What are the benefits for procurers?
PCP changes the balance between risks and benefits to make R&D procurement a win-win for all stakeholders:
What makes PCP interesting for public procurers?
(1) Shape industry developments to better fit public needs Pre-commercial procurement is in essence a mutual learning process for the procurers, users and the suppliers to get firm confirmation, both about the functional needs on the demand side and the capabilities and limitations of new technological developments on the supply side, when it comes to tackling a concrete public sector problem.
This co-evolution of demand and supply is key for innovation projects which are strongly R&D intensive in domains with very short life-time cycle such as ICT. By better steering the core feature set according to customer priorities, by assessing the performance of working prototypes and pre-product field tests in a real operational customer environment, procurers can prevent today's problems of buying off-the-shelf products which include a bunch of sometimes costly features which are not really needed while as the same time missing some critical capabilities.
(2) Better quality products at lower price When companies are developing in competition – as in PCP - the pressure to develop higher quality and better priced products is stronger. Studies from the US have shown that in procurements which have multiple competing companies in the development phase, higher quality products are produced (the socalled learning curve of each company is steeper) and the price of the first resulting end-products is on average 20% cheaper1 than in so-called single-source procurements.
(3) Achieve desired degree of interoperability from the start While the costs of adapting design at early stage R&D are limited, modifications at commercialisation stage that impact core product features can dramatically increase the overall risk of failure and cost of deployment of the final product as well as the time to market for suppliers.
Efforts after each R&D phase to achieve interoperability and product inter-changeability between the alternative solutions under development pave the way for open standards and avoid the risk that early adopters of innovative solutions are penalised with the additional burden of making their solution compliant with standards defined afterwards.
(4) Reduced risk of mistakes in follow-up tenders for large scale deployment Pre-commercial procurement offers procurers a deeper understanding of the technological capabilities and limitations of alternative technological solutions that are under development by different suppliers to address a problem similar to the procurer's need. A better understanding of the pros and cons of different solutions that are making their way to the market reduces the risk of miss specified tender specifications for large scale deployment as well as the risk that big commercial roll-outs do not deliver on expectations.
A typical reaction of procurers in Europe that are afraid of starting PCP is that PCP is too high risk for them. Zero risk procurement does not exist. It's less risky to avoid big failures in big procurement contracts by first dedicating a small portion (e.g. 2,5 % according to FAQ 21) of the overall procurement budget to de-risk the large budget large volume deployment contracts via small budget PCPs.
(5) Reduce supplier lock-in and recurring unforeseen customised development expenditures Retaining healthy competition between suppliers in every step along the way - from early design stages until the tendering for large scale deployment - helps public purchasers to extract the best solutions the market can offer while avoiding single supplier lock-in.
Access to a competitive supplier base and the right to license out IPR protected solutions to third parties also helps to reduce the risk for public purchasers to recurring add-on customised development expenditures.
(6) Opportunity to share development risks with suppliers – license free use for procurers PCP enables procurers to share the risks and benefits of undertaking new developments with the companies participating in the PCP in a way that does not involve State aid. See PCP Communication COM (799)2007 and associated Staff Working Document SEC (1668)2007 – available in all EU languages on the key documents page – for more detailed info on how to leave IPR ownership with companies in PCP at market price.
In exclusive development projects (the opposite of PCP) the procurer typically asks for very customer specific locally tailored solutions over which the public procurer wants to keep complete control or in other words exclusive ownership (including ownership of all IPRs resulting from the R&D). In exclusive development projects the procurer, as the sole owner of IPRs, covers the costs for filing, litigation and licensing of the IPRs.
In pre-commercial procurement the procurer shares IPR risks and benefits with the participating companies. The procurer assigns IPR ownership rights with participating companies, leaving companies the opportunity to resell developed solutions to other markets afterwards, in compensation for a development price which is significantly below exclusive development price and a set of IPR related rights that guarantee the procurer a competitive and secure supply chain in the future. In PCP (see PCP staff working document for more info) procurers typically also keep license free use rights of the newly developed solutions, rights to require PCP suppliers to license IPRs to third party providers at reasonable market conform conditions, a call back option that enables procurers to call back the IPR ownership rights in case IPR ownership rights are not used or abused against the public interest by the PCP suppliers, and the right to publish information about the key results of the PCP after the PCP is finished. In pre-commercial procurement each company (not the procurer) covers the costs for filing, litigation and licensing of his IPRs. This approach to share risks and benefits of IPRs with suppliers is the standard way of IPR handling in public procurement in US, Canadian and China. It has proven to be a major driver of innovation in those countries (ref. to the impact of Bayh-Dole act type IPR agreement in US public procurement market).
(7) Opportunity to share the R&D risk with other procurers through pooling of resources By cooperating together, procurers strongly reduce the risks and costs for individual procurers of purchasing yet-to-be proven technologies. By joining forces with other procurers, the costs and risks of pre-commercial procurement for each procurer are lower compared to buying design, prototype and field test from one supplier on their own.
Consolidating needs is also a virtuous exercise that can strongly contribute to drive local and regional authorities towards efficiency by adopting best practices, common operating modes and common solutions. At the same time, by pulling demand procurers increase the prospect for suppliers to develop 8 products that can address a bigger more coherent market, resulting in lower R&D cost and commercialisation prices. It stimulates industry to invest more in the development of new solutions for sectors of public interest, which is a positive long term evolution for the procurers as well.
(8) PCP can attract external financial investors for companies, which reduces risk for procurer to buy from innovative PCP companies in follow-up procurements Companies that have been challenged in competitive development and that have a first customer testing and validating their solutions are better prepared to address global markets and to attract external financial investment, such as venture capital, for the exploitation of further market opportunities. As such, the pre-commercial procurement process can attract venture capitalists looking for promising opportunities offered by SMEs involved in pre-commercial procurements. See for example the NHS UK PCP examples which have attracted significant venture capital for the companies involved. Strong external financial support from for example the venture capital market makes it 'safer' for the procurers that will buy from such SMEs afterwards.