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Forward Commitment Procurement Know How Programme Part 1

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Title: Forward Commitment Procurement Know How Programme Part 1


1
Forward Commitment Procurement Know How
Programme Part 1
  • Introduction to Innovation and Forward Commitment
    Procurement
  • KHP 1A Innovation and FCP Introduction,
    concepts and background

These materials remain the property of BIS. They
constitute part of a learning by doing
programme and are unsuitable for stand alone use.
They must not be used or passed to other
individuals or organisations without the express
and written permission of BIS
2
BIS, Innovation and Procurement
  • BIS and innovation
  • We want to make sure that Britain is the best
    place in the world to run an innovative business
    or service - this is critical to the UK's future
    prosperity, our quality of life and future job
    prospects
  • BIS and procurement
  • Developing a public procurement culture that
    stimulates innovation in the economy and delivers
    improved value for money to the taxpayer
  • BIS Innovation for Sustainability Programme
  • Developed to support these objectives and to meet
    the Governments commitment to scale up and
    replicate to use of Forward Commitment
    Procurement across the public sector

The challenge is to use public procurement and
public services to lead the way, shape the market
for innovative solutions and equip society to
meet the challenges of the future. Innovation
White Paper 2008 Innovation Nation
3
Forward Commitment Procurement Know How
Programme Part 1
  • Part 1 Introduction to Innovation and Forward
    Commitment Procurement
  • By the end of this section you will be able to
    explain the rationale of FCP and
  • outline the FCP process
  • Overview
  • KHP 1A Innovation and FCP Introduction,
    concepts and background
  • KHP 1B FCP principles into practice
  • KHP 1C FCP process overview
  • Activities and resources
  • Work through the key points
  • Complete the activities
  • Complete and submit the worksheets
  • Review and coaching session
  • Optional reading and activities

4
Know How Programme Part 1Part 1A Contents
  • This section is longer and more theoretical than
    subsequent sections.
  • It is divided into two parts which you can treat
    as two separate sections if you wish
  • Innovation and the public sector.
  • Forward Commitment Procurement introduction and
    origins.
  • The section will cover
  • Why innovation?
  • The role of the public sector in innovation
  • Definitions Innovation, Forward Commitment
    Procurement
  • Concepts Market Failure, Information Failure,
    Demand Pull
  • Why FCP?
  • By the end of this section you will be able to
    define innovation and explain the role of public
  • sector and FCP in addressing the market failures
    the impede innovation for the social good.

5
About InnovationDefining Innovation
Research is the conversion of money into
knowledge you dont know what the outcomes will
be when you begin, but it cant fail you always
end up knowing more than when you started.
Research is a low risk activity. Innovation is
the conversion of knowledge into money you know
what new outcomes you want to achieve before you
start but you can fail to achieve them.
Innovation is risky. Jack Frost, Chairman EIAG
  • Innovation is often confused with research.
  • They are in fact very different processes.
  • Research is a way of turning money into
    knowledge.
  • Innovation turns knowledge into money.
  • Research is about doing things for the first
    time.
  • Innovation is about using known things for a new
    purpose.
  • You dont know the results of research in
    advance.
  • Innovation is always targeted on known outcomes.
  • A key success factor for innovation is an
    accurate understanding of the unmet need it is
    targeting.

6
About InnovationInnovation why bother?
  • Change happens because a previously unrecognised,
    unmet need becomes apparent.
  • These unmet needs drive innovation.
  • Necessity is a key driver for innovation.
  • Innovation is hard
  • It takes time to come to fruition.
  • It requires us to think ahead.
  • It is inherently risky.
  • Innovation for innovations sake is not a good
    idea
  • dont innovate unless it is really necessary
  • but it is necessary more often than we admit, for
    example
  • escalating costs service reductions or higher
    charges
  • unable to deliver policy targets or ambitions
    unacceptable political or economic cost
  • pressing societal problems needing new
    approaches, etc.

7
About InnovationDefining Innovation

Innovation is the process of translating
technology and knowledge into new usable products
and services. It has been said that we have all
the technology we need to convert to a low carbon
economy. Arguably this is true but we still need
innovation to translate this technology into the
new products and services that we can buy.
Jack Frost, Chairman EIAG
Definition Innovation Innovation is the process
of translating technology and knowledge, into new
usable products and services
8
About InnovationHarnessing innovation for the
public good
  • Without new goods and services we will be unable
    to bring about the transformational change of
    society to a low carbon economy and a sustainable
    future.
  • The difference between these new goods and
    services and current goods and services is the
    extra social benefits (e.g. low carbon,
    sustainability) they provide.
  • These are new unmet needs that require innovation
    to be delivered.
  • But very often the process of innovation for the
    social good fails, and these new goods and
    services face significant barriers to market.
  • Many fall by the wayside, others remain too
    expensive or get stuck as impractical prototypes,
    while even the successes make only slow progress
    into the market place.
  • This means companies fail and society doesnt get
    the products and services it needs to bring about
    transformational change, a loselose situation.

Innovation will be the key to some of the
biggest challenges facing our society, like
global warming and sustainable development. We
need use all the tools at our disposal to unlock
solutions.
9
ConceptMarket Failure
  • This failure of innovation for the social good
    happens when the market doesnt operate
    efficiently in the interests of the social or
    common good.
  • When the market doesnt take account of the full
    costs or value of an economic activity, or
    doesnt deliver what society as a whole needs,
    economists call this market failure.

Definition Market Failure Market failure occurs
when market prices are not equal to the social
opportunity cost of resources. External effects
or externalities are evidence of market failure.
10
ConceptMarket Failure
  • Market failure, occurs because individuals are
    reluctant to pay for, or do not value, social (as
    opposed to individual) benefits.
  • Market failures provide a rationale for
    government intervention to influence and/or
    adjust the market for the benefit of the social
    good.

Market failure is a broad, catch all term that
economists use to explain why the free market is
failing to deliver what society needs and explain
why the market needs to be managed and regulated
in some way to protect the social good market
failures are all too common...
11
ConceptTypes of Market Failure
  • Market failures are quite common, and there are
    many types of market failure.
  • Externalities
  • Where the market does not take into account the
    social costs of production (e.g. pollution).
  • The environment is often undervalued, as is
    public health, good governance of countries and
    companies etc.
  • Information failures
  • Where information is not freely available markets
    will be inefficient.
  • Free rider problems
  • It is rational to let someone else do new things
    and take the risk and copy them.
  • It is rational for procurers to wait until
    someone else has bought a new product and taken
    the risk this entails before adopting them.
  • If everyone does this new products only arrive in
    the market slowly or fail to penetrate the market
    with sufficient depth or pace to justify
    investment and often fail to reach the market.
  • In the case of environmentally beneficial goods
    and services this is to the detriment of society
    as a whole.

12
ConceptExamples of Market Failure
  • Negative externalities (effects) occur when the
    consumption or production of a good causes a
    harmful effect to a third party.
  • In the past we regarded clean air and water as
    free and consequently this created problems such
    as the London smog or polluted rivers.
  • If a company produces chemicals, but cause
    pollution, then local fishermen will not be able
    to catch fish. This loss of income will be the
    negative externality.
  • Government intervened to regulate the free
    market with measures such as the Clean Air Act
    and the problem was largely solved.
  • Today emitting carbon dioxide is free, despite
    the problems it is now known to cause, and there
    are attempts to correct this by putting a price
    on carbon dioxide emissions.
  • Can you think of any others?

13
ConceptMeasures to correct market failures
  • As we have seen markets often undervalue social
    benefits and the common good.
  • Government and the public sector in general are
    societys agents and can intervene in the market
    to protect the common good.
  • Government intervention to correct so called
    market failures can take different forms
  • Policy and regulation (e.g. the Clean Air Act).
  • Fiscal incentives / disincentives (e.g. lower
    road tax for low carbon cars).
  • Grants and subsidies (e.g. the Renewables
    Obligation).
  • Procurement.
  • A combination of these measures works best.

Britain is home to a large number of companies
involved in low carbon innovation. However, there
is a number of areas where strategic action from
government is required to further strengthen
Britains potential. Targeted policy measures
will be essential to tackle market failures
preventing innovation and growth. UK Low Carbon
Industrial Strategy
14
Forward Commitment ProcurementUsing public
procurement to correct market failure
  • Public Procurement is gaining ground as a form of
    intervention through which government can
    intervene to address market failures and support
    societal objectives, for example to stimulate
    innovation for the public good.
  • The Forward Commitment Procurement approach is a
    way that procurement can be used to help overcome
    market failures that inhibit the
    commercialisation of innovative goods and
    services. It does this by
  • providing information on its unmet needs and the
    scale and nature of the market opportunity
  • providing a credible demand for innovative goods
    and services
  • transferring the risk to the party best able to
    manage it
  • placing a value on delivering societal
    objectives, such as reducing carbon emissions.

15
About InnovationInnovation why us?
  • As already discussed, the Public Sector has a
    special role in stimulating and enabling
    innovation where the resulting outcomes are for
    the public good.
  • But if innovation is hard and risky, why not wait
    until someone else takes the risk, or prices come
    down?
  • This is an example of the type of market failure
    discussed earlier, the free rider problem
  • i.e. it would be more rational for procurers to
    wait to buy products and services, when the costs
    of new products have come down, risks are ironed
    out and they are readily available.
  • But if everyone waits new products will fail to
    reach the market or will only do so very slowly
  • (e.g. in the case of LED traffic lights).
  • It can therefore be justifiable for government to
    intervene to help overcome this market failure by
    helping public sector purchasers mitigate the
    risks associated with innovation or early
    adoption
  • e.g. through grants to cover the additional costs
    of buying innovation for lead market procurers.

16
Forward Commitment Procurement Harnessing
innovation for the public good
  • As custodians of the public good it is the
    responsibility of the government through its
    agents in the public sector to hasten the arrival
    of socially beneficial new products and services
    into the market.
  • Therefore the public sector has an important role
    to play in supporting innovation and helping to
    overcoming the market failures that hinder the
    entry of new goods and services into the market.

Government action must complement the dynamics of
the market to address market failures around
innovation and company growth such as those
identified in the Stern Review. These include
providing support to drive consumer demand for
new, lower carbon solutions. UK Low Carbon
Industrial Strategy
17
Forward Commitment Procurement Harnessing
innovation for the public good
  • Forward Commitment Procurement (FCP) was
    originally conceived as a tool to address the
    barriers to market faced by environmental
    innovations, but is now also used to address
    market failures in other sectors of societal
    concern, such as sustainability and health care.
  • FCP provides a process by which public sector
    organisations can intervene to overcome market
    failures, and deliver benefits both for the
    contracting authority and society as a whole,
    simply by changing the way it goes about
    procuring goods and services.

The challenge is to use public procurement and
public services to lead the way, shape the market
for innovative solutions and equip society to
meet the challenges of the future. Innovation
White Paper 2008 Innovation Nation
18
Forward Commitment ProcurementIntroduction and
Origins
  • Why FCP?
  • The role of the public sector in creating market
    pull for innovation
  • Definitions FCP
  • Concepts Information Failure, Demand Pull

19
Forward Commitment Procurement Background
  • In 2005 the industry led Environmental
    Innovations Advisory Group (EIAG) (a joint BERR
    and DEFRA advisory group) was established by Lord
    Sainsbury to look at why the UK environmental
    goods and services sector was failing to grow and
    develop at the rate expected, and to advise
    Government what to do about it.
  • EIAG research showed that the lack of a credible
    articulated demand for environmental goods and
    services was at the heart of the problem.
  • This is a fundamental market failure - an
    information failure without information about
    nature of the demand the free market cannot
    allocate resources to deliver what is needed
    efficiently.
  • FCP was conceived and developed by EIAG as one of
    the ways Government could intervene to correct
    this market failure by providing the missing
    demand pull for new environmental products and
    services.

It is the lack of credible articulated demand
that is at the root of the relative failure of
innovation in the environmental goods and
services sector. Jack Frost, Chairman EIAG
20
ConceptWhat do we mean by Demand Pull?
  • In order to invest in innovation companies need
    to be reasonably certain of the size and nature
    of their future market i.e.
  • what do people want or need, if I make the
    product or supply this service will people buy
    it, what value do they place on what it can
    provide etc.
  • If there is no visible demand for a new product
    or service, companies cannot build the case for
    investment to deliver them to the market, as the
    market risk is too high.
  • So the new goods and services are not developed
    or brought to commercial production
  • i.e. there is no demand to pull new products and
    services into the market.
  • Government can intervene to overcome this market
    failure by helping to create the missing demand
    pull and by placing a value on innovation can
    create the market conditions that will support
    investment in innovation.

The key driver of growth for companies producing
low carbon goods and services is market demand.
Increasing this demand will create a powerful
incentive for low carbon innovation and the
creation of specialist low carbon businesses.
However, there are often market failures
associated with innovation investment.
Government needs to adopt a pragmatic approach to
identifying solutions to these problems.
UK Low Carbon Industrial Strategy
21
ConceptWhat do we mean by demand pull?
  • Public Sector bodies, as the agents of
    Government, can use public procurement processes
    to provide this missing demand pull.
  • It does this by providing the supply chain with a
    credible articulated demand for new goods and
    services.
  • How? by providing the market with critical
    information about the nature and scale of a
    credible market opportunity.
  • The great advantage of public sector requirements
    is that there is an implicit scaling up of
    demand, i.e.
  • if one public sector body has this requirement it
    is highly likely that others will too.
  • As we have discussed, it is particularly
    appropriate for the public sector to do this for
    environmentally and socially beneficial goods and
    services.
  • This goes a long way to overcome the barriers to
    market that innovative goods face, manage the
    risks involved, and unlock investment and bring
    new products and services into the market.

A large element of the perceived risk of
investment in low carbon innovation is tied to
uncertainty over the scale of demand and price of
the end-products. Used wisely, the purchasing
power of the public sector can help to reduce
this risk. UK Low Carbon
Industrial Strategy
22
Forward Commitment ProcurementInnovation and
Procurers
  • Innovation for the public good is a laudable aim,
    but as we have discussed, innovation is risky.
  • Sensible procurers worry when they hear the word
    new.
  • New products and services have risks they might
  • not work as expected
  • not be delivered on time
  • cost more .. and anyway have no track record.
  • But in some cases there is no choice e.g.
    existing products and services cannot deliver the
    transformation to a low carbon economy that we
    are aiming for.
  • If we keep buying them we will fail.
  • Business as usual is no longer an option new
    approaches are needed.
  • Forward Commitment Procurement helps procurers
    buy the new products and services they need,
    sensibly.

23
Forward Commitment ProcurementInnovation and
Suppliers
  • Think about innovation from a suppliers point of
    view.
  • Developing new products is risky and costs money
  • it inevitably incurs technical risk and requires
    a sound business justification to invest the time
    and money it needs.
  • Rational suppliers therefore develop new products
    only if they have to, e.g.
  • to protect margins
  • to win business
  • to retain customers.
  • The various technical and resource risks are
    under the control of the supplier and can be
    managed.
  • The risk that the supplier cant control is,
    having developed the product will someone buy it,
    i.e. the market risk.
  • Forward Commitment Procurement helps the public
    sector procurer to create the market conditions
    that support investment in innovation to deliver
    new products and services.

24
Why FCP?Innovation from the suppliers side
  • It is all about investment risk - not investment
    costs.
  • Many products and companies fail at the
    demonstration and scale up stage.
  • The gap between development and commercial sales
    is often referred to as the valley of death -
    in fact it is more a mountain of risk.





Risk to company
Government grant support
Revenues

more



Risk is at its highest when a supplier needs to
commercialise - the risk is high because demand
is not visible
Decreases as the product approaches market and
risks increase
Information that a real market exists reduces the
risk and enables a supplier to invest in
anticipation of future revenues












less


Development
Demonstration
Commercial sales
Scale up
Stages in bringing a product to market
25
Forward Commitment ProcurementManaging risk and
correcting market failures
  • A critical factor for suppliers of new products
    is the confidence that there will be a market for
    the new product once it is proven.
  • The amount of investment made by developers and
    by their suppliers depends on this confidence.
  • The future users of the new products can
    significantly affect investments by suppliers by
    making the future market as certain as possible
    (while retaining competition).
  • Forward Commitment Procurement is a way for
    public procurers to make this future market
    visible and credible without either procurer or
    supplier incurring unmanageable risks.
  • For example by making a commitment to procure
    at a certain scale, within a timeframe, if
    specification, price and performance parameters
    are met.

26
Forward Commitment ProcurementProviding the
missing market pull
  • The good thing from a suppliers point of view is
    that in the public sector market more often than
    not buyers have similar needs, and hence indicate
    a wider market.
  • This market information is highly valuable to a
    supplier, and if done in the right way it goes a
    long way to manage and reduce the supply chains
    market risk, and unlock the investment needed to
    develop innovate and develop new products and
    services that society needs.
  • Providing the supply chain with the missing
    demand pull is a corner stone of the Forward
    Commitment Procurement process.

Consumers, or regulators, demanding the
seemingly impossible from companies, i.e.
providing high and credible demand pull, can lead
to the development of radically new products.
Take for example the Californian Zero Emission
Mandates effect on the development of Zero
Emission cars. Jack Frost, Chairman EIAG.
27
Forward Commitment Procurement Definitions
  • FCP harnesses the power of public procurement to
    transform the market, creating the conditions for
    investment in the goods and services necessary in
    the shift towards the low carbon economy.
  • Public procurement because of the special role of
    the public sector in being agents for the social
    good by being a lead market for innovation that
    society needs.
  • Conceptually Forward Commitment Procurement is
    simple
  • a public sector body has an unmet need that
    current products and services cannot deliver
  • rather than compromise the public sector body
    offers to buy, in the future, a product or
    service that can deliver what it needs, when it
    needs it, at a price it can afford.
  • It addresses directly the key issues of
    information, investment and contractual risks and
    stimulating investment in innovative goods and
    services.

Definition Forward Commitment Procurement FCP
can be defined as a commitment to purchase at a
point in the future, a product that may not yet
exist commercially, against a specification that
current products do not meet, on a scale
sufficient to make it worthwhile for suppliers to
tool up and manufacture.
28
Forward Commitment Procurement A practical
supply chain management tool
  • Private sector companies actively manage their
    supply chains to promote investment in innovation
    and new or improved products.
  • They do this by engaging with their suppliers and
    providing credible information about their future
    requirements and purchases.
  • This provides the incentive and security for the
    supply chain to invest to deliver what is needed,
    when it is needed, at a price that is affordable.
  • FCP mirrors this supply chain management
    approach.
  • The public sector becomes the supply chain
    manager for the products and services required to
    deliver the social or common good.

29
Managing the supply chain for innovation Example
- the motor industry
  • The motor industry and their electronics
    suppliers share plans and ambitions many years
    ahead of products reaching the market.
  • The electronics suppliers align themselves behind
    the goals of their customers and invest in the
    development of products to meet their customers
    future needs.
  • To fail to do so would exclude them from the
    future market.
  • This leads to unprecedented innovation in vehicle
    electronics, in a cost effective way.
  • Every year cars can do more, perform better and
    cost less, in no small part due to the motor
    industries effective management of their supply
    chain.
  • FCP provides an endorsed process to enable the
    public sector to effectively manage their supply
    chain.

30
Forward Commitment Procurement Summary
  • A critical factor for suppliers of new products
    is the confidence that there will be a market for
    the new product once it is proven.
  • The amount of investment made by developers and
    by their suppliers depends on this confidence.
  • The future users of the new products can
    significantly affect investments by suppliers by
    making the future market as certain as possible
    (while retaining competition).
  • Forward Commitment Procurement is a way for
    public procurers to make this future market
    visible and credible without either procurer or
    supplier incurring unmanageable risks.
  • For example by making a commitment to procure
    at a certain scale, within a timeframe, if
    specification, price and performance parameters
    are met.

31
Forward Commitment Procurement Summary
  • This commitment can appear daunting to a
    procurer but provided a genuine need and
    credible intention is clear, the commitment can
    take different forms and may not need to be
    formalised in a contract.
  • FCP works best in conjunction with policy, fiscal
    incentives, and regulation that requires, and
    places a value on the outcomes being sought, or a
    cost on not delivering them e.g.
  • Carbon reduction targets
  • SOGE targets
  • Building regulations
  • Landfill tax.
  • The FCP process
  • makes unmet needs and future needs visible to
    todays investment decisions
  • manages risk to the supplier and the contracting
    authority
  • creates a win-win
  • the public sector and society gets the products
    and services it needs
  • the supplier gets a visible, credible, and
    scalable, market.

32
KHP Part 1 ASummary
  • The public sector needs to harness innovation to
    meet societal challenges such as climate change,
    sustainable development, social sustainability.
  • By providing a credible articulated demand for
    new goods and services to meet unmet needs, the
    public sector acts as a responsible supply chain
    manager for the public good.
  • This demand pull helps companies overcome the
    (significant) barriers to market for innovative
    solutions, and unlocks private sector investment
    to innovate to meet the public sectors (and
    societys) needs.
  • The FCP model provides a step by step process for
    the public sector to deliver the innovative goods
    and services it needs, when they are needed, at
    an affordable price.
  • However, FCP does require changes in the way the
    public sector operates.
  • We will explore this in KHP1B FCP principles
    into practice.

33
KHP Part 1 A ReadingFCP Background and
Principles
  • EIAG Report
  • Bridging the gap between environmental necessity
    and economic opportunity, EIAG, November 2006
  • http//webarchive.nationalarchives.gov.uk//http/
    /www.bis.gov.uk/files/file34987.pdf
  • Read pages 1 24
  • Make a note of any questions or comments
  • Copy and keep pages 20-21

34
OverviewInnovation for sustainability
  • Listen to or watch the presentation by Dr
    Jonathan (Jack)
  • Frost at the Tyndall Centre workshop
  • Beyond Stern Financing International Investment
    in Low
  • Carbon Technologies (approx 40 minutes long)
  • The presentation can be listened to as a podcast,
  • www.tyndall-podcasts.com/beyond_stern/jack_frost.m
    4a
  • or you can watch the movie version
  • http//www.tyndall-podcasts.com/beyond_stern/jack_
    frost_2.mov
  • Make a note of any questions and comments.
  • A static version of the graphic referred to in
    the presentation relating
  • to the example of the North America Emission
    Standards can be
  • found on the next slide.

35
(No Transcript)
36
Food for thoughtIs climate change a market
failure?
  • In the report Economics of Climate Change Lord
    Stern said Climate change is a result of the
    greatest market failure the world has seen.
  • Is this really true?
  • Failure certainly clearly something has gone
    wrong - but was it the market?
  • Perhaps in some respects
  • those who damage others by emitting greenhouse
    gases generally do not pay.
  • On the other hand, billions of people worked very
    hard over a long period of time to create the
    problem of climate change (albeit unknowingly).
  • The markets did give us what we asked for e.g.
    cheap energy.
  • Thats what markets do they respond to demand,
    to what the customer asks for, or indeed fails to
    ask for.
  • Is climate change a market failure? Or was it the
    failure of the customer?
  • And perhaps that was understandable when
    customers didnt know about climate change.
  • But we do now we need to start asking for
    different things, and enable to market to
    respond.
  • FCP provides a process for the public sector to
    ask for something different, and create the
    market conditions that enables the market to
    respond.

37
KHP 1A Review and Feedback Sheet
  • Write down any questions or points of
    clarification you would like to cover in your
    next review session.
  • Submit your completed worksheet and arrange a
    review session.
  • Optional reading and research
  • UK Low Carbon Industrial Strategy
  • you will find a copy of the in the KHP1A
    resources section
  • read the executive summary, highlighting key
    points.
  • BBC Reith lectures
  • Listen to 1 of 4 and 4 of 4
  • http//www.bbc.co.uk/programmes/b00729d9
  • link also in the resources section of the JERA
    KHP website
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