Government is regularly criticised for not doing enough to encourage innovation when procuring contracts. Often, it is the procurement rules themselves which get the blame with arguments that the "bureaucratic" and "cumbersome" rules around awarding public contracts are a barrier to buying truly innovative products and services that help solve some of the critical social, financial and environmental problems we face as a country.

We think that this criticism is unfair. In fact, for the reasons explained in this article, we believe that the public sector could be bolder in the way it approaches procurement by making greater use of the permitted legal mechanisms to ensure that innovation can be nurtured and rolled out across a wide range of Government services.

What are the rules and why do they exist?

Public authorities are required to follow the procurement rules when awarding certain contracts which exceed pre-set financial thresholds1. These rules, principally contained in the Public Contracts Regulations 20152, are based on EU Directives which aim to ensure that procurement markets across the EU are opened up to competition which is transparent, non-discriminatory and affords equal treatment to all bidders irrespective of where they are established.

At a very high level, these rules:

  • require contracts to be properly advertised on an EU-wide basis;
  • ensure that undesirable organisations are prohibited from tendering (including those which have been convicted of certain crimes such as bribery and those which have been proven to have performed poorly on previous procured contracts);
  • set out procedural rules for authorities to follow;
  • ensure contracts are awarded on the basis of lawful and transparent criteria; and
  • allow unsuccessful bidders a degree of feedback to help them understand award decisions and provide a 10 day standstill period during which a contract cannot be signed to give bidders an opportunity to challenge the award decision if legitimate grounds to do so exist.

The risks of getting procurement wrong can be severe, with high profile court proceedings and substantial damages payments being issued against Government3. It is therefore fair to say that some authorities take an overly cautious approach to compliance and occasionally use the procurement rules as a reason for rejecting more innovative proposals.

How can the procurement rules encourage innovation?

This topic has very recently been addressed by the European Commission in its notice entitled "Guidance on Innovation Procurement"4. The paper provides examples from a number of public bodies across the EU, in respect of achieving innovative results to overcome a broad range of issues. The guidance also discusses the use of 'functional requirements' or 'outcomes based' specifications (rather than descriptive requirements) and how to design evaluation criteria to encourage innovative responses. The guidance may be indicative of the Commission's view that there is a general lack of innovative approaches in procurement on an EU-wide scale.

However, there are a number ways Government can deliver innovation through the procurement rules. We've chosen five specific examples which are all expressly provided for in the law, although not under a single banner focussed on innovation. Together, however, they build up an armoury of tools for the public sector to drive through innovation and ought to give procurers confidence that a new approach can be taken without giving rise to unacceptable legal risk.

1. Early market engagement

This is not new. Procurement and legal practitioners have long advocated that authorities should engage at an early stage with the market, particularly where the "requirement" is unknown or the market is untested. However, before the introduction of the Public Contracts Regulations 2015, such engagement was not officially sanctioned by law. That has changed, and it's certainly clear that many more authorities are using this type of interaction to shape procurement exercises.

That said, it doesn't yet appear that there is adequate and sufficiently targeted engagement aimed at encouraging innovative solutions to important problems. In many instances, market consultations before publication of a contract notice are used as a tick-box exercise allowing the authority to justify internally that its process was robust. All too often, early market engagement takes place within tight timescales and far too close to the commencement of the formal procurement to allow for any meaningful consideration of genuinely innovative solutions or constructive feedback emerging from that engagement. More often than not, in fact, authorities know (or think they know) exactly what they are looking to procure and won't be side-lined by the suggestion of a new approach. Finally, authorities don't spend enough time thinking about who to target with pre-market engagement exercises and how to do this. Usually, this sort of interaction is commenced with the publication of a Prior Information Notice, which more often than not will only reach larger, established organisations with processes in place to monitor such adverts. The smaller, startup companies with the most innovative solutions may not even know that such adverts exist, never mind how to find them and respond to them.

This is unfortunate, but can be easily changed with time and preparation. Authorities should be encouraged to consult with the market much earlier in the process by building into their procurement timetables a sufficient period of early engagement. These market consultations should then be as open as possible (within the parameters of the law of course) so as to encourage new ideas. They should also be targeted at the right audience and new ways of engaging with smaller organisations should be trialled (e.g. presenting at trade shows and interacting with small business interest groups).

2. Encouraging greater collaboration

Early market engagement can also be a great way of introducing bidders to potential partners in an effort to encourage joint bidding where this would be an attractive option. Innovation is normally best delivered by new market entrants – the startups and "disrupters" – who don't already have experience of working with the public sector. These organisations find it difficult to respond to complex and lengthy ITTs and RFPs and may not even be able to comply with the experience and financial standing criteria to get to the tender stage in the first place.

The procurement rules specifically permit group submissions and offer authorities a good deal of flexibility to accommodate collaborative arrangements. As such, authorities can craft their Selection Questionnaires to make it clear that multi-party bidders would be welcome, particularly where members of a consortium are SMEs. The Government's standard form "Selection Questionnaire" already provides for group submission, but more could be done by ensuring at this stage that sufficient weight is attached to the bidder demonstrating as a whole that it has experience of delivering innovative solutions or otherwise making appropriate concessions for parties that don't have any experience at all because they are a startup.

Authorities should then ensure, having made an effort at the start of the process to encourage collaborative bidding that they don't inadvertently design later stages of the procurement in such a way as to work against these types of bidders. Blanket requirements for parent company guarantees and joint and several liability can put joint bidders off, and in some instances these requirements are not well thought through and not absolutely necessary.

3. Use of more flexible procurement procedures, including Innovation Partnerships

The Regulations set out five procurement "procedures" which an authority is permitted to use. Regrettably, there are some authorities which, as a matter of policy, refuse to use anything other than the simplest 'open' and 'restricted' procedures. These processes involve bidders submitting a tender without any opportunity for discussing the requirement with the authority in advance. They are heavily compliance-driven and give next to no flexibility to an authority looking to do things differently.

'Competitive dialogue' and the 'competitive procedure with negotiation', as their names suggest, allow parties to discuss aspects of the procurement, including the technical requirements, proposed financial make-up of the arrangement and contractual provisions. In the past, these procedures have been criticised for taking too long and resulting in high levels of wasted bid costs. In our view, this is because they were poorly managed and structured in a way which made delay and high cost unavoidable. However, we think that innovation is best delivered through the use of one of these more flexible processes. In an open or restricted procedure the authority must fully describe what it wants and bidders must submit compliant bids which satisfy those requirements. Given that authorities can't describe what they don't know exists, innovation will very rarely be achieved in an open or restricted process. The public sector should become more comfortable in using the more flexible procedures to allow a meaningful discussion with bidders to take place on what their "requirement" actually is and what potential solutions might be available in the market.

But the clearest invitation yet to the public sector that innovation should be encouraged through the procurement rules was the introduction of 'innovation partnerships' in the 2015 rules. IP offers even greater flexibility to procuring authorities and sets up a procedural framework within which innovative solutions can be researched, developed, prototyped and rolled-out all within a single procurement process. IP allows authorities to short-list a number of potential "partners" (including on the basis of any R&D specific experience), engage in negotiations with those potential partners to identify the organisations with the best potential solutions and then the authority can enter into one or more IPs. Once the parties are "in contract", the IP can be staged and the authority can agree to remunerate each partner for each stage in the process.

The first stage might typically be a "research" phase, followed by "development" of the product/service. The authority might choose after the first stage to terminate an IP with one partner on the basis of transparent criteria because the research has shown that the solution is not suitable or viable. The staged IP continues until the authority has identified a solution which can be rolled out.

The added advantage to the public sector of IP is that the public authority may be able to share the commercial benefits of any new product/service which is developed. Obviously, this would be subject to negotiation between the partners, but the process could see the greater commercialisation of the public sector with Government reaping financial rewards if the solution turns out to be a success and can be offered to other customers.

The UK was the first EU Member State to introduce this new procurement procedure back in February 2015; however, since then only 14 such procurements have been undertaken in the UK. This may be down to the fact that the process itself is still relatively unknown with little legal and practical guidance on its use, but given the procedure's obvious advantages that ought not to get in the way of bold authorities seeking to deliver innovation in an ever-changing world.

4. Less reliance on frameworks

Framework agreements are a common feature of UK procurement practice, and have many benefits as the public sector seeks to take advantage of a more centralised purchasing power. Frameworks also simplify the process of awarding specific contracts, as there is no need to run a full OJEU procurement each time. That said, however, they are a closed system (often for as much as four years) and mean that new entrants can be locked out of the market for a significant period.

It is also fair to say that some framework agreements, like the Government's G-Cloud frameworks, are not always used appropriately. This may be because the specific requirements, whilst seeming to be covered by G-Cloud, does not actually fall within the scope of that arrangement. This obviously opens the public sector up to legal challenge, but also means that an opportunity which might have been procured on the open market is actually awarded within a closed system. Authorities should carefully balance the benefits of following a framework in terms of potential cost and time savings against the commercial (and sometimes legal) benefits which exist if the requirement is procured openly.

Dynamic purchasing systems have also now become more popular since the rules on these were relaxed in 2015. A DPS is similar to a framework agreement, but is fully electronic and allows providers to join at any point throughout the DPS's term. One of the disadvantages to using a DPS for innovative solutions, however, is that they are aimed at commodity-type purchasing and do not allow for significant discussion on the requirements and solutions. So whilst this approach to procurement is more innovative, catering better for emerging market entrants, they do not necessarily facilitate a streamlined process for those types of bidders to develop and offer innovative solutions.

5. Possible use of direct awards?

As procurement lawyers, it is rare that we are able to advise a public sector client that a direct award can be made on the grounds that the chosen provider is the only person capable of performing a contract. However, for truly innovative solutions, it is not out of the question that this could be the case. The procurement rules allow authorities to award contracts without first conducting an OJEU procurement process where "competition is absent for technical reasons" or to protect "exclusive rights, including intellectual property rights". Of course, the rules around this exclusion are very restrictive and will be interpreted as such by any Court; however, in some cases, particularly relating to innovative technological products with protected intellectual property, this may very well be a possibility.

Instinctively an authority will think that this route is not available, and that is certainly the best way to approach this question in the first instance. However, it should not discourage an authority from properly investigating the possibility and being brave if it looks like grounds exist.

Conclusion

Public sector procurement on the whole is certainly better than the negative press attention that it sometimes attracts; but that said more can be done to encourage innovation and help new entrants access public markets. Some of the suggestions in this article are "quick wins" (e.g. encouraging collaboration at the selection stage) whilst others will take greater commitment both politically and from a resource perspective. However, we think there is real merit in using these legal techniques to drive an innovation agenda and bring public procurement into a truly modern age.