Where innovation goes to die

10 May 2010
Innovation is elusive; it is one of those words that means different things to different people. For some, innovation is reserved for those step-change events that alter markets, products or organisations. For others it encompasses incremental improvements to products, services and processes. I’m firmly in the latter camp, particularly when it comes to innovation from our suppliers. The reality is that big-bang innovation comes from left field. It will in all likelihood be a market-changing event that affects the way a company does business. Fifteen years ago the travel, publishing and music industries did not predict either the massive shift in their business model that the internet would cause or the speed at which it would effect that change. The fact that big-bang innovation is disruptive means it’s unlikely to find its way from the supply base back into the customer organisation. Why? Because procurement will have killed it. This rankles. I want to champion innovation but why can’t we make it happen? I think there are four main reasons. First, the procurement process is geared to make innovation unlikely even though it is often a key requirement in our evaluation criteria. We look for the supplier that can provide what we want at the lowest price. This immediately cuts into any budget the supplier might have had to look at innovation within the context of the contract. Typically we will ensure a level of efficiency is built into the contract, which, if the supplier is unable to meet the required reductions in its costs, will further reduce its ability to fund innovation internally. Which brings me to the second reason: our organisations’ desire to deliver projects within budget. In today’s world we frequently go for shorter-term contracts of between one and three years. It will take the supplier some time to adjust to the work and then to decide where it can innovate. That innovation will generally require investment to develop but there may not be time to get the payback. This is compounded by companies increasingly trying to balance their books on a quarterly basis which further drives the prospect of innovation away. My third point is that contracts don’t really reward innovation. Our job as custodian of the company’s money is to ensure that the company gets what it pays for. We negotiate complex contracts that keep the supplier’s focus on delivering against the requirements. We might create some targets around delivery of white papers or discuss innovation in our relationship meetings but this is normally an add-on. Finally, we don’t provide a way for the supplier to bring innovation into the company. Should the supplier have navigated the contract and have something it believes will help the customer, the idea will invariably be lost in the customer organisation. The supplier’s day-to-day contacts will be focused on delivery against the contract. Senior managers will be excited about the possibilities but will send an idea out to the wider organisation to review where it will die a slow death as people focus on those activities they are measured against. If procurement is going to nurture innovation from suppliers it needs to establish a route for innovation into the organisation and encourage the ideas that show the most potential.
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