In circumstances where there is limited access to funding for entrepreneurship and innovation, innovation procurement opportunities tend to be highly welcomed. However, although the benefits might be apparent, using case studies, Guest Contributor, Telly Valerie Onu, who is a Blockchain advocate, Impact and Fintech Innovator and Management and Development Specialist, highlights some of the challenges and risks of innovation procurement, and suggests how they can be managed.

 

Back in 2016, I recall a riveting article written by Montserratian author, Nerissa Golden, entitled “Open Innovation – Can we do this in the Caribbean?” The writer keenly described a fascinating study tour at an Incubator located in the High Tech Campus at Eindhoven in Holland, Netherlands, where every single presenter used the term Open Innovation. She marvelled at how business was conducted, where competing companies shared ideas and knowledge fluidly in the spirit of collaboration which resulted in improved and more useful technology and products.

 

What is Open Innovation?

Open Innovation can be in the form of informal collaborations or formal partnerships. The popularity of open innovation has been driven by its effectiveness in expanding the innovation potential of an organisation. Open innovation gives businesses and organisations the ability to access new (and sometimes left-field) ideas for new products and services and in solving problems. By casting the net wider, companies can end up with solutions they’d never have thought of otherwise. 

However, in comparison to the present reality of the Caribbean, where brilliant minds have the potential to change the development and growth trajectory of the region by harnessing their capabilities of solving local and regional problems, Open Innovation has been subject to political lip service as the culture of lack of trust lingers heavily in a region struggling to re-design and transform itself. The execution of strategic alliances are few and far between, as independent entities struggle against the notion of losing their Ideas. However, the reality is that ideas are a dime a dozen, with no rightful owner. Even as ideas are developed into early concepts, ideas alone do not trigger innovation. It is the business model and the team that triggers execution.  

 

Innovation procurement

According to the World Economic Forum, innovation offers the potential to improve everyday life, grow regional economies and solve societal challenges. Governments, industry and communities around the world are delivering programmes that seek to encourage innovation and achieve a better future. So whether it’s at the firm level or macro level, collaboration is the key to unlock innovation and drive change. It is no wonder that the writer in her piece observed that the main ingredient of Eindhoven’s success was its ability to foster open innovation amongst multiple stakeholders. where the trifecta of government, knowledge and business collaborate as public-private-partnerships to ensure the ecosystem thrives. 

So, how can one foster an environment where content creators and consumers can discover each other to develop solutions that solve problems? While there are many methods for fostering the development of an open innovation ecosystem, one clear opportunity lies in leveraging innovation procurement. 

In accordance with Nesta, the “power of the public purse” to drive innovation was identified as a key opportunity. Around the world, procurement processes are being redesigned and redeployed to create new demand for innovation and accelerate the emergence of inclusive innovation ecosystems by engaging and providing opportunities to underrepresented communities and people

According to Startup Genome in 2018, globally, procurement remains an area in which governments have taken the least action. However companies have been flocking to open innovation challenge platforms to crowdsource ideas and solutions. 

With no such thing like a magic bullet, fast forward to 2020, it comes as no surprise that the Caribbean has finally moved beyond hackathons and have started adopting co-creation and open innovation competitions leveraging  innovation procurement as a new mechanism to foster regional innovation. 

In a landscape devoid of proper frameworks to guide strategic alliances and public private partnerships, innovation procurement offers a number of benefits to leapfrog our development, however, it does not come without its associated challenges. 

So far there are two main methods used in innovation procurement.  These are Public Procurement of Innovative solutions (PPI), and Pre-Commercial Procurement (PCP).  The former, is used when challenges can be addressed using innovative solutions that are already in small quantities in the market, while the latter, is used when there are no near-to-the-market solutions yet and new R&D is needed. In some cases, the solution might be very early at the concept or proof of concept stages, but in many cases, solutions can be deployed as a pilot before they are scaled. 

The phases of innovation procurement (Source: European Commission)

 

The Good

On the one hand, innovation procurement has demonstrated its ability to deliver solutions to challenges of both public and private interest as their methods serve a key purpose in de-risking the most promising innovations step-by-step through solution design, prototyping, development and first product testing. 

Therefore, unpacking the benefits of innovation procurement can speed up product development significantly, boost product visibility, which lends a lot of credibility to a growing company, and can be a great way to attract new business interest from investors. 

On the public sector side, it enables the public sector to modernise public services faster while creating opportunities for companies in the Caribbean to gain leadership in new markets as it moves the region on a trajectory towards outcome based problem solving in a flexible manner, as suppliers are selected and rewarded based on their capability to deliver against defined outcomes. 

 

The Bad

As with any solution, how open is open? There are some serious risks and unintended consequences if open innovation is done incorrectly without clear rules. 

While sharing information and expertise with others outside the business, you can boost the profile of your company. But consider what happens if you submit a solution which is way beyond the proof of concept (idea) stage and is a minimum viable product (MVP) with associated execution know-how, i.e product and business models fully developed, and ready for commercialisation? In other words, the idea has crossed over into the execution phase? What are the consequences of sharing too much and how can that put your business at risk?

There are some legal challenges that can be easily overlooked, which can cause unnecessary hurdles if not thought through already in the beginning of an open innovation project. If they aren’t considered and handled in a professional manner from the start, the risks and possible negative impacts will not only affect your open innovation project, but can harm your brand image as well.

As an open innovation strategy, while it aims at decreasing the risk inherent to the innovation process, it may at the same time increase the risk inherent to collaboration with different partners.

For example, Compete Caribbean, a regional multi-donor driven programme, recently launched a unique Blockchain Open Innovation Challenge for the Caribbean, which focuses on open innovation calls for both problem owners (public/private) and problem solvers (innovators). The call for problem owners, is targeted at solving a need by leveraging blockchain innovation, while the calls for problem solvers are focused on matching them to specific crowdsourced challenges and financing those innovators solving existing problems. 

In a specific Call for the Digital Transactions and Money challenge, one of the pre-selected Problem Owners, a regional non-profit association comprised of public and private financial institutions and regulators, namely, the Caribbean Settlement Network (CSN) submitted and was pre-selected for this challenge to address the need for solutions for cross-border settlement. However, two members of the non-profit association, are actually Fintech solution providers, namely BITT, a Barbados based Fintech wallet provider firm already working on a Central Bank Digital Currency (CBDC) with the Eastern Caribbean Central Bank (ECCB) and Massy Group, owner of subsidiary Massey Technologies and SurePay with a massive bill-pay retail network providing solutions in some markets across the region. 

While I do not believe it was the intention of the donor to create a scenario of inequality, they inadvertently opened up the real risk of involuntary knowledge spillover (Cassiman and Veugelers, 2002) – leakage of critical internal resources; and disclosure of core competencies of a company submitting a solution to the challenge – to these potential cooperation partners that could be competitors. This risk is so great that if not mitigated, it can impact the ability to compete fairly, due to the lack of transparency of the roles and capabilities of all the stakeholders involved. 

Now, there is absolutely nothing wrong for companies doing open innovation to seek external ideas with an outside-in approach. It is however, good governance practice for companies to not hide behind the corporate veil of non-profit associations and enter these challenges based on their own merits and objectives. 

 

The Ugly

In another highly publicised case study, in 2018, the Government of Montserrat (GoM), took a tech startup, Rovika, which was founded by Dennison Daley and Manish Valechha in 2013, to court to contest ownership of an eCabinet Executive Document Management software called ExcoTrack. 

Prior to the establishment of Rovika, In 2005, Mr. Daley, a programmer and former government employee, was approached by the then Cabinet Secretary to develop an access database system to track Cabinet decisions. Later in 2012, the system was scrapped in favour of a newer web-based version of the Cabinet documentation monitoring/tracking process in an effort to provide efficient ways to monitor/track the GoM’s decisions and policies. 

The first version of ExcoTrack was launched in mid-July 2013, although it was still in its developmental stages. The initial cost for the development and design of, and training for, ExcoTrack was XCD 22,000.00 (around USD 8,100.00).

The entrepreneurs said that over the past seven years, the government’s contribution to include the initial grant, feature request charges, hosting, maintenance and fees amount to approximately $31,000.00 USD with 24/7 service. Part of accessing the grant required Daley to set up a company in order to access the grant, to which he invited Valechha to be a partner. Hence Rovika was born. In 2015, Rovika also successfully was awarded another grant to develop a new web-based vehicle and drivers licensing system with the ICT grant. However, the Government has not implemented its use, as it is awaiting legislative changes.

“The initial grant funding enabled by a verbal agreement with the Government ensured that ExcoTrack would not be given at a per-user rate and no limits would have been placed on the number of users on the system. Additionally, a minimum standard charge which at the time covered hosting and training with basic maintenance was set out. This at the time was in excess of $6000.00 XCD per year. It was also agreed that any future changes required would be charged to the Government, once it was outside of the original development or scheduled updates,” explained the entrepreneur.

(Source: Discover Montserrat)

However in 2018, Rovika Inc. moved to a Software as a Service (SaaS) licence structure which requires clients to purchase a licence as per industry practices. Rovika submitted a new agreement to the GoM, and the GoM refused to pay for the licensing claiming that with the amounts previously paid and the grants provided to the company, they should rightfully own the software. This disagreement led to the limitation of access to the software which subsequently led to a legal battle for access and ownership,  whilst the company continues to provide service. 

In the Rovika case, The legal and contractual issues were as follows: 

Contractual arrangements were verbal. The then Cabinet Secretary procured the services of the Programmer, Mr. Daley as an Independent contractor without a written agreement. As an independent contractor, Mr. Daley developed a very secure, robust, application software that is user-friendly and accessible from any electronic device that has access to the Internet, and/or from any data-enabled device. 

Lack of IT Policy. The Office of the Premier, did not make any IT policy provisions to ensure continuance of service if the person(s) and/or entity maintaining the application software should leave, fold, or have their services terminated; or in the event of security breaches or other mishaps.

Lack of  Service Level Agreement (SLA). To date, the Office of the Premier does not have an established Service Level Agreement (SLA) with Rovika Inc.

Absence of proper procurement practices. The Cabinet and now the Office of the Premier did not put in place any procurement process whatsoever. 

Lack of clarity on Total Cost of Ownership (TCO). Total Cost of Ownership (TCO) is an estimate of the total costs of solutions (equipment, goods, and/or services) over the whole of their life. It includes the purchase price or initial fees and all of the other costs an organisation or business might incur, less any benefits received. Many times, organisations never think about ongoing costs of maintaining a service or license fees. This lack of clarity and understanding of the scope of ongoing service fees, have sent a lot of great innovations to the graveyard. Especially in the Public Sector, the tension between annual budgeting cycles makes it difficult for them to participate in Software as a Service solutions with fluctuating annual budgets. 

These two case studies provide some critical insights on the flawed and procurement processes in the region which could thwart real efforts for young startups to launch and thrive. 

 

Is intellectual property adequate protection?

Without appropriate protection, a firm’s innovation effort can be diluted if there is a serious threat of imitation. Especially in the open innovation context, knowledge is transmitted in a way that even tacit knowledge can spill over to the open innovation partner – as open innovation aims at sharing tacit knowledge and IP which are inherent to the partners themselves. Consequently, appropriating the rents from IP and knowledge put into the open innovation partnership may be difficult as imitation may occur. 

In the case of the first case study, in promoting a technology such as “blockchain” that fosters greater transparency, it is quite ironic that corporate governance standards are currently not being applied to assess potential competitive risks.  Secondly, in a global space where the number of patent applications filed for blockchain and adjacent technologies has also grown, the IP framework and support in the region is weak and uncoordinated at best, and on top of that, there are additional hurdles in obtaining patents specifically for blockchain innovations. Perhaps this too can be a decentralised challenge. On the one hand, from an operational standpoint, it’s left to be seen the tensions between decentralised and centralised systems and the effectiveness of a patent. Lastly, blockchain innovations may not be truly patented given that algorithms or computer coding on their own are often considered non-patentable abstract ideas, unless it has unique and associated hardware components, and/or unique processes that enable the technology to function. 

Therefore, the very mechanism for protection and unfair advantage in this context lies in the execution and business model innovation of the startup. In a region that already has access to finance challenges,  it is important that ecosystem enablers provide a level playing field to foster trust through implementing proper governance processes. 

 

The need for clear rules for open innovation

In spite of the potential risks, as with any new process, open innovation and innovation procurement requires a different management approach, and involves insights from actors that fall outside of traditional supply chains, or in the context of organisations, outside the traditional networks, such as innovators.  It requires clear rules and expectations to guide the process. These rules aren’t just useful for the problem owners and problem solvers participating, but they also help establish a more predictable expectation of the process, not to mention, build trust. 

Outside of articulating the problem or question at hand, incentives, and logistics of the challenge, these rules should set out very clearly the following:

Establish clear objectives and goals:  Recognising that there are many models of open innovation expression, from Innovation challenges, startup-corporate partnerships, startup incubator / accelerator, tech studios, business acquisition, co-creation labs, co-working and co-living spaces, Intrapreneurship and hackathons, it is extremely important to set out the objectives and goals of the proposed alliance and select an appropriate model that fits the criteria.   

Intellectual property expectations:  You need to set out who will own the intellectual property if your company decides to adopt an innovation as the result of open innovation. This is crucial to give participants confidence in the process. 

Risk management and compliance:  As value seeking companies adopt open innovation as a competitive strategy, it is also clear that this strategy is also accompanied by risk and rent-seeking behaviour. However, risk management seems to have been overlooked by many open innovation networks. It is important for organisations, public, private or international, to consider risk management as part of their process to safeguard innovators. In an era where the region has suffered significantly from reputational risks due to OECD/FATF (Organisation for Economic Co-operation and Development/Financial Action Task Force) recommendations for weak regulatory compliance and anti money laundering regime, it’s important that even donors should adhere to basic corporate governance due diligence practices to avoid unintended consequences, not to mention the negative impacts of their brand. 

Data protection:  While the region might not necessarily have a regional harmonised framework for data protection, it should be best practice for open innovation networks to safeguard innovators data. Proper data protection policies and cyber security disclosures are necessary.  

 

Access to Catalytic First-Loss Capital

While we recognise some risks, beyond innovation opportunities: digital transformation, learning by doing, etc.… the benefits of open innovation challenges are countless and far outweigh the risks to open innovation. 

For startups especially, this is definitely a go-to mechanism to access first-loss catalytic capital. Let’s face it, unless you have sufficiently de-risked your business and proven the market, investors would not come running because it’s a high risk game – but you do need resources to prove them otherwise. 

Just understand this principle, as a company, you may have less control over your projects and ideas once it’s picked up by other companies, or can even find their way to new markets via other parties. Therefore, if you’re developing a sensitive or commercially valuable product, requiring a patent for an unreleased product – then open innovation might not be appropriate for you, as it could result in a loss of intellectual property.

As an ecosystem enabler, just be mindful that open innovation takes a lot of time and effort to get right. Not only do you need to set clear rules for the process, but you also need to dedicate the time and resources necessary to oversee the process and manage public interactions. This can be tricky. 

The landscape is changing. It is clear that innovation procurement promises to shape the future of the Caribbean, helping the region fast forward its trajectory towards an inclusive Digital, Green, Blue, and Orange Economy. 

 

 

 

Telly Valerie Onu is the Managing Director, Quintessence Consulting, DBA QGlobal, and the Co-CEO, and Chief of Governance of Beyond Capital Markets.

Telly is an experienced Digital Economist, Global Strategist, Management and Development Specialist, with a passion in industry and enterprise transformation. Telly is also an International Speaker, Blockchain advocate, Impact and Fintech Innovator, venture ecosystem builder, and a member of the working group on the Eastern Caribbean Currency Union (ECCU) Payment System and Financial Innovation.

 

 

 

Image credits:  Tumisu (Pixabay);  European Commission 

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