Innovative procurement

Challenges within public-sector contracting

Public-sector contracting is obliged to adhere to the principle of cost-effectiveness when purchasing delivery scopes, services and construction services. However, this principle in no way precludes the inclusion of innovative criteria when considering the cost-effectiveness of procurement. Quite the opposite: In consideration of the medium to long-term benefit and the overall life cycle costs, purchasing innovations to cover requirements can add towards economic efficiency. In fact, innovative services and products are also associated with positive environmental impacts in many cases, e.g. due to the potential for saving energy. 

There are procedures and approaches that enable the procurement of innovations to be brought in line with public procurement law and current procurement practice in order to achieve the promotion of innovation on the demand side while simultaneously upholding the principle of cost-effectiveness. The keywords below help provide a brief explanation of these procedures and approaches:


Public procurement procedure 

Public procurement law already provides effective tools to make the procurement of innovative requirements legally unobjectionable. Two particular examples of these are the "negotiation procedure" and "competitive dialogue".

Negotiation procedure

The negotiation procedure enables negotiations to be entered into with a small number of bidders and the desired solution to be further consolidated with the bidder that offers the prospect of the best solution to the problem right through to conclusion of the agreement. It is important to keep the narrowing of the applicant and bidder group traceable and fair. The choice of the most cost-effective offer must be based on concrete criteria communicated in advance.

Competitive dialogue

With a competitive dialogue, the contracting authority outlines the intended objective and continues a dialogue with potential bidders until the solution has been formed. The contracting authority then specifies the determined solution such that the bidders can submit offers as per an open process. There are no negotiations or further dialogues in this phase (§ 3 EG para. 7 VOL/A and § 3a para. 4 VOB/A).

Functional specifications

Another key aspect in promoting innovations is the option of functional specifications. These are used when the object of the research or development cannot be described in detail in terms of its design, but can only be described as an objective at first. The functional specifications denote the specifications by setting out the purpose, the function and the requirements. They do not describe the details of the product or service; instead, they describe the desired functionality – the result. The benefit of functional specifications is that they increase the number of alternatives on offer from a price and quality perspective and thus increase the chances of procurement being particularly cost-effective and innovative at the same time. They are of particular use when the contracting authority is not familiar with the market or perhaps does not even know what innovative opportunities are available. This method can be used to take into consideration technical developments and the resulting innovations (§ 7 VOL/A, § 6 VOF, § 7 VOB/A).

Alternative offers

Another way of increasing the consideration of innovation during procurement is through the regulations on alternative offers. These cover any deviation from the required offer (main offer) and therefore also cover change suggestions. In order to be able to cover requirements with innovative solution approaches, alternative offers should, in particular, be permitted in cases where conventional services are essentially being requested as part of the main offer and are described from a design perspective rather than functional either in whole or in part. If the contracting authority wishes to receive alternative offers and change suggestions, it must explicitly permit these. This permission must be stated in the announcement or in the procurement documentation when procuring delivery scopes or services. If such a statement is not made, alternative offers are not permitted. Minimum requirements for permissible alternative offers must also be created for conditions above the threshold values.


Innovation procurement tools  

The EU has identified public-sector procurement as being significant in the achievement of political – i.e. primarily outside the realm of public-sector contracting – goals. The following strategic political objectives are in place: Public Procurement Promoting Innovation (PPPI), Green Public Procurement (GPP) and Social Responsible Public Procurement (SRPP). The EU has additionally started promoting new public procurement tools that cover the typical product innovation life cycle from the idea stage to the market.

PCP and PPI

Pre-Commercial Procurement (PCP) relates to bidding for research & development tasks in the pre-commercial phase. "Public Procurement of Innovative Solutions" (PPI) requires purchasers to act as the first users of innovative solutions in the market launch phase.


Organisation – the interaction of those involved 

Many players are involved in the procurement of public-sector services. They fall into four categories: strategic decision-makers, procurers, users and bidders. All these groups have a key function to fulfil and they can make a great contribution towards making procurement open to innovation by their open-minded behaviour

Strategic decision-makers

Strategic decision-makers within politics (mayors, city directors, district administrators, ministers, permanent secretaries etc.) largely define the main guidelines of purchasing policy and shape the procurement processes. They can prompt the procurement of innovations through designing processes, objectives and frameworks accordingly and can encourage the purchase of new technologies. They also introduce suitable incentive and reward schemes and offer training opportunities for employees. 

Operative procurers

Operative procurers have a narrow playing field but can use their economic and technical expertise within this to make procurement innovative. They know the market and are able to strive for an innovative solution through early reconnaissance.

Users

Users are often underestimated, though they are in the best position to evaluate the pros and cons of new products. Through their day-to-day professional experience and intensive exchange of information they can provide the public sector with valuable input when it comes to introducing innovations.

Bidders

Bidders are primarily interested in selling their products. However, they too can promote innovations by, for example, pointing the way towards new technical possibilities. They know the benefits of their products (e.g. energy-saving, lower costs, user friendliness). Their goal must therefore be to inform purchasers about their innovations by means of intensive dialogue.


The principle of cost-effectiveness

Public-sector contracting is obliged to adhere to the principle of cost-effectiveness when purchasing delivery scopes, services and construction services. However, this principle in no way precludes the inclusion of innovative criteria when considering the cost-effectiveness of procurement. Quite the opposite: Taking into consideration in the medium to long-term benefit and the overall life cycle costs, purchasing innovations to cover requirements can contribute crucially towards economic efficiency as innovations are often associated with lower operating costs in the long term. The best way to calculate this is to use the Total Cost of Ownership approach. This determines all costs incurred before (analysis costs, contractual costs and communication costs), during (ordering costs and transport costs) and after procurement (energy costs, maintenance costs and disposal costs) and uses a risk-assessed interest rate to relate this to the point at which the decision is being made.


Demand aggregation

Public-sector contracting authorities can combine the demands of various procurement centres in order to save costs and to boost their negotiating position through increased order quantities. The resulting reduction in price can also tip the scales in favour of innovation. 


Holistic project management

Holistic project management is essential when it comes to major and complex procurements of innovative systems. Such procurement requires early planning from the emergence of a requirement, market reconnaissance, the contracting process through to accounting, and requires the involvement of all affected areas and persons – strategic decision-makers, procurers, users and bidders.


Best practices 

The best way to visualise the correct and efficient application of the elements described above is through examples of best practice. You can find a selection of these on our German site.