a problem if the “Prime” was to supply the solution.

    I think the author would be better off considering the many instances whereby large companies dominate the market in the public sector and give consideration as to how those effective monopolies could be broken up. Rather than considering how a procurement concept designed to enable innovation can be used to eliminate the market advantage (which is always temporary) gained by any organisation who has made the investment and taken the risks that enable them to deliver a unique service or product.

    1. Peter, thought provoking comment, we need to get you to write something for us. But I was not proposing in the slightest “a mechanism by which a company with a unique service or product can be deprived of their hard won market advantage” through the Innovation Partnership process. I think we are aligned really – my example is where an incumbent has won fair and square, but now has a monopoly. So whilst it is fine for them to profit from their innovation, etc, we have to create further competition and innovation becuase you can’t just let the incumbent be in place fowever with no threat even of competition.

      1. Peter Stuttard says:

        Peter. I understand your position, but is does raise some interesting ‘ethical’ questions and it presents some conundrums. I champion innovation and entrepreneurial spirit, but I despair at the effects of the effective monopolies that plague the public sector (Defence in main in my case); how to strike a balance between the two is the challenge. It will be good to talk. As you will have guessed, some of these topics are very close to my heart…

        Contact me on my email, and lets establish comms.

        Peter