In the procurement of innovation, at least one aspect of the whole process carries some uncertainty. This is the origin of risk in any procurement process. The challenge for managers is to identify the risk for all parties involved and quantify it. They must then move on and assess the necessary mitigating actions to be taken. Finally, they must determine whether the actions they have taken have had the desired impact.
What is Innovation Procurement
Innovation procurement is any procurement process that involves buying the process of innovation or the outcome of innovation. The process of innovation refers to research and development. The outcome is the product of such research and development techniques. In either situation, the buyer is buying a product or methods that are not in existence yet. They are trusting that the vendor will follow through on their promise of innovation based on their capacity and track record.
The procuring party presents a need. The vendor develops the methods and products that will serve the need. The nature of innovation procurement risk is that it perhaps represents more risk to the procuring party than other forms of procurement. It, therefore, requires very strategic risk mitigation techniques.
Here are a few risks to consider.
Technological Risk
This is the risk that the vendor may not be able to deliver on the contract as initially agreed. They may be unable to develop the methods or the product. They may also deliver, but not according to the agreed specifications.
The procuring party can hedge against this risk in several ways. First, it’s beneficial to get the supplier involved early enough when defining the need that needs to be fulfilled by the innovation. Early involvement of suppliers enables them to plan their capacity to enable timely delivery. Second, the procuring party should conduct a thorough screening of suppliers. They can conduct some market intelligence to find other projects they have been involved in and how those went.
Some companies go as far as conducting some design contests with potential suppliers before finally awarding a commercial contract. It allows them an opportunity to assess the working methods of several companies before settling on a long-term partner.
Engaging technical advisers in innovation procurement can help identify and hedge against potential procurement risks.
Organizational Risk
This is the likelihood that innovation will fail to work once it gets to the organization. This could be due to incompatibility with existing technology or internal working methods. Failure could also be attributed to non-acceptance by the involved parties in the organization.
The main cause of non-acceptance is the failure to involve people in the assessment of needs before beginning the procurement process. The only way to remedy this is to always have people involved in deciding on what the organization should procure to improve efficiency. Once the innovation is ready, there has to be enough support to encourage adoption. Some early users may be introduced to the innovation so that they can help garner support.
Financial Risk
Financial risk in procurement of innovation manifests in two ways. First, there is the risk that the procurement costs might go over what was budgeted initially. In addition, there is a risk that the firm might be unable to raise the funds for the procurement project.
If the vendor fails to deliver as promised, the company has to undergo a new bidding process which costs money. There are additional costs too if the vendor takes longer than agreed to deliver.
Dealing with financial risk in innovation procurement requires contingency planning. Some money should be set aside to carry out to facilitate a new bidding process should the vendor fail to deliver as per the contract. Payment modalities for vendors should be set up so that money is released gradually according to delivery. Incentive bonuses may be included in the contracts based on the quality of delivery.
Turbulence Risk
This is the risk that arises from unforeseen events. They tend to affect large-scale projects that last years. The longer into the future a project goes the higher the turbulence risk. It’s quite hard to quantify turbulence but constant dialogue with the vendor and all stakeholders enables early spotting of turbulent events. Contracts should also be detailed enough to cater to as many situations as can be envisaged at the planning stage.
Taking insurance can also help mitigate the risk of turbulence events occurring. There are insurance products specifically developed to guard against contingent events during projects. Observing the conduct of the vendor throughout the project is crucial too. A change of leadership or team composition might affect the pace or commitment to delivery. The procuring party should not hesitate to express any concerns they have with such changes.
Assigning the Risk Management in the Procurement of Innovation
Successfully navigating and managing innovation procurement risk is a tough balancing act for a lot of organizations, both public and private. It requires a careful analysis to identify and mitigate the various forms. Technological risk requires a proper understanding of the vendor’s capacity. Contracts must also protect either party from breaches by the other.
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