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Smart Procurement as a Key Driver of Innovation  
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Smart Procurement as a Key Driver of Innovation
DAVID STRANGWAY
Summary
It is widely understood that smart government procurement is key to innovation. Such procurement is perhaps the single most important key to the success of the United States and its culture of innovation. The European Union is fully committed to using procurement in its drive to become more innovative as it commits to being the “Innovation Union.” Several countries are exploring in detail how to make effective use of procurement as the tool to drive innovation. These include many countries such as Australia, Netherlands, Spain and the UK. It is interesting to note that in the recent Review of Federal Support to Research and Development—Expert Panel Report, one of the six recommendations is for Canada to develop a smart government procurement policy. Canada has a remarkable opportunity to change its culture of procurement to exploit this most important driver of innovation.
1.It is recommended that the Canadian government create an independent agency charged with identifying innovative opportunities created along the lines of DARPA in the US and the more recently created ARPA-E. These would have the capacity to identify opportunities for Canada to use its procurement much more effectively. This would create strong demand on ways to meet Canada’s grand challenges and opportunities. Consider for example the impact on Canada’s innovation capacity, if instead of purchasing four obsolete submarines, a decision had been made to establish a network of hundreds of unmanned submarines, patrolling all of Canada’s coast using modern communication, monitoring and propulsion technologies. These could be continually upgraded as new technologies were developed and became available.
2. It is recommended that Canada require all of its procurement decisions, both military and non military, to identify the impact it will have on building Canada’s innovation capacity. Each procurement decision should be required to contribute to building Canada’s innovation capacity and culture in non-governmental institutions in both universities and in the private sector.
3. It is recommended that government transfer a number of its internal research institutes to various non governmental organizations including both universities and the private sector (including consortia). These would continue to be publicly funded, but by this procurement would dramatically increase the competitiveness and innovation of the institutes. This will drive a considerable change in culture and will take time, but the Canadian government can make Canada a more innovative nation.
* former faculty member at MIT; former chief of Earth and Planetary Science NASA (Apollo Missions);former president of the University of Toronto; former president of the University of British Columbia; former president of the Canada Foundation for Innovation; founder of Quest University Canada; adviser to Angola and South Africa on higher education; Phd,FRSC,OC

4. The federal government should adopt a policy for procurement of its grants and contracts that cover the full costs of the projects, including indirect costs. This will is a major driver of innovation in the United States. This would mean that universities and the private sector would not have to pirate other core activities (eg teaching and learning) to support the awarded project.
GOVERNMENTS AS DRIVERS OF INNOVATION
Innovation is not a simple linear process from basic research through to implementation; rather it is an interactive process. Basic science is important as a supply for new ideas, but technological breakthroughs and demand-driven public challenges are also major drivers of new ideas and scientific breakthroughs. It is widely understood today that procurement to meet explicit government and public needs is a necessary condition to create an innovation culture (see - Where Good Ideas Come From by Steven Johnson. 2010).
United States — It is worth exploring the seeds of American success as an innovative nation. Perhaps the single most important decision was taken in the years following the Second World War. A major practice was established in those early post-war years that research and development should take place outside government agencies. Only if there was an absolute need would research be conducted internally to support policymaking. This general principle remains in place to this day. It has led to the development of some extremely strong research universities. This principle was supported by a policy that held that the full costs of research, including indirect costs, would be provided to the research-performing institutions. This has been a key driver of the differentiation of the American university system. This approach has led to a remarkable culture of innovation. Much of the publicly identified needs are met by contracting out to the private sector. The most innovative companies in the US can often be traced to the smart procurement that was explicitly designed to develop highly innovative and entrepreneurial companies. It is instructive to look at the activities of the Defense Advanced Research Project Agency (DARPA). A recent book called The Mad Scientists of DARPA (Michael Belfiore, 2010) provides insight into this agency and the influence that DARPA continues to have on driving innovation in the US. This is a federally funded think tank that is incredibly influential in identifying and supporting new technologies in many fields. It has a budget of around $3 billion per year. Ninety eight percent of this is spent outside government (see Connell). The mission of DARPA is to be an “enabler for radical innovation for national security.” In my own experience as chief geophysicist for NASA’s Apollo missions, I was fortunate to see the impact of these practices on providing the basis for building the US capacity for innovation in both universities and the private sector. There are many federal departments that contribute to building the nation’s innovation capacity. The National Institutes of Health has a budget of $29 billion; $24 billion of this is spent externally.
It is common to attribute the success of Route 128 around Boston to the presence of MIT and Harvard. In the same way, it is common to attribute the success of Silicon Valley to Stanford University and the University of California, Berkeley. These institutions are of, course, a necessary part of these great complexes of innovation, but this is only part of the story. An equally important part of the success has been the access to government funds through procurements, and the federal commitment to build the American innovation capacity. Some of this is of course driven by military procurements, but all federal agencies participate in this “endless frontier” (Vannevar Bush, 1945).
For the past 30 years or so, the Small Business Innovation Research program (SBIR) has played a very key role in driving innovation in small and medium enterprises (SMEs). For a really comprehensive review of this program the reader is urged to see the report by Connell listed below. Much innovation takes place in the enterprises contracted by SBIR. In the long run, they are often acquired by larger companies and lead on to major economic impact. SBIR has a number of important characteristics. Perhaps most important is the fact that it is enshrined in legislation that every agency is required to allocate 2.5 percent of its research budget to external contracts focusing on SMEs and their capacity for innovation. This is enshrined in legislation and so the agencies cannot bypass this requirement. They provide funds to cover the full cost of the research to be conducted. The natural tendency for any governmental agency is to protect its own and not to consider outsourcing. SBIR is widely admired around the world and is seen as a very important driver of innovation.
More recently a new agency called ARPA-E has been created. The idea here is once again to drive innovation in the important field of energy and the related conservation culture, by the use of technology. This new agency has already played a significant role in focusing energy-related research in universities and the private sector. It is a particular driver of innovation in the general area of energy and the accompanying environmental technologies. It is widely understood that even the success of Silicon Valley depends very heavily on the American policies of public procurement.
Another approach to developing innovation derives from the policy that even the operation of major national research laboratories is frequently contracted out to universities and/or private organizations. One has only to identify the publicly funded, but privately managed, private laboratories. Examples are many and include such facilities as the Jet Propulsion Laboratory, Los Alamos National Laboratories, Lawrence Livermore Laboratories, FermiLab and facilities such as those managed by Battelle National Labs. Even the operation of American telescopes is done by a consortium of universities. Most of the oceanographic facilities are managed by various independent research and university institutes, but funded federally. This form of contracting out has provided incredible flexibility to the government and led to true excellence in getting results from public procurement. In my own experience, I was privileged for a period of time to head the Lunar and Planetary Institute managed by a consortium of universities, but funded by NASA.
The European Union — The Research, Innovation and Science Commission of the European Union is working very hard to ensure that the incredible results that can derive from smart procurement become one of the major platforms to help the EU deserve the name Innovation Union. This name has been chosen for the next framework plan. This is more complex in the EU, as the EU itself is not the major procurement agency. This is largely at the level of the individual state. But the concept is deeply imbedded in the EU as a whole and in particular in the Research, Innovation and Science Commission. A new policy will take effect in 2012 as they enter the eighth framework plan (FP8), also referred to as Horizon 2020.
“One of the keys to their (the US) success is a long-established innovation support system that combines supply-side measures such as research funding with action to foster the demand-side for innovation, aiming in particular to give innovative SMEs a kick-start into the markets. The United States spends over 50 billion dollars every year on R& D procurement, more than 20 times the EU total — public procurement accounts for some 17 percent of the EU’s GDP, or around 2 trillion Euros per year. This represents a vitally important market for innovation, particularly in areas such as health, construction, transport and energy. So, Europe has an enormous opportunity to use procurement strategically to boost innovation,” (Geohegan-Quinn, Commissioner for Research, Innovation and Science, 2011).
The plan is to strongly support smart procurement. This will be done when two or more states plan a significant procurement. The EU will provide a top-up of up to 50 percent of the cost of the procurement as a tool of developing innovation to a much higher level. Of course there are some joint projects now, such as the European Space Agency, a project of the EU as a whole.
It is also interesting to note that there are several countries within the EU that fully understand this approach to driving innovation. Several countries are already acting to build their own innovation capacity by stimulating outsourcing and smart procurement.
A recent study by Connell at Cambridge University provides very significant insight into the role of demand-side in driving innovation. In his studies, Connell has examined the nature of the very comprehensive agglomeration of research companies around Cambridge University. Very few of the companies that function in this area are in fact direct spinoffs from Cambridge University research. Some are, but most of these companies are largely successful, as they are able to access private and government procurement funds. The university is a necessary condition, but the drive is largely due to procurement. He documents the creation and impact of the SBRI program, modeled on the US SBIR program, which also provides 100 percent funding to SMEs. This program is slowly improving and focuses on R&D procurements. It is increasingly seen as key to making the UK more innovative. But he also documents the resistance shown by mainline government departments: “The problem seems to stem both from the perception across many government agencies that innovation is the responsibility only of the private sector and perhaps the DTI, and from the overwhelming predominance of value for money considerations and risk minimization in public procurement procedures,” (Connell, op. cit.). It is not hard to recognize these syndromes in Canada.
Canada — Canada has a long way to go to develop a truly innovative culture. Where Good Ideas Come From – the Natural History of Innovation by Steven Johnson describes in very clear terms the processes of innovation by comparing it to evolution. Canada has done a good job of building the supply-side research capacity of the nation, in particular in the past 15 years. This is a never-ending process, as Vannevar Bush described the “endless frontier” in 1945. One of the key decisions that has made the great research universities in the US so successful, is that when they compete for federal research grants, the funding awarded is designed to cover the full costs of the research, including the indirect costs to the institution. Compare this to the grants-in-aid scheme adopted in Canada. Recently there has been some recognition of these indirect costs, but it leaves the institutions to subsidize the research by withdrawing funds from the undergraduate teaching and learning programs. Canada has done very little to contract out some of the major national laboratories to universities (or consortia) or the private sector. Some steps have been taken (e.g., Triumf in British Columbia or the Nanotechnology Institute in Alberta), but there is a great deal more that could be done to further develop this side of the country’s innovation capacity. Canada could usefully transfer more of its research institutes to external bodies and place them on a more competitive and innovative basis. This is recommended in the Review of Federal Support to Research and Development–Expert Panel Report. Such action as they recommend for the NRC research institutes would empower non- government institutions (public and private), put them on a competitive basis and decentralize research to various parts of the country. This would be a very big culture change for Canada, but would lead to a much more innovative country. As the EU says, “the innovation Union sets out concrete proposals to increase the amount spent on innovation procurement including both the procurement of commercially available innovative goods and services and pre-commercial procurement of new products and solutions still to be developed. The Innovation Union calls on Member States and regions to set aside dedicated procurement budgets to stimulate innovation — this should create procurement markets across the EU upwards of 10 billion Euros a year,” (op. cit.).
The Review of Federal Support to Research and Development — Expert Panel Report identifies what they call the procurement gap. There is no doubt that Canada has a major procurement gap: “Federal departments and agencies, including those of major industry relevance, such as the Department of National Defence, undertake most non-regulatory research internally. According to Statistics Canada federal in-house R&D is projected to be $1.9 billion in 2010-11, while R&D contracted to business is projected to amount to $272 million or only about 15 percent of the in-house R&D total. More than 80 percent of the amount of R&D contracted to business is accounted for by two agencies — the Canadian Space Agency at $167 million and the Department of National Defence at $59 million.” While these have led to some good results for Canada (particularly the space agency work has helped to develop private sector innovation capacity), there is clearly room for a major culture change. There is much that federal agency procurement can do to build Canada’s private sector innovation capacity. The internal culture barrier to be overcome is significant. Enhancing innovation through procurement is not about distributing the support to all parts of the country; it is about reinforcing excellence and capacity where it is, independent of politics.
There are interesting examples of such successes. Not long after the Second World War, a visionary civil servant named Larry Morley persuaded the Geological Survey of Canada to start the geophysical mapping of Canada. New technologies were adopted and adapted and all the work was done by contracting out according to predetermined standards. From this pioneering work, Canada has become what most would recognize as the most successful country in the use of geophysical techniques for mining exploration and land use mapping. Morley did the same for the field of remote sensing, establishing Canada as the global leader.
An interesting case history is to consider the case of the ill-fated submarine purchases 15 years ago. Canada bought four obsolete submarines from Britain. To date, these submarines have hardly seen the water and it appears that the government may be considering scrapping the submarines after investing nearly $2 billion dollars in them. Consider what this investment could have done for Canada’s innovation capacity to monitor the country’s ocean borders. Canada is a global leader in underwater remotely piloted vehicles. Canada is a global leader in the creation and use of satellites for communication and remote sensing. Imagine if, instead of purchasing four obsolete submarines, Canada had decided to create a network of several hundred remotely piloted underwater vehicles to monitor the country’s coast. Creating this capacity would have given Canada the ability to monitor intrusions into its waters, as well as to collect widespread scientific information about its offshore resources and about ocean science including the Arctic; even under the ice. This would have met Canada’s need to monitor incursions into its waters. This would have driven excellence in driving technologies in Canada including fuel cells, communications technology, monitoring technology, satellite linkages, resource distribution and ocean dynamics, as the vehicles were continuously upgraded. New and emerging technologies would have driven continuing improvements. And imagine the mission control station, perhaps in Churchill, that could monitor all of these in real time. Today it would be quite logical to add a set of remotely piloted drones that would monitor the land and the adjacent oceans. And think of the export possibilities. It is worth noting that Project Neptune is the world’s first sea-floor network, on the Pacific coast monitoring many things such as earthquakes in real time. (It should be noted that this idea was presented to the government before they purchased the submarines) Canada is making major military purchases. Surely this capacity can be used to drive the innovation needed to meet national security requirements. Following 9/11, the US National Academy of Sciences was consulting its membership within days to find the most effective scientific and technological approaches to strengthen security. Much of this work drew on Canada’s established excellence in exploration technology. Canada has a competitive advantage in remote monitoring for national security, for resources including fish stocks and for environment and pollution in the age of global climate change. Grand challenge and opportunity thinking transcends individual departments.
On the Link Between Basic Science and Public Objectives: The Need for Grand Challenges
— It is useful to finish off this briefing with a few thoughts about the connection between basic science and meeting grand public challenges. In the 1960s there was a call by US President John F. Kennedy to land a man on the moon. This had little to do with the science of the solar system and everything to do with showing US technological superiority. The technological feat was dramatic. But the real legacy of the missions was to completely rewrite the story of the origin and evolution of the solar system. Scientific revolution was driven by meeting the public need as defined by Kennedy,
At about the same time, there was a public need to understand the nature of earthquakes and a need to find ways to predict them. As we know this is a work in progress, but in the meantime there came the public need to determine if any nation was setting off clandestine nuclear explosions either in the atmosphere or underground. A global seismic network was established and coordinated by the Comprehensive Test Ban Treaty Organization (CTBTO) and their partner countries. The byproduct of this has been dramatic. The mapping of the distribution of earthquakes worldwide has identified the earth’s earthquake belts. This has been a major plank underpinning the plate tectonic revolution and how the dynamic earth works.
Knowledge and innovation proceed in typically non-linear ways and resemble nothing more than evolution. Canada can do much more to create an ecosystem for innovation and to establish a set of grand challenges and opportunities. It is worth noting at the end that China is committed to raising its GERD/GDP to 2.50 by 2020. Given the rise of the GDP in China, it will likely pass the US and the EU in total expenditure on STI. Even today, China has established 26 research laboratories in other countries (11 in the US and 11 in the EU). The EU has a target of reaching 3.0 by 2020 as well. The rate of innovation is increasing dramatically around the world. Canada can compete if it decides to use its procurement power.
CONCLUSION
The Canadian government is in a position to dramatically increase Canada’s innovation culture. Innovation is a complex process that involves universities, governments and the private sector. As shown earlier innovation is not the responsibility of the private sector alone. Around the world, governments are playing increasing roles in using their purchasing power as drivers of innovation. This has long been the case in the United States, where smart procurement has been a significant contributor to building innovation capacity in both universities and the private sector. We recommend that Canada adopt four major elements in its procurement policies to drive the demand side of innovation.
1. Create an independent funded agency such as DARPA in the US to identify grand challenges and opportunities for Canada.
2. Federal procurement policies should require that innovation be one of the key criteria in awarding contracts
3. A number of federal research institutes should be transferred to universities and the private sector, while continuing to be fully funded by the federal government
4. The federal government should adopt a policy of fully funding its programs of grants and contracts to ensure that the programs can be delivered without compromise.
REFERENCES AND SELECTED READINGS
Bush,V. (1945) Science, the Endless Frontier, Washington DC, US Office of Scientific Research and Development
Belfiore, M. (2010) The Department of Mad Scientists, How DARPA is Remaking Our World, from the Internet to Artificial Limbs, Harper Collins
Johnson, S. (2010) Where Good Ideas Come From — The Natural History of Innovation, Riverhead Books
Innovation Canada: A Call to Action, Review of Federal Support to Research and Development- Expert Panel Review (2011)
Commissioner Geohegan-Quinn, (2011) speech presented on Feb 1, 2011
Connell, D. “Secrets” of the World’s Largest Seed Capital Fund, a report of Centre for Business Research, University of Cambridge
Connell,D. and Probert,J. (2010), Exploding the Myths of UK Innovation Policy: How ‘Soft Companies’ and R and D Contracts for Customers Drive the Growth of the Hi-Tech Economy, Centre for Business Research, University of Cambridge