Much of the Cutler Report is devoted to exploring the structure and order of internal Government frameworks within a national innovation system. This includes recommendations as to the extension of business innovation and knowledge sharing programs, additional support for the growth of human capital and the establishment of a National Innovation Council, supported by a consistent National Information Strategy, to co-ordinate innovation priorities and measure performance.
These are wide-ranging and are consistent with the Report’s emphasis on how Government can assist in improving not only traditional scientific and research innovation, but also non-technical business and service innovation.
However, the Report also makes interesting observations and recommendations regarding how a more innovation-conscious Government should itself behave as a customer and consumer of services in the context of its own procurement practices. Potentially, these recommendations would affect purchasing agencies of Government entities and a range of businesses that supply products or services to them.
While known for contracting in a notoriously rigid and risk averse manner, the Report recommends that going forward, Government should recognise its role as an active participant in facilitating innovation by:
- as a major and significant customer, demanding and prioritising the importance of innovation in products and services purchased by it;
- becoming open to risk-sharing arrangements in relation to the innovation components of significant procurements;
- creatively exploring and fostering more innovative approaches to Government procurement, including through the use of forward purchase commitments; and
- working with state and territory governments to implement a pilot small business innovation contracting program, similar to that implemented in the United States, designed to strengthen the growth of highly innovative firms and businesses.
The Report acknowledges that public sector procurements are typically highly specific and driven by an identified need to obtain a particular service or product at the lowest possible cost. This is a perfectly understandable and normal commercial imperative. However, because of the possible size and scale of its procurements relative to the overall market, Government enjoys a unique position and opportunity to stimulate innovation through its procurement attitude and processes.
It is recommended that Government should not simply assess its procurements like any other commercial corporation, but also have regard to the innovation components offered by various suppliers when evaluating competing tender offers. This might even justify Government paying a premium to secure an innovation component as part of its contracted products and services, notwithstanding that the benefit of that component may derive generally to the broader economy rather than immediately to the relevant Government entity. The Report’s reasoning is that if a supplier is offering innovation as part of its product or service components, it is likely that the innovation will be of benefit to local industry. Due to its unique position, Government should therefore be prepared to “internalise the local spillover when evaluating competing tender offers”, notwithstanding that this might have an immediate cost impact.
Government is also in a unique position to provoke suppliers into thinking of innovation as a critical part of its proposals - to a degree which might not otherwise occur to suppliers - by emphasising the importance of new and novel solutions in its selection process. As such, suppliers will come to accept that demonstrating innovation is an important part of obtaining government outsourcing business.
Risk sharing and procurement models
Contracting with Government is often difficult due to a generally limited risk appetite and a rigorous and stringent approach to accepting legal, commercial and technology exposure. In its capacity as a customer, Government often faces large suppliers with polar opposite preferences and views as to risk allocation. Equally, suppliers are often frustrated by the apparent unwillingness of Government entities to concede what they see as normal and commercially acceptable positions and an extreme public sector attitude towards the allocation of risk.
Increasingly, Government recommendations appear to be recommending a more moderate approach in relation to supplier capping and liability (for example, in the Guide to limiting supplier liability in ICT contracts with Australian Government agencies released by the Minister for Communications, Information Technology and the Arts in 2006). However, the experience of contracting with Government generally remains a difficult one. The Report acknowledges that numerous submissions have remarked on “a prescriptive government response on procurement with little scope for innovation”, which “appears to be driven by an extreme aversion to bearing risk”. One submission to the Report authors reported research into Government client attitudes as being that “innovation increases risk and should be avoided at all costs unless it cannot be avoided because of otherwise unachievable timing or cost objectives”.
The Report also suggests other reasons for the current attitude of Government, including:
- senior procurement officers being improperly equipped with technical and commercial knowledge required to buy and use engineering services, resulting instead in a heavy dependence on legalistic tendering and contractual frameworks; and
- a reluctance of public sector decision-makers to risk their reputation on unknown or less significant suppliers and a natural bias toward ‘safe’ choices such as large multinational corporations.
While not explored in the Report in any detail (apart from the comment that Governments should become more open to the sharing of risk), creative and contingent pricing mechanisms can also afford Government an invaluable opportunity to drive supplier innovation. A typical procurement model demands a particular scope of work from a supplier in exchange for agreed payments. As difficult as innovation may sometimes be to quantify and prospectively commit to, suppliers may be willing to accept more non-traditional items within their scope of work if the consequence of failing to achieve those items manifests as a price flex, or a reduced incentive payment, as opposed to resulting in a contractual breach.
Supporting programs
There are, of course, more structured ways in which Government can mandate that its agencies tangibly support innovation in procurement. The Report cites the US Small Business Innovation Research (SBIR) scheme which requires US Government research agencies with research and development budgets in excess of US $100m to dedicate 2.5% of that budget to assisting research and development by small business where the potential for commercialisation and public benefit exists. Eleven US federal departments participate in the SBIR scheme, which is administered by the US Small Business Administration Office of Technology.
Though not specifically mentioned in the Report, the Office of Technology also administers the Small Business Technology Transfer (STTR) Program. Five US federal departments participate in the STTR program, awarding US $2 billion to small high-technology businesses. This is a research and development-focused program aimed at expanding public-private sector partnership through joint venture opportunities between small business and premier non-profit research institutions.
The Report notes that the SBIR scheme is well regarded by many as best practice and notes its implementation in many jurisdictions beyond the United States. It recommends that Australia would benefit from implementing a similar scheme.
The scheme has three phases:
- an initial phase of assistance to determine the technical merit and feasibility of commercialisation of the proposed R&D effort and the quality of performance of the relevant small business;
- a second phase of R&D assistance based on initial phase success and a further assessment of scientific and technical merit and commercial potential; and
- a third phase, in which the small business pursues the commercialisation objectives of the prior phases with non-scheme funds.
Notably, such a scheme already exists in Australia in relation to Defence procurement. While more limited in scope than the SBIR scheme, the Report notes it as generally well regarded. The scheme aims to award 20% of annual Defence procurement budget to small-to-medium Australian businesses.
The Report recommends that a broad program similar to the SBIR scheme would enhance Australia’s national innovation system and promote a more problem-solving and learning culture within the public sector. Of course, the success of such scheme on a global scale would ultimately depend on the extent to which such scheme initiatives can be aligned across all states and territories and the degree to which Government is prepared to embrace more creative and innovative procurement models.
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