Google's Project Loon ©Jon Shenk
Google's Project Loon ©Jon Shenk

How procurement can enable innovation

19 January 2018

Some say there is an inherent conflict between procurement and innovation, but it made Google’s lifesaving Project Loon a reality. The function has the potential to enable transformative ideas – if it learns how to operate in a shifting innovation ecosystem

When David Natoff was leading strategic sourcing at Google, an unusual request landed on his desk: to buy a $50,000 balloon. With an average project spend of $3m, it would have been easy to reject the request and say: “I’m not working on this, it’s too small,” he recalls. But he threw himself into sourcing the perfect balloon.

That one balloon became 2,000 balloons. It was the prototype of Google’s Project Loon, a research and development project with the mission to provide internet access to remote areas. “It became a much bigger prospect – and we managed to reduce the costs,” says Natoff. Several years later, when storms battered Puerto Rico in October 2017, Google was able to use the balloons Natoff and his team had procured (above) to provide 4G internet access to areas that had been cut-off. In the wake of the storms, the balloons delivered basic connectivity to 100,000 people, helping them connect with emergency services and loved ones.

For Natoff, who now runs his own consulting firm Blue Sphere Consulting, the Project Loon anecdote neatly encapsulates how procurement can be a player in innovation. “Procurement can be innovative when it’s an enabler rather than a cost-savings blocker,” he says.

It needs to be, because innovation is only getting more critical. PwC’s 2017 global CEO survey found that nearly a quarter (23%) of leaders singled out innovation as their top priority for the coming year, ranking it way ahead of other concerns such as human capital, competitiveness or customer experience.

 

GET THINGS DONE

So what exactly should procurement’s role be? “Ideas and creativity are the foundation for innovation; but they [alone] are not innovation,” says Marcell Vollmer, chief digital officer at SAP Ariba. “They must be converted into actual products and services that can be implemented to drive new ways of thinking and acting.” That’s where procurement should step in and enable and support – as Natoff did – not stifle or hinder with excessive process.

Warrick Cramer is CEO of Tomorrow Street, an innovation centre run out of Vodafone’s supply chain function. He believes procurement can play a vital role in innovation. “Some say there is an inherent conflict between procurement and innovation,” he says. “I disagree, and think there are few other functions that are better suited to spearhead innovation.” He cites procurement’s ability to get things done, its connection to the whole business and its external market knowledge as key enablers.

Samuel de Frates, senior procurement director at pharmaceutical giant GSK, agrees: “Procurement plays a critical role in connecting innovation from an infinite source of ideas in our supply base, to an infinite number of business opportunities. If procurement doesn’t connect these two worlds, who will?”

There already exist plenty of examples of good practice in SRM, with procurement professionals proactively encouraging their supply base to suggest ideas. According to State of Flux’s latest SRM Survey, eight in 10 organisations are actively seeking more supplier innovation.

GSK, for example, ran a specific ‘packovation’ event where suppliers brainstormed ideas for intelligent packaging. The event resulted in Thinfilm, which uses technology to give customers product advice via mobile phones and is now being used in GSK’s over-the-counter Flonase nasal spray.

At TECOM Group in Dubai a regular supplier innovation forum brings together 10 critical suppliers large and small to pitch innovative solutions, such as an energy management project using giant solar panels at Dubai’s Industrial City. “Our role as a company is to drive the economic development of Dubai,” explains senior manager, procurement operations & SRM Jonathan Tungu. “So we need to tap into suppliers, one of the key pillars of innovation.”

But, as Daniel Weise, partner and managing director at Boston Consulting Group (BCG) explains, while procurement is part of the innovation game, the rules of the game are rather confusing at the moment. “The supplier ecosystem now is different,” he says. “It’s not about having two or three suppliers – those £100bn companies that are years old. Now it’s start-ups, smaller companies that haven’t been around as long. Navigating that ecosystem is key to procurement.”

The boundaries of organisations are becoming more porous, and the innovation ecosystem is changing, agrees Lance Younger, head of Deloitte UK’s sourcing and procurement practice. “Supplier innovation is becoming more fluid,” he says. “Dealing with only a few big suppliers means you are blinkered. Innovation often comes from the edges not the centre.”

True innovation is increasingly unlikely to come from large organisations, held back by bureaucracy and legacy. Instead, corporates are recognising the need to engage with a diverse range of start-ups, often via open innovation platforms. The State of Innovation report from The Unilever Foundry (Unilever’s platform for start-ups) predicts that within five years, all top corporates will be collaborating with start-ups.

“Start-ups are more likely to be better at disruptive innovation,” explains Tom Symons, principal researcher at Nesta, the UK’s innovation foundation. “Market incumbents almost always miss the next big thing; new companies are more likely to take risks, experiment and explore new technologies.”

This shifting ecosystem creates a challenge for procurement: the need to balance risk management with risk taking, and demands for supplier consolidation with the imperative to work with cutting-edge and specialist providers. According to The State of Innovation report, 75% of start-ups say it is difficult to navigate large organisations and 66% say unfamiliarity with processes and bureaucracies is a barrier. But there’s an opportunity here too: a huge 89% said smooth procurement processes were the most critical element of a successful partnership.

THE NEED FOR SPEED

The problem is, many established procurement processes are simply too slow, says Mark Bromley, sourcing lead UK & Ireland at MasterCard. To support strategy to grow market share, procurement at MasterCard needs to prioritise speed to market. Bromley works closely with MasterCard Labs, the firm’s R&D arm, helping to bring ideas and products from start-ups into the business – and he has reinvented procurement processes to do so.

“To be innovative we have to work very closely with innovative people, both internally and externally – small companies trying to develop life-changing products,” he explains. “We need to get them in quickly and not lose their interest. If it takes 6-8 months to on-board them, they will go elsewhere.”

To speed things up, Bromley has created a streamlined MSA (master service agreement), working with his legal team to ensure it is aligned to core T&Cs, and that it covers the main risk factors. “It is light touch, not asking for lots of liabilities or insurance,” he says. As the relationship develops, so can the MSA. Bromley introduced the process less than a year ago and has already brought in half a dozen new suppliers, including Fluid AI, which is working on technology for virtual bank kiosks, and one start-up creating chips to enable older technology, such as the Nokia 3310, to use contactless pay.

“When I met with start-ups to ask them what the biggest challenges of working with corporates were, the main thing was long and clunky procurement processes,” he says. “Contracts are a barrier. A 50-page contract is designed for a Microsoft, not two guys in Estonia who would need to get external counsel to review it. We had to create something flexible and easy.”

ENGAGEMENT THRESHOLD

Amanda Spencer, head of supplier relationship management at EY, is about to start a similar project, to find out where the pain points are for start-ups, and break down barriers. “The thresholds for engagement with procurement are often set against a monetary value. This is the first process that needs to change as smaller suppliers become more credible and crucial,” she says. She predicts that she will find, as Bromley did, that “on-boarding is where a world of pain kicks in”.

However, she points out that it “needs to be a two-way street”, with corporates helping start-ups to understand the importance of things like cyber security. “It’s important smaller firms understand the impact of some of the things we do push on them; we need to educate,” she says.

Innovation is inherently risky; procurement by its nature risk adverse. But there are ways to walk the tightrope. Collaborate internally to assess what can be relaxed. “When working with start-ups, we must be realistic about the real risks the company is taking on by not having a supplier sign a 150+ page IT security policy,” says de Frates. He adds that it is about “smartly containing risk”, by using anonymised data in testing, for example.

“If it’s cutting edge, there will be some risk,” states Bromley. “But the next thing you know, you’re working with the next Google.” And Tomorrow Street’s Cramer suggests “not taking any risk is probably the biggest risk you can take”.

Reframing how the business thinks of risk requires a cultural shift, and indeed many barriers to innovation are cultural. Organisations need to become more comfortable with failure if they are to ultimately triumph. “There is an inherent fear of failure in corporates; there is less reward for taking a risk and succeeding than there is reprimand for failure,” says Cramer. “It doesn’t mean I think it is OK to fail, but I do think it is wrong not to try.”

RISK THAT WORKS

Natoff believes there has to be a culture of “controlled risk taking” and experimentation, and that procurement should create the conditions for this within its teams. “It’s about providing the bandwidth for people,” he adds. “The biggest challenge is most organisations are too busy to experiment.”

To support innovation then, procurement functions need to become more innovative themselves. Leaders must think about how they can free up resource and get teams together to brainstorm ideas. One CPO in the pharmaceutical industry told SM he had created a ‘skunkworks’ team within procurement, whose job was to try new things and embrace open innovation models, and whom he freed from focusing on everyday tasks.

Rethinking incentives and targets can help. At TECOM, at least 2% of spend has to go towards SMEs while GSK procurement has a target around ‘Year Three Innovation sales’, says de Frates: “Procurement has to deliver product innovation that achieves a specified level of sales in year three of the product launch.”

FOCUS ON THE CHALLENGE

If you do what you always do, you’ll get what you always get - so a mindset shift is needed in how you approach solving problems. Procurement needs to be more open-minded when planning tenders, says Nesta’s Symons. “The response to risk is putting in as many safeguards as you can. That removes any room for innovation, because the specifications are so tight. To overspecify in the procurement process removes the possibility of innovation.” This is, he adds, a particular problem in government procurement.

Instead procurement should take a problem-based approach, focusing on the challenge rather than what they think the solution might be. At GSK, an innovation sourcing team works with R&D to identify business challenges, which suppliers can then pitch solutions to.

In the public sector, Citymart is a platform that takes problem-based procurement to local authorities, replacing detailed specs with problem statements. “When cities go to procure something and write specs, [procurement] tends to have less than 3% market knowledge on average,” says founder Sascha Haselmayer. “Take a traffic light spec. There might be 30 different ways to get the same outcome: educating children, using sensors or speed bumps, driving behavioural change… All sorts of things can lead to the same outcome, but [procurement] isn’t looking for them.”

Citymart worked with the city of Barcelona on a series of challenges, including one to tackle bicycle theft. By reducing a 155-page document of T&Cs down to 27 pages – “at 155 pages you are giving people 155 reasons why they can’t participate” – the city received 119 bids. It would normally get four.

The winning project is a collaboration between a company that makes furniture, which devised a bike parking station, a tech company that produced an app to control bike locks remotely, and an insurance company that will insure bikes by the minute while they are locked up.

“The assumption is that the solutions are already out there,” says Haselmayer. “We just don’t know where they are or what they are. See what is out there before you invent anything.”

IT STARTS WITH A ‘WHY’

The existence of such tools is allowing organisations to “scale” supplier innovation, says Deloitte’s Younger, with crowdsourcing “liberated by technology”. Open innovation platforms like P&G’s Connect + Develop, Unilever’s The Foundry and Vodafone’s Tomorrow Street are just a few examples of how companies are opening themselves up. In the public sector, the Defence Science and Technology Laboratory (Dstl) R-Cloud matches opportunities to suitable potential suppliers and pushes those opportunities out, lowering the barriers to entry. Now the system has more than 500 suppliers signed up, says Dstl’s Sarah Fitzgerald, 60% of which are SMEs.

Deloitte itself has an “active strategy to develop our ecosystem”, says Younger, working with companies it never would have considered a decade ago, like Formula One’s McLaren. “[Supplier innovation] is not just about contracts anymore,” he says. “People are changing cultures, operating models and processes to drive innovation.”

This makes it an exciting time to be in procurement. MasterCard’s Bromley is energised by the potential to bring in disruptive technology. By being agile, procurement has won “hearts and minds” internally, and shown its added value.
“If we introduce a new technology to the CEO of a bank and they love it, they want it on Monday – not in six months,” he explains. “If we don’t get [the supplier] in at the right time, someone else will.”

BCG’s Weise uses the example of two online shopping platforms in Germany wanting to modify their e-sales platform – and both competing for the capability of one specialist provider. The faster company was able to block out the provider for a year, giving significant competitive advantage. He also cites the automotive industry, where competition in the autonomous vehicle space means procurement is involved in M&A decisions around innovative tech start-ups.

But for all the cutting-edge technology involved in today’s innovation, the bedrock of innovation is really quite simple, says Cramer. “It’s about constantly questioning and challenging our assumptions. It all starts with a simple ‘why?’”

So why not start by asking yourself: why are we doing it
this way, and what can I do to help my organisation think
a bit differently?  

 

Inside Tomorrow Street

Tomorrow Street is a joint venture between Vodafone and Technoport, an incubator, lab and co-working space in Luxembourg. It sits within Vodafone’s supply chain function. CEO Warrick Cramer (pictured) explains how it works…

“We operate an innovation centre where we take in business-ready start-ups and work with them on globalising their products and services. We focus on three main areas: AI, the Internet of Things and cyber security.

Tomorrow Street launched in September 2017, and we signed up our first company, LB Networks from the US, about a month later. They have a platform called Ocular IP that enables companies across industries to gain a granular visibility of their digital infrastructure.

There is a divide between start-ups and big corporates, and we bridge that gap. Given the pace at which technology and the world is changing it has never been more important to join forces.

Innovation is not just about putting a ping-pong table next to the coffee machine. It is about corporate culture. As such it cannot be a goal, more of a result. It does not happen overnight because minds need to be shifted.

Lots of corporations suffer from FTI (failure to implement). You carry out the work and then nothing happens. You need to focus on what is important, not what is urgent.”

 

Do you speak innovation? Some of the terms you need to know

CROWDSOURCING Enlisting the views and services of lots of people, usually via an online platform, to help solve a problem or get ideas/input into a specific task or project.

HACKATHON An event in which a group of people engage in collaborative problem solving. Originally used in computer programming, it now also covers business and social issues.

INCUBATOR A facility to nurture start-ups during their early days. Usually includes access to shared space and services, management training and support, and sometimes financing.

MOONSHOT an exploratory, ground-breaking project with no expectation of near-term profit or benefit.

OPEN INNOVATION Using external ideas and routes to market as well as internal ones, sharing risk and reward.

SKUNKWORKS An experimental laboratory or department of a company, independent of its main research division.

TECH TOURISM Defined in Unilever’s report as ad-hoc, exploratory activity which lacks the ability to impact core aims, like trips to tech HQs.

THE VALLEY OF DEATH The time between a start-up receiving an initial capital contribution and generating revenues.

Quick wins: six ways to be more innovative

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