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Challenging a risk-averse government procurement culture

Young companies face bigger challenges when bidding for government contracts. Yet, until recently, procurement reform has been absent from the discussion table when policymakers debate the role of government in supporting startups.

New or young companies on the frontline of solving problems are under-utilized by governments facing bigger challenges when bidding for government contracts than older incumbent businesses that too often have lost their dynamism. While most governments still choose to debate “fair small business procurement targets,” some are starting to focus on how to reduce the barriers for those talent rich new businesses.

While historically government officials and entrepreneurs have chuckled and not been shy about being cut from different cloth, more recently “tucked and untucked shirt” communities can be seen hand-in-hand working on more relevant programs and better regulatory conditions for new firms to form and scale.
However, government still remains very risk-averse as a customer resulting in less support from the public sector and more importantly, less bold solutions to governments constantly emerging challenges.

Tom Symons, a principal researcher active in the field, recently found that out of the top 25 firms in the United States winning government contracts, the youngest was founded in 1969. And this pattern is not just evident in the US. In the United Kingdom for example, startups, defined as companies in their first five years of operation, get less than 3 percent of government spending. If you consider companies in their first two years of operation, the percentage of government procurement assigned to them drops to 0.5%. You will not be surprised that Symons, who works on the policy and research team at Nesta in the United Kingdom, suggested in The Guardian newspaper that the risk-averse procurement culture in governments should change.

To better illustrate the thicket of anti-entrepreneurial incentives embodied in public procurement practices, it is possible to list five ways governments appear to be turning their backs on new and young companies.

  • Bias towards incumbent companies. This bias is institutionalized in such requirements as needing three or more years of audited accounts, which make public procurement impenetrable by many startups, even when they offer a superior product or service at a lower cost than established government contractors. This reality comes at the expense of the taxpayer. To address this, one city, Sao Paulo, for example, changed regulations so that when tendering for public sector contracts, companies only needed to show tax compliance at the time of bidding to pre-qualify for the contract.
  • Bias towards tried-and-tested solutions. Procurement practices have typically entailed public organizations describing a specific solution to a challenge. The level of specificity often stifles innovation. Experts have called for cities to set the example in changing this harmful practice (see for example the Innovation That Matters report by 1776 and the US Chamber of Commerce Foundation). Entrepreneurs are after all better at building airplanes “in the air”.
  • Procurement as an insider’s game. Many startups are discouraged from embarking on the lengthy process of securing public sector clients because of the complexity and heterogeneity of the public sector bidding processes. Often startups simply decide it’s not worth their time. And while public agencies improve their track record in terms of fairness, it is clear that relationships and track records mitigate risks for contracting employees who prefer to take fewer risks when awarding the contract.
  • Bureaucratic payment delays. In addition, public procurement is often characterized by extended payment periods when compared to the private sector. To address this, many governments, such as the United Kingdom, have issued new regulations ensuring that invoices must be paid within 30 days, as well as created a single bidding portal for all procurements. Cash flow is a significant issue in an era when there is so much pressure on startups to avoid giving away equity or taking on debt too soon but to reply on income for operations and growth.
  • Lack of coordination. In general, the agencies working to increase innovation and support for new firm formation do not coordinate with those that do procurement. The US Government for example has over 1,000 support programs to foster and encourage new entrepreneurs. There seems little alignment with its agencies tasked with picking contractors.

National and local governments have long prioritized encouraging procurement officers to give a fair share of their government’s business to small firms and you will be hard-pressed to find a small business conference or women’s entrepreneurship conference where procurement is not on the agenda. What is new is the early adaptors in those governments starting to look at ways to contract more with young firms by, for example, issuing smaller contracts, setting less restrictive qualifying conditions, or facilitating more transparent tenders. Here are some examples.

A more inclusive procurement policy

Growing Your Business”, a May 2013 report by the UK Prime Minister’s Enterprise Advisor, David Young—formally known as Lord Young of Graffham—congratulated the British government for implementing measures, such as abolishing pre-qualification questionnaires for small contracts, and abolishing pre-security clearance requirements unless there are exceptional circumstances.

However, he called for more aggressive reforms, such as legislating “single market” principles to provide a simple and consistent approach to procurement across all public sector agencies. The British parliament has since created a single procurement market-place, Contracts Finder, which hosts all public contracts above £10,000 in central government and above £25,000 across the wider public sector.

More recently, Lord Young’s February 2015 “Report on Small Firms” urged the UK go further in increasing transparency and revisiting circumstances for procuring on a large scale versus purchasing through smaller procurements.

City-level policy levers and programs to crowdsource solutions

The CITIE framework sets out “government as a customer” as one of the nine roles that a city can play to support innovation and entrepreneurship across its full range of its activities. A CITIE diagnostic tool evaluates cities suggesting that a city:

  • Ensures the visibility of procurement opportunities through a single portal.
  • Ensures that pre-qualifying requirements are achievable by new businesses.
  • Defines targets for spend on new businesses.
  • Uses problem-based procurement methods.
  • Uses open innovation methods to engage the ecosystem.

The CITIE study authors argue that high-performing cities “see the value of outcome-based procurement strategies which invert the traditional procurement process”. Code for America in the United States has delivered the same message suggesting cities and counties can lead the way in reimagining procurement.

The experience of Barcelona has shown that when city governments experiment with problem-based procurements, they naturally open up avenues to government contracts for a wider selection of companies, including innovative startups. The Barcelona Open Challenge, for example, has sought to procure innovative solutions for pain points such as reducing bicycle thefts in the city, reporting potholes, and monitoring pedestrian flows in the city. The Challenge provided winning proposals with guaranteed public service contracts, plus office space from which to run their operations. This validated their projects to seek further clients.

Similar practices from around the world include the Chicago CleanWeb Challenge, a year-long hackathon that challenged developers to use city data and create technological solutions for environmental issues. Philadelphia, in turn, won $1 million through the Bloomberg Philanthropies Mayors Challenge to create a pathway for new players to bid on city work. Philadelphia is doing this via a 12-week accelerator-type program, called FastFWD, aimed at refining business ideas from an open call to entrepreneurs to come forward with solutions to public safety challenges.

In essence, these types of programs help bridge the pre-commercialization gap for their innovative products and services by awarding contracts and other benefits that help promising startups grow. The OECD-World Bank Innovation Policy Platform explains we have seen this at the national level, where public procurement has sparked a number of major technological revolutions, including Internet Protocol technology and the Global Positioning System (GPS). That historic evidence was the inspiration in the United States behind in 1982 as the first large-scale public venture award program that was replicated across the globe.

If we are to achieve greater and better assessment of the impacts of public procurement policies and regulations on innovation and entrepreneurship, we need better evidence which, to date, is still scarce. We know, however, reforms in government procurement need to extend beyond civic innovations. As Tom Symons suggested, to support innovation and address complex social challenges, we need to be conscious of the barriers that can exist for new and young companies trying to win public contracts at all levels.

Last week I met with representatives of some U.S. corporations anxious to engage more aggressively in startup ecosystems. I had assumed they were primarily seeking talent to hire or investment opportunities. To the contrary – they seemed focused on the fact that solving challenges across their value chains might after all be better done by teams of fresh founders and startups rather than a formal in-house research and development infrastructure. What they needed was a better way to source problems across potential co-founders and new firms quickly and effectively.

Perhaps like these corporations, what should incentivize governments to open their doors more deliberately to contracts for startups, should be looking for as NASA describes it, “better, faster and cheaper” answers. New firms possess the ability to turn on a dime, pivot to solving different challenges or to switch to the crisis of the day, and think outside the rules and lines burdening institutions.

Government may have to remain risk averse, but taxpayers should be demanding more than implementing procurement fairness for “small business”. Americans should be demanding that more of their money go to contracts for those new and young firms populated by America’s most disruptive pioneers already taking risks with their own money in a race to meet the impossible. Let’s face it, as voters we charge our government with the impossible. Why not challenge them to seek more help from those of our citizens who relish with glee the challenge of impossible odds!

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