Leveraging Procurement to Grow the Innovation Economy
On the subject of innovation policy, we are fortunate to hear from David Connell. David recently carried out an independent review of the Small Business Research Initiative (SBRI), a cross-government programme to fund, through procurement contracts, the development and trialling of innovative new products and technologies to address unmet public sector needs.
His review (“Leveraging Procurement to Grow the Innovation Economy”) was commissioned by 10 Downing Street and announced by the Prime Minister in a speech to the CBI. It was published in November 2017.
We first asked David what is different about SBRI compared with the better known Innovate UK grant programmes and Treasury funded R&D tax credits?
He explained that there are four important differences.
“First SBRI competitions start with the definition, in functional terms, of a specific unmet public sector need. If the development is successful it is envisaged that the department or agency running the competition will eventually purchase the product, directly or indirectly through prime contractors.
Secondly, SBRI awards are contracts not grants. This means the work is 100% funded against a defined budget and deliverables. Grants and R&D tax credits require some level of match funding and for many start-ups and SMEs, this is simply not available or does not make sense given their business models. As important, a lead customer contract is the best sort of funding any company can have; it focuses R&D on real customer needs, provides endorsement for further customers, investors and partners, and reduces both the breadth and depth of the valley of death.
Third, the amounts involved are enough to take the development to a significant milestone and make a real difference to the business. Competitions are phased to focus funding on the best projects. For projects moving to Phase 2 this typically totals a million pounds over 2 to 3 years.
Finally, the SBRI process is designed to be run using an approach that draws on best practice by private sector corporations for R&D contracts with third parties and by venture capital investors. Unlike many grants, there is no requirement for collaboration, though businesses may subcontract elements of the work. The selection process includes an interview at both Phase 1 and Phase 2, with interview panels comprising both problem owners (e.g. NHS clinical specialists) and people with a business and VC perspective”.
David has championed SBRI since 2004. Why does he think it is so important?
The evidence shows that many (possibly most) of our most successful STEM based companies, as measured in terms of employment, exports and longevity, owe their early success to lead customer R&D contracts. Few are based on academic research IP and most have been able to use early customer funding to avoid or delay venture capital. This in turn has enabled entrepreneurial founders to retain control and grow a fully rounded business rather than succumbing to investor pressure for an early trade sale.
As start-ups, many of these, ultimately successful, companies were unable to raise venture capital or operated in, what were then, unfashionable technologies or specialised niche markets.
If we are to rebuild our industrial base, it is important that public sector customers play a full part in this success process as lead customer whenever appropriate.
What are your Review’s findings?
The use of procurement to stimulate UK innovation through SBRI has been vigorously supported for over 15 years by industry and professional associations, select committees, entrepreneurs, investors and governments of all colours.
My review shows that well run SBRI programmes can bring significant benefits to the public sector, and be transformative for start-ups and SMEs. Unfortunately, most spending departments have only paid lip service to the many exhortations and targets from Downing Street. Most SBRI programmes have lacked ownership and some 85% of SBRI contracts have been below minimum guidelines – too small to deliver benefits to either the public sector or the companies involved.
My recommendations offer a funding and governance architecture to address this problem.
Copies of publications expanding on these issues can be downloaded from David’s website: <www.davidconnell.org>