Governments’ procurement approach fails to serve Canada’s innovation economy: CCI report

The current culture of federal and provincial government procurement fails to serve the Canadian economy or the governments’ own purposes, according to a report by the Council of Canadian Innovators (CCI).

The report recommends establishing a national procurement agency, creating a federal procurement concierge and implementing a procurement target for government purchases from small and medium-sized Canadian companies.

“Government procurement isn’t cold fusion or a room temperature superconductor. This is not some massive unsolved problem,” Benjamin Bergen, president of CCI, said in an email to Research Money.

“Other countries around the world are able to buy innovative technology services without massive scandals, or punishing bureaucratic process. We know this, because we hear from CCI member CEOs who routinely sell to governments around the world, even as they struggle to get their foot in the door here in Canada,” he said.

“At CCI we’ve been calling 2024 the Year of Procurement,” Bergen said. With governments trying to control spending and Canada’s national productivity indicators lagging, he added, “procurement can validate innovative Canadian companies and drive future growth, while also giving governments the tools to operate more efficiently.”

Procurement amounted to 14.6 per cent of Canada’s GDP in 2021 – representing hundreds of billions of dollars a meaningful force that shapes the country’s economy, says the report, “Buying Ideas: Procuring Public Sector Innovation in Canada.”

However, the report notes that Canadian governments have run into serious problems in defence and digital procurement over the years – including troubled high-profile, high-dollar projects like the Phoenix pay system for federal employees and the Canadian surface ship program.

A 2023 federal Auditor General report found that about one-third of the 1,480 "mission-critical" government digital applications are rated to be in poor health, including many mission-critical applications critical to health, safety, security and well-being of Canadians, the CCI’s report says.

Canadian businesses spend less on R&D as a percentage of GDP than Portuguese businesses, and as a country we are often slow to adopt new technologies, according to the report. “This is a public policy problem, not a failure of entrepreneurship.”

For generations, governments have focused on supply-side science and innovation policy in the form of research funding, and this approach has not managed to close the innovation gap between Canada and leading advanced economies, the report says.

In its 2017 Skills and Innovation Plan, the federal government aimed to double the number of high-growth Canadian firms from 14,000 to 28,000. In 2020, however, Canada had taken a step back, recording only 10,700 high-growth enterprises.

According to the report, “A purely supply-side innovation policy suite has not worked. Policymakers have under-examined our considerable public sector procurement spend as an opportunity to create demand-side pull for innovation.”

In the fast-growing cybersecurity sector, for example, Canadian firms sell three times as much to governments abroad as they do to public sector clients within Canada, the report says.

“When Canadian governments do a poor job of buying innovative technologies it significantly undermines our innovation economy,” Bergen said. “And when the government disproportionately relies on large foreign technology service providers to offer sub-par solutions, that impacts Canadian companies’ ability to compete and succeed globally.”

Over-specification and long cumbersome processes are problems

According to the report, government’s procurement failures fall into a few key categories. One category involves over-specification at the outset of a procurement process, and a lack of ongoing dialogue with vendors who may be able to innovate to better meet government’s needs.

Governments in Canada use a “waterfall” approach to procurement, where design is done all at once at the outset, and this is captured in a scope-of-problem definition. Because the scope needs to be defined ahead of time, this approach is inflexible and doesn’t account for emergent problems, the report says. This approach also leads to “gold-plating” projects with every requirement that might be needed in anticipation of potential challenges. “With onerous requirements comes an elevated chance of failure.”

Software projects with budgets over $10 million succeed on time and on budget only eight per cent of the time, while smaller projects – those under $1 million – succeed 70 per cent of the time, the report notes.

Federal government IT procurement spending has grown from $3.5 billion to $4.5 billion from 2018 to 2022. Despite that, Canada’s governments have slipped behind many of their peers on digital maturity. In 2003, Canada was ranked 6th in the United Nations’ E-Government Development Index, but slid down to 32^nd  in 2022, losing ground where peer countries have either improved or maintained strong positions.

“Getting digital procurement right would empower public servants to get the tools they need to do their jobs more effectively and save money through more efficient operations in critical public services like health care,” the report says.

Another problem area is long and cumbersome procurement processes that discourage nimble innovators to invest time and effort for an uncertain outcome that may take months or years to fully play out.

In the Canadian innovation landscape, a significant challenge is the lack of mechanism for direct and ongoing feedback within procurement programs, the report says. Governments prioritize process over outcomes in procurement, leading to an adherence to rigid specifications and protocols that stifle open communication.

Challenge-based procurement programs like Innovative Solutions Canada, which recently had its funding reduced by over $90 million, and Innovation for Defence Excellence and Security have structural shortcomings that hinder iterative development from occurring, according to the report.

For example, these programs have Q&A functions that participating companies may use, but departments, in the experience of CCI member companies, are hesitant to reveal specific information related to a posted challenge. Innovators have stressed that even when questions are raised related to an issued request for proposals or request for information, there is often no guarantee of receiving meaningful, actionable answers.

Also, many key procurement programs require the public disclosure of all inquiries made by companies, creating a dilemma for innovators. While they need to seek clarity to develop effective solutions, having their inquires made public might inadvertently reveal their strategic and technical approaches to addressing challenges, potentially placing them at a competitive disadvantage or revealing trade secrets. This has dissuaded many companies from participating in the procurement process.

Canada’s extended procurement cycles also present a significant obstacle for domestic innovators, the report says. The Canadian procurement process is broadly divided into seven phases. Between these phases, vendors can wait for months. “Such delays are particularly taxing on the resources of SMEs and startups with thin financial safety nets. This protracted inactivity disrupts the continuous dialogue crucial for refining solutions to meet the fluid needs of government bodies.”

Lack of technical expertise in federal bureaucracy and risk-adverse culture

Another problem area the report points to is lack of in-house capacity and expertise among public servants to meaningfully engage with vendors. In software, for example, of the approximately 17,000 IT professionals who work in the federal government, “few are software developers, and their ranks thin out even more among senior job classifications.”

This expertise void has resulted in Canadian governments over-concentrating procurement dollars in large, incumbent firms whose main skill is navigating procurement procedures. An analysis of federal government IT procurement contracts reveal that the top five vendors received 30 per cent of all IT procurement dollars, according to the report. “ From an economic perspective, this means that significant taxpayer funds are being channeled to global firms, sidelining local innovators who have a deep-rooted stake in Canada's progress.”

Limited opportunities in the government’s professional development programs for internal upskilling have contributed to procurement issues, the report says. “This not only widens the gap between innovative domestic solutions and their adoption but also reinforces the cycle of dependency on external expertise.”

The current government procurement culture also is missing a clear path to commercialization for companies that do manage to have their products purchased by government, the report notes.

After navigating the complex procurement labyrinth and securing government contracts, companies often face a void where they should find opportunities for expansion, it says. Without a clear path to commercialization, companies are unable to scale their innovations, limiting their growth and potential returns. “This not only hampers their development but can also discourage future innovation efforts, knowing that government support does not extend beyond initial validation.”

By not cultivating a path for commercialization, the government misses out on the economic benefits that come from the widespread market adoption of these innovations, benefits that could far exceed the initial procurement investment, the report says.

Another problem area in procurement is institutional culture and career incentives which create a risk averse culture that steers government buyers towards the “safe” choice.

Risk aversion in government procurement manifests in exhaustive risk assessment frameworks with overly complex tendering processes, heavy bureaucratic documentation requirements, and stringent qualification criteria, according to the report.

Over-complicated process and an emphasis on low bids leads to a “winner’s curse” wherein the winning bids are more likely to be outliers that have mis-estimated the scope of work, the report says. Pre-qualification – a well-intentioned measure to avoid situations like these – has ossified, in the experience of innovators, into a system with extremely high front-loaded costs for prospective vendors and an uncompetitive market.

“If left unaddressed, this approach could undermine the vigor and resilience of Canada's tech sector and innovation performance in the long term,” the report warns.

Canada could learn from other countries’ procurement models

Several countries are doing better at procurement than Canada, said Laurent Carbonneau (photo at right), CCI’s director of policy and research. Carbonneau co-authored the report with Abu Kamat, director of strategic initiatives at CCI.

In the United States, the Small Business Innovation Research (SBIR) program has a long history of success,  Carbonneau said. The SBIR, a grant-based, pre-commercial procurement program, requires American federal agencies that conduct over $100 million in external research to set aside a portion of their overall R&D spending for small businesses through a competition-based granting system. Around $2.5 billion in SBIR awards are disbursed annually.

Critical to the program’s success is an unusual appetite for risk. SBIR awardee companies are actually more likely to fail compared to their non-awardee counterparts, indicating that federal agencies are taking chances on novel technologies.

Research in 2023 from the American National Academies of Sciences found that SBIR-backed companies are three times more likely to have scientific publications and eight times more likely to patent. They are also five times more likely to subsequently attract angel or venture capital funding and three times more likely to pursue an initial public offering or be acquired.

In the 2000s, the United Kingdom pioneered the Forward Commitment Procurement (FCP) model which has been adopted around the world. FCP projects work because a clear, well-defined process oriented around innovation outcomes reduces the risk of innovation for buyers and a staged approach allows for off-ramps that don’t leave departments saddled with troubled projects that are too big to fail, CCI’s report says.

In Finland, a network of agencies has created an ecosystem for government procurement that routinely leads the European Union. Finland’s approach includes the Innovative Public Procurement program, an application-based effort to encourage public sector innovation procurement by covering the costs of public sector entities seeking to buy innovative products or services.

Recommendations to “create a culture of success”

Policies are required in Canada to bend the curve on procurement, score tangible wins for government innovation procurement, and create a culture of success to build on, the CCI said. Its report makes a suite of six recommendations that CCI said can be implemented today:

1. Create a national procurement agency, or empower an existing agency like the Industrial Research Assistance Program, to operate on the model of Business Finland, which acts as a bridge between government and innovative Canadian companies, fostering procurement of innovation and building capacity across government. Key activities should include: financial and behavioural incentives to support procurement; a streamlined application process; develop technological expertise across government.
2. Create a small and medium-sized enterprise procurement target that would require departments and agencies to identify and contract with SMEs and require government purchasers to track their success in driving more innovative SME procurement.
3. Create a framework for forward commitment procurement modelled on the U.K.’s Forward Commitment Procurement program.
4. Develop and recognize innovation procurement standards that could serve to lighten administrative burden, reduce perception of risk, and allow for more harmonized procurement processes across jurisdictions. Adopting the Digital Governance Council’s new “Agile and Open Procurement of Digital Solutions” standard would be an excellent start.
5. Prioritize commercialization in procurement programming, by recognizing the importance of intellectual property in the commercialization process, and the role it serves as a legal safeguard to ensure that innovators can reap the rewards of their ingenuity. Procurement should also consider broader commercialization pathways, ensuring that the government is not seeking bespoke and highly specific technological tools that have limited utility beyond a specific government application.
6. Create a federal procurement concierge modeled on British Columbia’s Procurement Concierge Program. At the federal level, this program could liaise with the Industrial Research Assistance Program to act as a centre of expertise and training within the public sector on innovation procurement. A procurement concierge would also be mandated to help innovative companies navigate the bureaucratic process of procurement, and when the concierge identifies persistent bottlenecks or sources of failure, the program could make recommendations for improvement.

“The stakes are high,” the CCI says. Governments use more than one dollar of every four they spend buying from the private sector – and nearly one dollar in six spent across the entire economy. “Public procurement of innovation is an important lever on Canada’s innovation performance and contributes to correcting our historic innovation underperformance.”

NOTE: A video launching the CCI’s report is available here. The video includes a conversation with Dr. Alexandra T. Greenhill, CEO at Careteam, and David Helliwell, executive board chair at Thrive Health.

R$