How outcome-based procurement can make our cities truly smart
By Ben Whitaker
The procurement process, while essential, is currently facing issues that prevent it from delivering maximum value or lowest risk options. A long list of technical requirements often prevents many companies from submitting a truly innovative solution to governments, sometimes disqualifying lower cost ways of solving the same problem. The current procurement environment also often brings long wait times, high costs and requires the whole process to start over again once the procured technology becomes obsolete.
Further, the advent of cloud technology has fundamentally changed how software is developed and provided. As a result, there is a new procurement path more closely suited to constantly evolving and upgrading software: outcome-based procurement. Using this method rather than the traditional specification/input-based model, public and private entities can collaborate to create thriving cities, while enabling innovation and limiting government risk.
This method focuses on the top-level outcome needed and the best way to measure it, rather than the procurement of a specific locked down set of tools, technologies or services in hope that they will achieve the desired outcome.
Overall, outcome-based procurement provides three core benefits to both the government and private companies that make it attractive when trying to create a smart. It reduces government risk, enables innovation and speeds up the time it takes to issue an RFP. These benefits ensure that the city and people ultimately benefit.
The solution to the procurement problem
In traditional input-based procurement, the government often contracts for services using a very specific RFP that clearly outlines the exact specifications a product or service should include. This ensures that the eventual solution meets the specific requirements the government requests. There are however, two problems with this. These requirements do not necessarily ensure that the outcomes intended via the RFP are met and also do not allow for innovative solutions to solve the outcomes the RFP is intending to solve, if the specified solution doesn’t meet the desired outcome, it falls to the government to pay to change orders or additional services, as they assumed the risk of solution design. Eventually, the government has to put out a new RFP to replace the original solution because it either becomes outdated or is ineffective.
Outcome-based procurement flips this process upside down by keeping requested parameters for a product or service to a minimum, instead allowing companies to respond to an RFP by suggesting the best value solution they can. This might be better value by being more “off the shelf” avoiding cost/time/risk of bespoking, or might be more innovative than other approaches thanks to the RFP language not disqualifying it. It also allows the government to pay the chosen companies based on the outcomes they deliver, rather than build and maintain regardless of impact. This adds an extra incentive for companies to continue innovating and improving the product or service throughout the length of the project, because the better they perform the more money they make. It also minimizes risk for the government because it won’t be stuck paying for a solution if it is botched. It’s a win-win for both the government and companies, and spurs constant innovation for smart cities, which adds the further benefit that citizens will have access to the best services possible.
In fact, Mckinsey recently published a study which found that the public sector could save $3.5 trillion globally by implementing things like open data and better procurement methods, particularly outcome oriented ones. The study also reiterated the high cost of traditional procurement, finding that governments often spent the same amount on the transaction as they did on the product or service they were purchasing.
The responsibility ultimately falls on governments to ensure a quality standard of living in our future cities. By embracing partnerships with the private sector and incentivizing positive innovation, this can easily be achieved. Enabling partnerships of private sector technology with an outcome based procurement model will improve public offerings and only further spur smart city innovation, creating a more efficient and vibrant future urban ecosystem.
Ben Whitaker is the Head of Innovation at Masabi.