The carrot and the stick: should SMEs be cutting their costs during Proof of Concept work?

It’s been almost 5 years of running our own Open Innovation programme at Digital Catapult NETV and we’ve learnt a lot in that time. Over the years we’ve continuously reshaped our support, to make sure it compliments the ever-changing, complex relationship between SMEs and corporates. 

Recently, this has included applying our Business Challenge 2.0 blueprint standard to anything we do in this space. For those that have followed or directly benefited from one of our Business Challenges, you will know that we are tough when it comes to the corporates we engage with, ensuring they have the right intentions when engaging with SMEs.  We do this by ensuring they’re not just ticking a box, that they have a realistic budget (often harder when the scope is open to allow for bespoke solutions) and they have internal buy in at the right levels.  This has resulted in a successful programme of activity that has created around £1million worth of commercial investments between corporates and SMEs.

The feedback we have received from SMEs is that we have created an opportunity for them to meet the right people within a corporate - the individuals with the problem they’re being asked to solve. We have done the due diligence on their behalf and then provided them with an opportunity to pitch their solutions. This is great for both sides in principle because the SME gets a great corporate on their CV and the corporate gets their problem solved and is able to engage with small agile suppliers.

However, what has become clear in the last 18 months is that there are a lot of corporates (with or without innovation teams) that focus too much on the initial engagement with SMEs. They’re looking for the ‘quick wins’ to prove that they are ‘agile’ and can work like a start-up. In reality what is happening is that there is no consideration for the long-term partnership. 

We’ve seen SMEs get so excited about the potential of winning a bigger contract down the line, that they play down the cost of the POC to ensure they get it over the line quicker. This is despite the fact that a lot of the upfront development costs are in the POC! This is a huge risk, especially if the client’s long-term intentions aren’t clear, or there are internal processes that can complicate a longer (and more expensive) project.

Some of the barriers we’ve observed that stop a large scale roll out following a POC are:

Procurement Rules – some organisations have certain procurement rules that do not allow the company to procure a supplier if the contract is worth more than 50% of that company’s (the supplier’s) turnover. This is because the company is seen as too much of a risk as they may ‘go under’ and leave the client unsupported. However, some people we have spoken to feel that procurement is just an excuse and if a company really wants to work with them they usually find a way.

Culture – organisations can be very competitive internally with different departments or different sites. This can result in internal stakeholders being reluctant to share their findings including the work they’ve done with SMEs, or perhaps not being willing to take on solutions from another team. This kind of attitude can also affect the organisation during a company restructure which is quite common within a corporate. We see this a lot: the new person comes in and wants to put their own stamp on things, meaning they choose to ignore any work their predecessor has done with SMEs or even changing the innovation process altogether. This can be particularly difficult for an SME who has one contact that leaves or changes job roles.

Lack of Communication – similar to above, because corporates are by definition large, it is difficult for each department to be aware of what others are working on. Therefore, we have seen times when a department has built a POC with an SME not knowing that this work has already happened elsewhere in the company.

Vision – it is all well and good having an innovation team with a small budget but does the vision of innovation embed itself throughout the organisation and do all staff know why they need to support it? If not, even the best POC might end up sitting on the shelf and never resurfacing. A lack of business as usual (BAU) support to spend the time and resources to roll out properly can mean the end of a SMEs contract. 

Introducing: Ethical Innovation Theory

These challenges are the reason behind Ethical Innovation Theory. EIT helps corporates to consider the long-term innovation intentions and to ensure their processes are appropriate to support these intentions before they go to the market. It helps to protect the corporate’s reputation with the SME community but it also starts this conversation early with both sides so that an SME can decide whether or not it is worth their while to get involved in a particular project. For instance; they might not reduce their POC costs if they know it is unlikely for the relationship to go beyond that, but each side of the partnership goes into the project fully informed. 

The challenges I’ve highlighted here, and the approach to overcoming them have been discovered over the last few years, as well as during the research we have recently been doing with Durham University into Ethical Innovation Theory. (A quick thanks to all of our network that got involved!) 

It has been really interesting to hear conflicting opinions on both sides. Some individuals in corporates have suggested that SMEs shouldn’t aim for the ‘carrot’ of working with a corporate long-term because it isn’t as tasty as it looks (will continue to drive down costs and expect more etc). Whereas some on both sides of the table are saying it is more about understanding how there will be mutual benefit from a long-term relationship, so an SME shouldn’t be looking to solve one problem but should instead be constantly looking to the next opportunity for what they can support with. One thing that has become clear during the research is that few organisations have a clearly defined process for engaging with tech SMEs, although this is partly because each relationship is different. 

However, it has been interesting to observe that, broadly speaking, the engagement with tech SMEs is seen differently to engagement with any other ‘traditional’ SME within a corporate’s supply chain. Some are keen to understand how to create a ‘rule book’ that everyone within their organisation can follow, to ensure they’re all working from the same standards when engaging tech SMEs. It seems that this is mainly because, at the moment, a lot of the success of these relationships comes down to proactive advocates internally banging the drum and finding ways around hefty processes.

If you have experience of this subject as an individual in an SME or a corporate I’d love to hear from you to understand what did and didn’t work for you!