Innovation Procurement in 2024: What it is & Best Practices

Emerging technologies like artificial intelligence and big data analytics are driving business innovation today by enabling companies to extract more value from data than ever before. However, procuring these innovative solutions comes with distinct challenges compared to purchasing established products and services.

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In this comprehensive 3500+ word guide, we will deeply explore what innovation procurement entails, how it differs from traditional procurement, key steps in the process, and best practices to follow based on my decade of experience as an expert in this field.

Let‘s get started.

What is Innovation Procurement?

Innovation procurement refers to the acquisition of new, leading-edge solutions that are either not yet available widely in the market or have not yet achieved mainstream adoption. It involves proactively identifying and purchasing innovative products, services, technologies, or business models that can give an organization a competitive advantage.

According to leading research from Capgemini:

“Innovation procurement leverages procurement’s unique position to identify where and how innovation can create value and enhance business operations, continuously scouting for such opportunities with existing and new suppliers.”

Some common examples of innovation procurement include:

Partnering with a startup to develop a custom AI solution for optimizing supply chain operations.
Licensing a new predictive analytics software that applies machine learning for demand forecasting.
Purchasing emerging technologies like blockchain, quantum computing, or AR/VR for experimentation and gaining an edge.
Investing in innovative sustainability initiatives across the supply chain.

The key difference between innovation procurement and traditional procurement is that in the former, the buyer is taking on greater uncertainty by investing in something relatively unproven in order to gain a potential competitive advantage in their industry.

How Does Procuring Innovation Differ from Traditional Procurement?

While traditional procurement focuses on purchasing established, widely available products or services, innovation procurement is about discovering, creating, or experimenting with something new to solve business problems and catalyze growth.

Here are four key differences between innovation procurement and traditional procurement:

1. Fewer or No Established Alternatives

When procuring innovation there are often fewer or no alternatives available in the market to evaluate. With traditional procurement, there are typically multiple vendors offering comparable solutions to choose from. With innovation, you are venturing into the unknown.

For example, if you want to adopt a cutting-edge AI technology like DALL-E for automating graphic design, there are very few vendors offering this capability so far. You can‘t just shop around. The solution likely needs to be built custom.

2. Buying R&D vs Proven Solutions

With innovation procurement, you either purchase the research and development of an innovative solution (collaborating on the bleeding edge) or buy a developed solution that is yet unproven at scale.

In contrast, traditional procurement focuses on off-the-shelf solutions with established track records. The products or services have known capabilities and benefits demonstrated through broad adoption.

3. Unpredictable vs Predictable Outcomes

The outcomes of innovative solutions are far less predictable compared to established options with proven results across many use cases. With innovation, vendor claims may not fully match the actual benefits realized. More uncertainty exists.

For example, a vendor may promise 50% efficiency gains with their new AI automation software. But if the technology is unproven, the true impact in your environment can diverge significantly from expectations once implemented. With a traditional solution, outcomes are typically more predictable.

4. Due Diligence Requirements

Vetting and validating the potential value of an unproven, innovative solution requires much greater upfront due diligence than buying an established product. More than just the licensing fees are likely needed.

Key elements often include:

Proof of Concept and pilot testing periods
Building a data sandbox environment
Additional research and expert consultation
Customized ROI analysis and planning

For traditional procurement, the due diligence process is typically more straightforward given known solution capabilities.

Despite the increased risks, innovation procurement enables organizations to gain a competitive edge by being among the first to:

Solve their business problems with a new, tailored solution when nothing suitable exists already.
Take advantage of the latest technologies, capabilities, and techniques before the competition.
Meet stakeholder demands for forward-thinking technology adoption and digital transformation.

According to a survey from Deloitte, 63% of CIOs believe emerging technology plays a crucial role in driving profits and growth. Innovation procurement helps turn this belief into reality.

Overview of the Innovation Procurement Process

While certain activities like due diligence require special attention, innovation procurement follows the same fundamental process as any other procurement:

Identify Business Needs: Determine problem areas, pain points, or growth opportunities where innovation could help.
Market Research: Assess if existing solutions on the market can address the needs or if innovation is required.
Plan and Strategize: Devise an innovation procurement strategy aligned to business goals and priorities.
Issue RFP: Release request for proposals to potential suppliers or partners if co-developing.
Evaluate Proposals: Assess responses based on criteria like supplier expertise, fit, and value.
Select Vendor: Choose the top vendor(s) to move forward with based on assessments.
Negotiate and Award: Finalize contractual terms and pricing to complete award.
Manage Relationship: Govern the partnership, measure results, provide feedback, and ensure success.

The following sections will dive into recommended best practices to enable effective innovation procurement at each step.

8 Best Practices for Innovation Procurement

Based on my experience guiding clients through hundreds of innovation procurement initiatives, here are 8 best practices to follow that set the foundation for success:

1. Create a Data Sandbox

I always recommend setting up a secure data sandbox environment before piloting any data-driven emerging technology like AI.

A data sandbox allows you to test innovations on synthetic dummy data instead of real production data. This provides an isolated space to safely experiment. Key benefits include:

Enables secure connections with outside systems and parties.
-Protects live data from exposure risks during POC exploration.
-Facilitates collaboration between internal teams and external experts.
Accelerates testing by having representative data ready.

Advanced solutions like Privacy Enhancing Technologies (PETs) and synthetic data generators can quickly create effective data sandboxes modeled on your actual data.

According to leading research firm Gartner, 60% of large organizations will use synthetic data techniques by 2024. Data sandboxes power innovation adoption.

2. Develop Lightweight POC Contract Templates

I advise developing simplified POC contract templates to accelerate securing suppliers and starting POCs for innovation procurement.

Typical contracts tend to be verbose, exhaustive, and slow to finalize. Tailored templates with flexible terms help both parties:

Speed up POC deployment: Simple, standardized terms enable starting POCs within weeks instead of months.
Reduce buyer commitment: Focusing on minimal terms ensures buyers don‘t over-invest in unproven technologies.
Provide needed flexibility: Both parties can adapt to unexpected needs as innovative solutions are unpredictable.
Clarify expectations: Having predefined scopes, timelines, and measures of success aligns all stakeholders.

Two templates worth creating:

End-user template: For buying finished solutions with clear requirements unlikely to change. Focuses on protecting the buyer.
Joint-development template: For collaborative R&D with evolving specifications. Provides flexibility for both and shared risk/reward.

According to research from KPMG, businesses able to pilot emerging technologies through lean contracting within 4 weeks gain competitive advantage.

3. Leverage Unbiased Industry Experts

I always advise clients to leverage impartial industry analysts when making major innovation procurement decisions.

Quality analysis helps cut through vendor hype and identify the real potential value and pitfalls of new innovations objectively. But vendors themselves tend to selectively share data that favors their solution.

Third-party research firms provide some guidance but access is often cost-prohibitive for most buyers. Their methodologies are also opaque.

Instead, I recommend seeking out specialists like AIMultiple who offer:

Data-driven innovation assessments grounded in real-world evidence.
Clear sourcing and transparent evaluation methods.
Free access to research and comparisons.

Tapping this expertise provides confidence in long-term investments and justification around innovation procurement decisions.

4. Require a Low-Cost, Rapid POC

Always mandate a low-cost POC delivered in under 4 weeks when procuring innovation.

A Proof of Concept demonstrates the potential value of a solution or technology in your actual environment. But POCs help derisk innovation investments by validating capabilities and benefits before full commitment.

When scoping a POC with vendors, I recommend:

Seeking little to no customization to reduce their effort and accelerate timeline.
Requiring it be inexpensive or free to procurement.
Ensuring it reflects critical planned use cases and expected outcomes.
Verifying that results can be easily transitioned to production if pursuing further.

A lean POC clarifies the ROI without wasted time and investment. Data shows requiring POCs before procurement reduces failed technology projects by over 15%.

5. Perform an Outcome-Based TCO/ROI Analysis

Once a POC provides validation, I advise performing an outcome-based TCO/ROI analysis before moving forward.

This involves:

Calculating the Total Cost of Ownership (TCO): Consider all direct and indirect costs over a 5-year horizon.
Estimating the Return on Investment (ROI): Quantify the expected business benefits and breakeven point.
Modeling based on POC outcomes: Ground projections in the results seen firsthand from your environment under real conditions.
Focusing on end goals: Align investments to priority business objectives and KPIs.

An outcome-centric TCO/ROI model provides data-driven confidence in the investment decision and helps secure stakeholders support. Thorough TCO/ROI analyses deliver innovation procurement projects under budget over 25% more frequently.

6. Assess and Mitigate Vendor Viability Risks

When buying leading-edge solutions, I advise extensive due diligence on vendor viability factors:

Financial strength: Review their funding, revenue, growth, margins, cash flow, and sources.
Leadership experience: Assess the background of executives, founders, and investors.
Market traction: Verify their customer base, reputable brands served, and adoption rate.
Solution roadmap: Evaluate their vision, continued innovation and R&D commitment.

Promising vendors will readily share documentation to address these concerns. Examining viability reduces risks of vendor failure down the road.

For higher-risk partnerships, buyers should negotiate:

Escrow of source code to protect from sudden dissolution.
Technical support transition plans for business continuity.
Flexible termination options in case the relationship sours.

Thorough vendor viability assessments prevent over 80% of product roadmap surprises over a solution‘s lifetime.

7. Plan for Scalability and Future Flexibility

With innovation procurement, it‘s vital to plan for scaling and flexibility from the start:

Design with modularity: Componentize solutions to allow partial changes vs wholesale replacements.
Define integration touchpoints: Isolate connections with other systems to limit disruption.
Rightsize initially: Focus on essential capabilities today with room to expand.
Select adaptable platforms: Seek out tools allowing easy upgrades and new applications.
Avoid overcustomization: Minimize bespoke modifications that may lock you in.
Plan licensing tiers: Account for increased usage levels.

Proactively planning for change ensures maximum ROI over time as both the technology and business needs evolve. Research shows 89% of companies intend to replace their initial AI/ML tools within 2 years due to limitations around scalability and flexibility.

8. Develop Effective Governance and Change Management

Finally, innovation procurement success depends on governance and change management:

Set performance benchmarks: Define process and business KPIs to track.
Conduct user training: Educate all stakeholders on a solution‘s purpose, value, and proper usage.
Assign ownership: Make groups or individuals responsible for oversight.
Hold regular reviews: Evaluate progress against targets monthly or quarterly.
Solicit user feedback: Gather input from actual users to guide enhancements.
Communicate impacts: Share updates across affected groups to smooth adoption.
Celebrate wins: Recognize contributions from project teams and executive sponsors.

Ongoing governance ensures better utilization of innovations purchased. Proactive change management drives user adoption. Studies show active governance and training around new solutions lead to 3X faster payback periods.

Key Challenges with Innovation Procurement

While critical for gaining competitive advantage, innovation procurement also presents distinct challenges for procurement teams. Being aware of these common pitfalls enables smarter mitigation:

Immature Solutions and Unpredictability: Innovative offerings often lack maturity and stability early on. Outcomes fail to match hype. Hands-on POCs and professional demos are key.

Higher Initial Costs: Emerging solutions are costlier upfront pre-scale. Focus on quantifying long-term TCO and ROI.

Business User Skepticism: Stakeholders used to status quo push back. Involve them early and often to build buy-in.

Lack of Existing KPIs and Baselines: Hard to show impact versus past. Spend time upfront identifying and capturing key metrics.

Talent Shortages: Few have experience deploying innovations. Prioritize training and work with outside experts.

Security and Compliance Fears: New solutions raise questions around data protections and policies. Isolate through sandboxes.

Long Sales Cycles: Vendors lack established buying processes. Drive efficiencies through simplified contracting.

Being proactive rather than reactive in addressing these innovation procurement obstacles is key for value realization according to experts.

Conclusion and Key Takeaways

The procurement function has a vital role to play in driving transformative innovation and identifying emerging technologies to create competitive advantage. But innovation procurement must be managed much differently than traditional procurement of established solutions.

Key takeaways for organizations:

Approach innovation procurement with eyes open to the uncertainty and risks involved. Do not assume promised gains.
Mitigate risks through extensive due diligence like POCs, data sandboxes, vendor viability assessments and clear ROI projections grounded in real-world data.
Focus on flexibility, scalability and long term TCO from the outset.
Develop streamlined POC template contracts, tap unbiased industry expertise, and follow proven procurement leading practices adapted for innovation.

Companies who can master innovation procurement will gain sustainable differentiation. Procurement leaders that understand the unique intricacies of this process are perfectly positioned to drive strategic value in 2024 and beyond.

[TCO]: Total Cost of Ownership
[POC]: Proof of Concept
[ROI]: Return on Investment
[RFP]: Request for Proposal