Procurement

A winning idea for innovation

Steve Kelman

One encouraging piece of news on the procurement front in the past few years has been the use of contests by some agencies, such as NASA and the Air Force, to buy solutions to problems that require innovation. In a traditional procurement process, the government chooses a supplier to solve a problem and, often — especially if the problem is difficult — pays them for their work regardless of whether they actually solve the problem.

Contests are different in two ways. First, the government broadcasts its needs to the public and allows anybody to submit a solution, rather than choosing one contractor to work on the problem. Second, the government pays the winner a prize for a successful solution, not simply for effort — though the contest prize often must be larger than what a contractor would have been paid for effort alone.

Whenever contests are suggested as a procurement technique, advocates (including me) repeat the obligatory statement that “the technique isn’t suitable for all procurements,” but the phrase often stops there.

Recently, though, I read a brilliant paper in the July 2012 issue of the Academy of Management Review that provides some helpful insight into determining when contests are a good alternative to contracting. (Readers of past columns referencing articles in academic journals will note that it is not unusual for me to read an article months after publication; academics like to think the content is timeless.)

In “Crowdsourcing as a Solution to Distant Search,” Allan Afuah of the University of Michigan’s Stephen M. Ross School of Business and Christopher Tucci of the Swiss Federal Institute of Technology in Lausanne offer the following guidelines:

  •  The more the customer believes there is a significant likelihood that the solution to the problem might involve knowledge and skills outside what the researchers call the customer’s “knowledge neighborhood,” the more it makes sense to use a contest. One reason is that the bigger the gap between the knowledge needed to solve the problem and the kinds of knowledge the customer already has, the harder it is to select the appropriate contractor to solve the problem and the greater the likelihood of selecting a contractor that will fail. (Incidentally, this theoretical observation is supported by empirical evidence that winners in private-sector contests are often geographically distant entities or individuals unknown to the customer.)
  •  The easier it is to describe what the customer needs, the more it makes sense to use a contest. If a potential solver needs to understand a lot of hard-to-describe details of the customer’s environment and culture in order to solve the problem, it is unlikely that the far-flung small businesses and innovative individuals who typically tackle such challenges will be able to solve the problem correctly because there will be something they don’t know about the situation that makes their solutions inappropriate.
  •  The less contact the solvers need with the customer while they are working on the problem, the more it makes sense to use a contest. Otherwise, the communication demands on the customer will become overwhelming.
  •  The cooler the problem, the more it makes sense to use a contest. Cool problems attract more solvers, and they are often willing to work on the problem for lower prizes. That is one of the reasons for the success of various open-source software innovations.

The researchers’ guidelines are sensible and practical. Federal program managers should keep this checklist in their toolkit.

About the Author

Kelman is professor of public management at Harvard University’s Kennedy School of Government and former administrator of the Office of Federal Procurement Policy.

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Reader comments

Thu, Jan 10, 2013 Roger Baker

Steve, VA has issued our scheduling app contest. A whole different way of solving our need for an app to schedule patient visits. http://www.nextgov.com/health/2013/01/develop-open-source-scheduling-system-va-and-win-3-million/60572/?oref=ng-dropdown

Tue, Jan 8, 2013 David Bodner

I would agree with the guidelines stated but add one: is a breakthrough required? The need for a breakthrough indicates that we don't even know which direction to orient our development efforts. Still the average government employee should consider himself lucky if he's in the position of employing this technique even once in his career.

Mon, Jan 7, 2013 OccupyIT

Once again, the problem with the analysis is that it is one sided and does not comply with the concepts clearly defined in the FAR for procurements to fairly balance the sharing of risks and costs with contractors. Seen from just the buyer's side this may seem a pure win, at least in the short term. Seen in the overall economic perspective 'contests' require all offerors to expend the costs of the entire project (instead of just bid and some design costs) with only one vendor receiving compensation. You now have many vendors assuming 100% of the risk in a winnder take all (or maybe no winner) game. How many times would you expect vendors to invest in a lottery, especially given the possibility of less oversight for contests seen as a work around for wired deals? Something that meets the criteria specified (well specificied requirements requiring little client interaction) could just as easily be procured as a COTS package. Contests are just poorly run procurements that circumvent the restrictions (security, citizenship, professional certifications, past performance, etc.) and oversight (FAR) imposed on real, more-fair, procurements. Before you jump to conclusions about the Golden Age of Contests, try a longitudinal study showing the total life cycle costs (including USG time, prizes and PR campaign costs) necessary to get the 'free' winner in production.

Mon, Jan 7, 2013 Joy California

I will have to keep my eyes open for these contests. I guess only the RoboCall solution contest caught my eye. Just a fun way to find solutions! Are these contests open to individuals as well or only from Federal vendors?

Mon, Jan 7, 2013 Beltway Bill

Another effect is getting recognition of projects/products/solutions already inside the Govt but ones that few know about, especially the groups who offered the contest. Many times the best solution is already approved, accredited, paid for, and deployed.... but there's no means nor motivation to spread that news (to market/advertise) thus wasteful redundency is bound to occur. Additionally, there's little motive for a group who's deployed the solution to submit the idea to the contest -- there's no benefit. If it is wasn't for GCN, FCW, InformationWeek, and all those Govt-IT magazines, I'm afraid it would be far, far worse. I suggest a better return on the Govt $$ would be to encourage and increase the 5th estate's access to the Govt's thousands of program managers, large and small, cutting-edge and old-school.

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