VENTURE STUDIO BUSINESS MODEL

If you are asking yourself, “what is a venture studio?,” then you have come to the right place.

For those looking to start a new company, one popular business model is called a venture studio. A venture studio business model, which is also called a startup studio business model, is a company that works to build several different companies in rapid succession. Venture studios develop the idea behind a company while simultaneously investing capital.

In the academic world, this model of business building is also called parallel entrepreneurship. There are a number of reasons why the companies that are involved in this type of startup can succeed. 

First, venture studios typically focus their resources on creating startups. This means that venture studios have a lot of experience building new companies and can apply this experience to achieve a greater chance of success. Furthermore, because of the repetitive nature of the company building, these companies are ideal for developing product and service prototypes rapidly. In addition, because these companies are typically building multiple startups at the same time, they have the ability to work on multiple projects simultaneously. Finally, the venture studio business model means that the same infrastructure can be applied to multiple companies at the same time. This means that venture studios are efficient when it comes to building multiple companies. For those wondering, “do venture studios work?” — the answer is yes. 

In a lot of cases, a venture studio will provide companies with the initial team, capital, and strategic direction they need to help them find the product-market fit and scale efficiently. It is the most efficient vehicle for new business creation.

WHAT IS A VENTURE STUDIO?

One of the most common questions we hear is “what is a venture studio?” The definition of a venture studio is that this is a location that aims to create multiple companies in rapid succession. As alluded to above, this model is often referred to as a startup foundry or “parallel entrepreneurship.” In order for something to be classified as a venture studio, there are three separate criteria that the studio must meet. These include:

• The resources of the venture studio are focused on creating startups from the ground up, meaning that there is a lot of time, effort, and dedication focused on working on a project for a certain period of time.
• The venture studio builds several different startup companies in rapid succession, meaning that they are often working on multiple prototypes at the same time.
• The venture studio has the infrastructure in place that lends itself to an efficient company-building machine. The venture studio often pools its manpower, technical tools, and skills to build several projects in a year, reusing infrastructure in an efficient manner.

People often confuse a venture studio with an incubator studio, also known as a business incubator. When comparing a venture studio vs. incubator, an incubator studio typically receives some sort of equity in the business in exchange for capital and expertise. This is a key difference that everyone should keep in mind.

STUDIO VC

One of the important topics of discussion when it comes to venture studios is the possibility of equity. Equity is incredibly valuable to startup companies, particularly given the potential for massive returns with the success of even one product prototype. Some people view venture capital firms as a subset of venture studios while others look at venture capital as a different entity altogether. Studio venture capital investors are typically much more involved in startups than a typical venture capital fund. With a typical venture capital fund, there are investors who pump in a tremendous amount of capital into a project that is already somewhat off the ground. Then, these investors expect a significant return on their investment within a few years. Sometimes, venture capital firms take a portion of the equity in the company in exchange for their investment. For the most part, venture capital firms leave the day to day operations of the business alone.

On the other hand, a venture studio fund builds a business from the ground up. They are heavily involved in getting the startup off the ground, working with prototypes, and providing assistance to the startup in the form of capital, expertise, manpower, and connections. When looking at a business agreement with a venture studio, the agreement may resemble that of a venture capital firm agreement. Sometimes, venture studios are going to take some equity from the startup company in exchange for the tremendous amount of resources the studio is going to provide. Startup studio equity will vary depending on the capital and the studio policy; however, this is an important point to examine in the agreement.

At High Alpha, a venture studio based in Indianapolis, we build new B2B SaaS companies from the ground up. We design, prototype, and validate our top concepts during our quarterly Sprint Week process, which is our forcing function for launching new tech startups. When we launch a new company, we essentially build a cocoon of expertise around the startup, across every discipline required to build a world-class company. The level at which we support our companies allows us to compress the amount of time it takes to move from an idea to a world-class business. Our studio services include brand, design, engineering, HR and recruiting, sales, marketing, finance, and data science.

CORPORATE VENTURE STUDIO

Many companies have a venture studio as a subset of an existing corporation. This is often referred to as a corporate venture studio and is called corporate innovation. Because of the tremendous amount of success that many venture studios have already enjoyed, existing corporations are looking to create an arm of the company that looks for new ways to grow and build. This comes in the form of investing in startups, as this has the potential to lead to exponential investment returns in exchange for existing capital which the company already has plenty of. Many corporations already have a powerful social venture studio that can make static capital work harder than ever before. This means that startup companies can take advantage of the tremendous amount of capital these corporations have while corporations can enjoy much larger returns on their capital than they otherwise might. For this reason, there has been significant growth in the number of corporate venture studios over the past few years.

STARTUP STUDIO PLAYBOOK

While startup studios are very popular, the venture studio platform is still very much evolving. One of the most popular areas of venture studios today is the healthcare venture studio. With so much new technology being created in this space, there are a lot of people who are looking to build new products that have the potential to save lives. While the playbook for venture studios is still very much under development, there are a few best practices that venture studios tend to follow. These include:

• A high-quality venture studio is going to provide advice to young startup companies that help turn ideas into concrete operations
• This will come in the form of operational guidance that comes in the form of human capital
• In addition to human capital, venture studios are going to provide financial capital as well. The amount of financial capital will vary with the specific venture studio.
• Venture studios may also set up portfolios that can provide a steady income to the startup company as it gets off the ground

In this manner, startup studios are going to provide operations, advice, capital, and guidance to help turn startup dreams into reality.

STARTING A VENTURE STUDIO

There are many people who are wondering how to start a S7Clear X venture builder. For those looking for answers to the question, “how to start a venture studio,” this comes in the form of answering a few important questions. First, where is the funding going to come from? Startup studios function by providing capital to startups that help get the ideas off the ground. There are a few sources of funding available including the founder’s wealth, corporate funding, and money from outside investors. Next, how is the venture studio going to be structured? Is the studio going to fund a few startups on its own? Or, is the studio going to collaborate with investors to decide collectively how to invest in startups? Finally, what is going to be the focus of the studio? Is the studio going to invest in companies overseas? Is the studio going to function on a single sector of a single industry? How is the funding going to be distributed? It can be helpful for those looking to start a venture studio to learn more about this process. Some popular books to take a look at include Startup Studio Playbook and Anatomy of Startup Studios. 

TYPES OF VENTURE STUDIOS

Venture studios may focus on a single industry, like us here at High Alpha. We specialize in B2B SaaS companies based on our deep experience and can be helpful in applying our tried-and-true strategies in that space to grow and scale similar companies.

We have a tremendous amount of experience working with B2B SaaS companies, including Smartwyre, so we can help you conduct target market research, develop your products, and expand your customer base. You can also learn from the expertise of our partners. As one of the most successful venture studios in our industry, we can help your startup company progress through the exciting but challenging, stages of launching a new company.

STARTUP STUDIOS BY CITY

When looking for funding, it is important to find the right startup studio. There are lots of startup studios all over the world. Some of the top venture studios NYC include the MIT NYC Startup Studio, which is a trust with a tremendous amount of funding for those looking to create venture studio NYC. There is even a startup studio in London called Nesta which has enjoyed a lot of success. Superset venture studio San Francisco is another great example of a growing venture studio. There is more than one Atlanta venture studio that people should take a look at — Atlanta Ventures’ studio and The Core Ventures Studio are just two studios in the city.

If you can’t tell by now, there is a global startup studio network of companies building the next generation of businesses. At S7Clear, our venture studio’s mission is to build the next generation of B2B SaaS companies. In addition to a network of startup studios, in recent years, the Venture Studio Collective has grown, providing a tremendous amount of resources for those looking to start a new company. 

When someone is looking for a source of funding, it’s important to take a look at all of the options available, weighing the pros and cons, and looking for a partner that has the appropriate reach. When considering fundraising options, it’s important to consider local, regional, national, and international partners. 

VENTURE STUDIO PARTNERS

When trying to find funding for a new business, it is critical to find the right partner. A startup founder needs to create a list of criteria that will help them go through the list, finding the right resources to get their business off the ground. Some of the top venture studios in the world right now include Human Ventures, High Alpha, IDEO CoLab, Idealab, Superset Venture Studio in San Francisco, West Venture Studio, OC4 Venture Studio, and Techstars Venture Studio. 

All of these venture studios have enjoyed a tremendous amount of success; however, venture studios also need funding to be successful. Venture firms like True Ventures, Foundry Group, and Emergence Capital have a track record of working with venture studios. It is important for startups and entrepreneurs to take a look at all the options available, doing their due diligence to find the one that is right for their needs.

VENTURE STUDIO VS VENTURE CAPITAL

hen taking a look at a venture studio vs venture capital, the key difference involves services to help a business with their early operations. Both models provide funding to the new company, but only venture studios help them as a pseudo team while the company is starting out. This maximizes the quality of the new brand, the companies output, and its speed to market. Venture capital firms are not going to be as involved in a company’s day-to-day operations.

A venture studio fund will usually have several venture studio partners who are responsible for providing services as a part of the venture studio structure. Services can include but aren’t limited to design, marketing, go-to-market, finance, HR and recruiting, and more. Along with the services, they also have a vast network of partners that can help you get discounted services, create investor relationships, and meet potential customers. All of these partners will spend time thinking through the problems the new company faces so that they can support the co-founder with the resources they need to fuel the early stages of growth.

VENTURE STUDIO VS INCUBATOR VS ACCELERATOR

As you take a look at the startup studio business model, you may be curious about a venture studio vs incubator vs accelerator. What are the perks of working with a company builder from a venture studio fund? What makes the most successful venture studio? Is the model the most efficient way to start your early-stage startup?

STARTUP INCUBATOR

A startup incubator usually offers a long-term relationship with curated members. They usually do not take any equity but charge a fee instead. Some might provide access to technical facilities and physical space.

STARTUP ACCELERATOR

Accelerators are growth-based and usually have a time-limited relationship. They have a time-limited program focused on speeding up your company’s growth, and they might also provide funding in exchange for equity.

When looking at how a how venture studio is different from a startup accelerator, you need to look at the specifics of the program. A startup accelerator is usually a brief program that lasts a few weeks and might also involve a financial award. A startup accelerator program is usually limited and scattered across a wide variety of industries. This is not the case with a venture studio, which tends to be more narrow and focused, developing a long-term relationship with a company that goes beyond the startup period.

VENTURE STUDIO MODEL

A venture studio provides you with access to all the resources you need to get your company off the ground in addition to funding. With a full-stack venture studio, you get to work with a team that can help you design, market, and build your product. This also includes long-term relationships with the entire network associated with the venture studio’s portfolio.

This study investigates the relationship between regulatory policies governing public procurement and participation by small and medium enterprises (SMEs), using a large dataset on European procurement. We find that better quality procurement regulation is associated with greater SME participation and higher probability that SMEs win contracts. Dividing contracts into smaller lots, a key feature of 2014 EU procurement regulation reform, bolsters participation by SMEs but only increases the probability of SMEs winning contracts for small value lots (€25,000 or less). Our results suggest governments seeking to enhance participation by SMEs in public procurement without explicitly favoring SMEs can do so by improving the overall quality of procurement processes.

Introduction

Public procurement (PP) generally represents a significant share of aggregate GDP. In the European Union (EU), PP represents 13.3% percent of total EU GDP, with public authorities spending some €2 trillion per year during the 2015–2017 period on the purchase of services, works, and supplies (European Commission 2019). Most countries have put in place legislation that regulates the process through which public contracts for goods, services, and works are allocated. These generally seek to assure “value for money” and accountability for the outcome of contract award decisions. In the EU, specific directives define in some detail how procuring government entities—both EU institutions and at the member state level—must behave when undertaking public procurement that exceeds certain threshold values. The basic principles include competition, non-discrimination, and transparency.

Procurement regulation that reflects primarily “value for money” considerations may skew the allocation of contracts to large firms that are better able to incur the costs associated with procurement processes and satisfy criteria that are used to ensure bidders have the capacity and track record to implement a contract. Because small- and medium-sized enterprises (SMEs)^Footnote1 constitute most firms in any economy (Ayyagari et al. 2007), many governments have sought to address this potential bias and ensure that SMEs are able to participate in public calls for tender. SMEs generally confront various constraints, ranging from access to finance to limited human resources (Beck and Demirgüç-Kunt 2006), that may impede their ability to satisfy both the administrative and substantive requirements associated with PP processes, dissuading them from competing for public contracts. Reflecting this, many countries have introduced measures into public procurement regimes that aim to support SME participation. These may explicitly favor SMEs through provisions such as price preferences, earmarking a minimum share of total procurement or specific contracts to SMEs, or requiring winning bidders to sub-contract to SMEs.^Footnote2 Alternatively, they may focus on facilitating SME participation in PP through generally applicable measures that aply to all tenders, such as simplification of procedures, bid eligibility requirements that are feasible for SMEs to satisfy, and limiting the size of contracts.

In this article, we analyze the second type of policy. We ask whether generally applicable PP regulation aimed at fostering SME participation in PP has this effect. This research question is answered using detailed data on public contracts awarded in 32 European countries in 2016 and 2017. Specifically, we examine the relationship between SME participation and the “quality” of PP regulation, measured by how closely national regimes align with internationally accepted good practice. We also assess the role of contract size and subdivision of contracts into smaller lots, a key feature of the 2014 EU PP policy reform aimed at enhancing SME participation in PP.^Footnote3 Our interest is to investigate whether the quality of PP regimes affects participation in public tenders by SMEs and the likelihood of their success in winning contracts and to estimate the relationship between average contract size and the probability of SMEs winning tenders. We can do so because the EU reported whether SMEs participated and won tenders in 2016 and 2017.^Footnote4

We find that the quality of PP regulation, as measured by indicators compiled by the World Bank and by DigiWhist—a European public sector accountability research initiative^Footnote5—has a statistically significant positive relationship with SME participation in PP tenders. We also find an associated positive probability that an SME wins a PP contract. SMEs are more likely to submit bids when government entities employ open procedures (first price auctions) and when contracts are of small size. Threshold regression analysis reveals that conditional on contract size, dividing projects into smaller lots increases the probability that a SME wins the contract. To the best of our knowledge, these findings contribute to the literature on PP by being the first to document that measures aimed at facilitating SME participation in PP—as distinct from requiring preferential treatment of SMEs—can be effective.

The plan of the article is as follows. Section 1 discusses our research question and places it in the context of related literature. Section 2 characterizes the quality of PP regimes across countries, one of our explanatory variables. Section 3 describes the procurement data used. Section 4 reports the results of empirical analysis of the relationship between PP regulation and SME participation in procurement contests and the probability of success. Section 5 concludes.

Public procurement regulation and SMEs

Much of the extant empirical analysis of the effects of PP regulation tends to take a public sector governance perspective. Studies have shown that adoption of internationally accepted good practices in public procurement, such as transparency and use of design and award processes that reduce discretion and the scope for corruption, lowers project costs and/or increases quality by increasing competition for contracts. For example, Knack et al. (2019), using enterprise data for 88 countries, find that firms are more likely to participate in public procurement markets in countries with more transparent procurement systems that rely more on open competition. Taş (2020), focusing on public procurement in the European Economic Area, finds that PP regulation that is more aligned with internationally accepted good practice standards significantly increases competition and lowers average contract prices for procuring agencies.^Footnote6

Recent thinking in the economics literature frames the impact of policy on SMEs through the entrepreneurial ecosystem. In this framing, policies can have a leveraged or multiplicative impact on SMEs and ultimately economic performance (Stam and van de Ven 2019). PP regulation arguably is a salient dimension of the entrepreneurial ecosystem, an element of both the “quality of government” that helps to define the investment climate in which firms operate and a specific source of demand for SMEs.^Footnote7 There is substantial literature assessing the (potential) role of PP as a mechanism to support innovation (Edler and Georghiou 2007; Aschoff and Sofka 2009; Edler and Yeow 2016) and SME entrepreneurship (Dennis Jr 2011; Harland et al. 2019). One reason is that PP can represent a meaningful source of demand for firms, so that a government contract may encourage firms to invest more, expand employment, and increase productivity (Ferraz et al. 2015; Hoekman and Sanfilippo 2019). Success in promoting greater participation by SMEs in PP may help attain broader industrial development objectives (Geroski 1990; Acemoglu et al. 2018), including through spillovers within geographical clusters of economic activity (Porter 1990).

SMEs may confront greater difficulty in contesting public procurement markets than large companies (OECD 2018). Specific characteristics of SMEs may inhibit them from bidding for public contracts. SMEs may have limited capacity to incur the cost of lengthy payment delays, satisfy bid security, minimum turnover or experience requirements, or difficulties in obtaining loans for the working capital needed to execute a contract on a timely basis (Loader 2011, 2015; OECD 2018). Both financial and human resource capacity constraints are likely to be more severe for SMEs than for large firms, with implications for the capability to incur the (opportunity) costs of dealing with the administrative requirements associated with bidding for public contracts.

Evenett and Hoekman (2005) argue there are two important dimensions of procurement regulation. One relates to “leveling the playing field” by removing discrimination that impedes participation by some firms (often foreign). The other centers on transparency and related mechanisms that reduce discretion and the potential for corruption or collusion in the allocation of contracts. Competition and transparency are core elements of what is internationally recognized as good procurement practice, where the goal is value for money. Nondiscrimination may reduce the prospects that SMEs can successfully contest procurement opportunities as it will boost potential competition. Greater transparency and due process may be a positive or a negative for small firms.^Footnote8 On the one hand, it reduces fixed costs and there is a presumption that small firms will be less able to provide bribes or side-payments than larger firms. On the other hand, less discretionary procurement practices may encourage greater participation by firms that otherwise would refrain from bidding for contracts—or were simply excluded because they were not “connected.” How public procurement regimes where contracts are allocated based on transparent and competitive processes will affect participation by domestic SMEs—our research question—is therefore an empirical question.

Governments tend to take two types of approaches to enhance the participation of SMEs in PP. The first comprises measures that aim at “leveling the playing field” for SMEs, through, e.g., calling for contracts to split into parts that may be easier for an SME to bid on and for contracts to be awarded based on the “most economically advantageous tender” rather than the lowest price. Both are elements of EU procurement practice. The second goes further and involves proactive measures in PP legislation that favor SMEs, through, e.g., set-aside requirements and price preferences.^Footnote9 The extant literature assessing the effect of policies targeting SMEs is relatively limited and has tended to focus on the latter types of proactive policies. Nielsen (2017) surveys the existing research on the impact of SME-specific PP policies. He concludes there is some evidence that these result in greater SME engagement in procurement but also notes the evidence is mostly of a case study nature, with little attention given to the potential costs of SME preferences in terms of value for money forgone. Nakabayashi (2013) develops a theoretical framework to assess the effects of SME set-asides and procurement preferences and applies this to public procurement of construction services in Japan. He concludes that set-aside programs increased SME participation in public procurement auctions by approximately 40%.^Footnote10

In the present article, we cannot assess the effects of explicit PP preferences for SMEs because the EU—the source of our data on PP calls for tender and awards—does not apply such measures. In contrast to other jurisdictions, the EU does not use proactive discriminatory measures in its procurement legislation to favor SMEs in contract awards. Instead, the EU seeks to encourage participation by SMEs in public contracts by reducing barriers to entry and costs associated with PP processes (European Commission 2008). Specifically, reforms to EU PP legislation introduced in 2014 encouraged procuring entities to complement the use of a “most economically advantageous tender” criterion as opposed to the allocation of contracts to the lowest price bidder with the following elements: (i) reduce the average size of contracts where possible; (ii) consider subdivision of contracts into smaller lots where this is not detrimental to the realization of project objectives; (iii) implement e-procurement systems; and (iv) ensure timely payments (European Union 2014).^Footnote11

Our focus is on the role of national procurement regimes in general and on the four types of measures implemented in the 2014 EU procurement regulation, including dividing contracts into smaller lots to make them more accessible to SMEs. Research on the effectiveness of the “EU approach” has cast doubt on the efficacy of some its elements. Stake (2017), using Swedish PP contract award data, concludes that the use of “most economically advantageous” criteria in tender awards rather than lowest price did not increase SME participation and success rates. A reason for this may be the finding by Ancarani et al. (2019) based on a survey of SMEs in Canada, Hungary, and Italy that administrative requirements or price competitiveness is not regarded as a major barrier to participation in procurement auctions. Instead, limited human resource capacity and financial strength were reported as more important impediments. These factors commonly are found to be participation constraints in the literature. Direct targeting of these factors, including ensuring timely payment for services, should therefore facilitate greater participation in PP tenders by SMEs.

The same applies to splitting contracts into smaller lots. Evidence of the effects of this is both limited and mixed. Timmermans and Zabala-Iturriagagoitia (2013) argue that “coordinated unbundling” of contracts can be effective in promoting participation of SMEs in public procurement, but Glas and Eßig (2018), using data on 380 contract awards in Germany to assess the effectiveness of splitting tenders into lots, find that this does not significantly increase the success rate of SMEs. Instead, they argue that other factors, including the type of public procurement procedure, the degree of competition (number of participating companies), and the overall tender volume, influence SME success. Blind et al. (2020) suggest that one such factor may be the extent to which firms are successful in offering innovative solutions and engage in standardization activities at standards development organizations.

Characterizing public procurement regulation

The basic features of good administrative practice in public procurement from a value for money perspective are well known.^Footnote12 They include requiring procuring authorities to conduct procurement in a transparent and impartial manner and utilizing open (competitive) tendering methods to award contracts above a minimum value threshold.^Footnote13 Notices of intended or planned procurement should be published (including information on timeframe, treatment of tenders and contract awards, technical requirements, and evaluation criteria used to determine the winning bid and payment terms). Implementing regulations should specify whether procuring entities may (or must) treat domestic bids more favorably than those from foreign companies or consortia, what such treatment comprises and the criteria that apply.^Footnote14 Transparency is important for firms to be aware of opportunities. Publication of notices, ensuring sufficient time to prepare bids, and clearly specifying performance requirements are particularly important to SMEs as small firms have less capacity to be informed about procurement opportunities.

Djankov et al. (2017) characterize the quality of PP regulation for 142 countries in 2016. They assess three dimensions of the procurement process: (i) bid preparation; (ii) the content and management of the procedures used to award contracts; and (iii) payment of suppliers. The bid preparation score gauges the quality of the needs assessment associated with procurement projects and the call for tenders. The bid and contract management score considers the processes used for submission and evaluation of bids. The payment of suppliers’ score measures payment timeframes and the procedures for request of payment. The arithmetic mean of these scores is used to calculate an overall public procurement score. The data used to construct these scores come from surveys of more than 1900 PP experts. Djankov et al. (2017) describe the questionnaire and the coding of the scores in detail.

An alternative exercise with a similar goal but less comprehensive country coverage is the DigiWhist initiative, a EU Horizon 2020 research project involving a consortium of six European research institutes. It covers the (then) 28 EU member states, the European Commission, Armenia, Georgia, Iceland, Norway, Serbia, and Switzerland. One element of the project is to produce data measuring the transparency of public administration and the accountability of public officials based on both de jure and de facto practices pertaining to the scope, information availability, evaluation, open competition, and institutional aspects of public procurement in European countries. The DigiWhist effort builds on indicators used in the World Bank Public Accountability Mechanisms (PAM) initiative. The resulting EuroPAM indicators score the quality of PP processes and regulation in the European countries considered. DigiWhist public procurement quality scores are available from 2012 to 2017. Accordingly, we consider the annual changes in procurement quality when we employ DigiWhist quality scores in the empirical analysis.

Table 1 reports summary statistics for PP quality indicators generated by the two sources for European countries for which we have data on participation by SMEs and outcomes (awards) from the EU Tenders Electronic Daily (TED) database. These data are discussed further in Section 4 below. The summary statistics for the two sources of policy information are comparable.Table 1 World Bank and DigiWhist public procurement indicators, in selected European statesFull size table

Figure 1 displays the overall PP quality scores for European countries. It reveals there is some variation across the two sources in scores and associated rankings of the European countries included in the sample.^Footnote15 The overall PP indices vary significantly across countries, making it possible to assess how PP regulation quality affects levels of competition and cost-effectiveness using data on the outcomes of procurement processes from the TED database. In the empirical analysis, we consider the association between the basic features of PP regulation and participation by SMEs, complemented with a focus on a specific measure that has been adopted by the EU to encourage SME engagement: dividing contracts into smaller lots. Our interest is to analyze empirically the “EU approach” which centers on implementation of what are agreed—both at EU level and internationally—to be good general procurement practices, including measures introduced in the 2014 EU PP reforms that sought to “level the playing field” for SMEs, without explicitly favoring them.^Footnote16

Methodology

Data and sample

We use the World Bank and DigiWhist information on the quality of PP regulation and PP contract award data for 32 European countries sourced from the TED database, which contains information on all tender opportunities as well as information on contract awards made by procuring entities in the European Economic Area (EU28, Iceland, Lichtenstein, and Norway), Switzerland, and the former Yugoslav Republic of Macedonia.^Footnote17 In addition to acting as a platform for calls for tenders, TED is also a depository of information on PP outcomes, i.e., which firms win contracts.

Data in TED pertain to the three main categories of PP distinguished in EU law—services, supplies (goods), and works (construction- and infrastructure-related projects). Data are reported on the number and value of contracts issued by procuring entities for each of these three categories, as well as the procurement procedure that applies. These include open (competitive) bidding, restricted procedures, and the so-called competitive dialog. The first two account for most procurement. Under open procedures, contracting authorities are required to publish procurement opportunities in the Official Journal of the EU, specify the technical criteria that bidders must satisfy, and evaluate bids and allocate contracts on the basis only of the bids received. Restricted procedures, used for higher-value contracts, involve a process where contracts are awarded based on competition between prequalified suppliers that express interest in participating. Some 85% of PP contracts are allocated through open procedures in the European Economic Area, accounting for about three-fifths of total PP by value (Kutlina-Dimitrova and Lakatos 2016).^Footnote18

Public authorities are obliged to publish their tender invitations on TED for all contracts exceeding EU public procurement thresholds. For the period under analysis, the thresholds were €135,000 for public sector supply and service contracts issued by central government entities (€209,000 for other authorities); €387,000 for utility supply and service contracts; €80,000 for small lots within a project above the services threshold; and €5,225,000 for construction/utility works and services concession contracts. Many contracts that fall below these thresholds are also reported in TED, as authorities often use TED to publicize tenders independent of contract values.

The TED data are available online in CSV format starting in 2006.^Footnote19 The European Commission extracts the data from standard forms pertaining to the initial contract notice and final contract award notice that must be provided by each procuring authority.^Footnote20 For each contract, the TED database includes fields for the estimated contract value (determined by the procuring entity), the actual contract (award) price, the sectoral Common Procurement Vocabulary (CPV) code that applies to the subject of procurement,^Footnote21 the procurement method used, type(s) of contracting authority, and the names and locations of both the procuring agencies and the winning firms. TED includes information on SME participation for 2016 and 2017. A total of 1,018,794^Footnote22 tenders were awarded in these 2 years. For 205,578 of these tenders, or 20% of the total, information is reported on the number of SMEs that participated in the tender process. We focus on this subsample of contracts in the empirical analysis.^Footnote23

Dependent variable

We start with the economic factors that affect participation of SMEs in PP, using the ratio of SME bidders to total bidders for a contract c as the dependent variable,^Footnote24 and then examine the probability that an SME wins a contract. Information on whether an SME wins a tender is available for a larger set of contracts (531,164 in total), but data often are not reported on the number of SMEs participating in the PP tender process. Of the 531,164 contracts where information is reported whether an SME is awarded the contract, the SME win ratio is 53%. This ratio is higher in the subsample of 205,578 tenders for which we have information on the number of SME bidders per tender, i.e., participation rates are reported. In this subsample, which we use for the empirical analysis, 67% of tenders are won by an SME. Most of these contracts (185,682) were awarded using open procedures (first price auctions).^Footnote25

Independent variables

We employ public procurement regulation quality scores described in Section 3 as the main independent variables. Additionally, we examine whether dividing contracts into smaller lots promotes SME participation. The TED data contains information about the number of lots for each contract. We construct an independent variable, dividedlots, if the contract has more than one lot. Almost 80% (163,265) of the contracts in our subsample involved division of a part of the project into smaller lots.^Footnote26 Some 60% (123,842) of these tenders had estimated contract values exceeding the legal thresholds that determine if EU procurement regulations apply. Thus, 40% of the contracts in our sample are below the thresholds established in the EU regulation determining if PP rules must be implemented, i.e., publication of tenders and reporting information on winning bidders. This feature of the database is important for the empirical analysis as we are interested in low-value contracts that are more likely to be won by SMEs. The ratio of below threshold to total contracts is somewhat higher to that observed in the complete TED database, where 716,571 (70.3%) of all contracts are above the value thresholds specified in EU PP regulation.

Control variables

We use several control variables, including dummy variables for the type of procurement method used, the type of public procurement authority that issued the call for tenders, whether estimated costs exceed the legal thresholds above which EU procurement law applies, and whether the contract is divided into smaller lots. Sector fixed effects are used to control for possible sector-specific dimensions of PP participation and outcomes.^Footnote27 Contracts in the subsample are weighted towards goods: 79.3% of contracts comprise procurement in goods sectors (including works); services account for 20.7 of awarded contracts. Participation and win rates for SMEs competing for goods and services contracts are very similar. Table 2 reports summary statistics for the dependent and control variables.

Table 2 Summary statistics of the variables

As the world wakes up to social and environmental injustice, a spotlight is shining on global supply chains. Countries around the world are requiring greater transparency in supply chains, across a range of topics, from conflict mineral mining to deforestation regulation.

The burden on supply chain leaders and procurement teams to disclose and report on the values of their suppliers is growing exponentially. The pressure to perform, drive efficiencies, and deliver a competitive advantage is now compounded by administrative overhead to not only ensure supply chains reflect the values of the purchasing organization but also to prove it to third parties.

This can feel like a mountain to summit. For the future of sourcing, we must strap on our boots and get climbing.

Appropriate application of data and analytics will be critical in the successful management of these emerging requirements for procurement teams worldwide. The complexity of global supply chains creates a unique challenge. Fortunately, new technologies and data standardization make this an achievable goal.

Leveraging Prequalification Questionnaires

As procurement companies, we must stop thinking of a Prequalification Questionnaire (PQQ) as just a questionnaire. When we study traditional responses to PQQ questions as data points, we unlock huge value from the content stored in what is traditionally considered an administrative headache.

Digitization of a PQQ is not enough; building structure and intelligence into the design of a questionnaire, and the structure of its responses, enables analytics on a whole new scale. This drives enormous benefit for the procurement organizations facing new reporting strains, as well as for the suppliers sharing the burden.

There are three important elements to an efficient supply chain reporting framework:

• Common data standard
• Data sharing
• Analytics and benchmarking

With these in place, procurement teams can easily extract required figures for annual reporting or legal disclosures. Procurement reporting tools can help teams instantly answer the following types of questions:

• How many of my suppliers are SMEs?
• How many of my suppliers have a modern slavery policy statement?
• What percent of my supply base is operating an internally accredited carbon reduction scheme?

Empowering Procurement to Take the Lead

As a procurement leader, you are probably familiar with requests to report on the supply base. Perhaps you’ve heard something along the lines of, “I’d like to add a figure to the annual report on how many of our suppliers can demonstrate they mine conflict-free.” It seems like a sensible thing to do, but so often leaves a procurement team scrambling to determine which suppliers would be relevant to contact, how to reach them, and how to collect and store the information.

More and more, legislative action includes provisions for not only reporting on individual company practices, but the practices within companies’ supply chains as well, meaning these sorts of requests will only grow with time. By requiring companies to report on the ethics reflected in their supply chains, these pieces of legislation seek to drive out “bad actors” typically lurking at tier three or four of the supply chain.

Conflict Minerals

New EU legislation takes effect January 1, 2021, aimed at restricting the trade of conflict minerals. It requires EU companies to only import tin, tantalum, gold and tungsten from responsible sources. From that same date, EU importers of these products will have to carry out due diligence on their supply chain.

SECR: Streamlined Energy and Carbon Reporting

SECR legislation, which came into force April 1, 2019, requires all large UK companies and large LLPs, as well as all quoted companies, to report on their annual energy use, greenhouse gas emissions and energy efficiency actions they have taken.

Modern Slavery

The UN Universal Declaration of Human Rights protects the rights of workers and individuals. The UK Modern Slavery Act includes a provision for transparency in supply chains and requires large companies to issue a slavery and trafficking statement annually. The statement must set out what steps the organization has taken to ensure there is no slavery in any part of its business, including its supply chains. France and Australia have followed suit with similar legislation while other European countries have legislation in the works.

Deforestation

The UK Government published proposals in August for legislation requiring large UK companies to perform supply chain due diligence and publish information certifying that certain commodities were produced in accordance with local laws pertaining to deforestation.

“This would mean publishing information to show where key commodities, including rubber, soil and palm oil, came from and that they were produced in line with local laws protecting forests,” reported Sky News.

Equality, Diversity, and Inclusion

Several countries have long-standing equality legislation that prevents discrimination based on a range of factors including gender, race or sexual orientation. Focus is now shifting to apply these principles to supply chains and promote diversity through procurement processes.

Driving Value in Your Procurement Team

Carbon accounting, as an example, is rapidly becoming the universal tool for procurement professionals to measure cost effectiveness and drive business performance both internally and within the supply chain.

It is well known that reducing an organization’s carbon footprint can deliver money straight to the bottom line. Organizations that focus on carbon reduction can save millions per annum through an internationally accredited ISO14065 greenhouse gas certification program.

Collection and promotion of the appropriate data regarding emission levels, performance against targets and offsets are critical to measuring the impact carbon accounting throughout the supply chain can have. Streamlined data collection, reporting and sharing tools are key enablers of tomorrow’s sourcing reality.

Common Standard

International standards and responsible sourcing protocols are common reporting frameworks organizations can complete once and share many times. A procurement organization’s willingness to accept and adhere to common standards has the power to dramatically reduce supplier reporting obligations.

Suppliers often feel overburdened by the sheer volume of forms, certifications and audits they must complete. By accepting internationally recognized standard data templates and audit protocols, suppliers can spend less time achieving accreditation and more time on their core business, driving efficiency and increasing productivity.

Standards have traditionally dictated how questions are asked but have put less emphasis on how the responses are collected and stored. It is equally important that responses to standard questionnaires are stored properly so they can be treated as data points to be compared and analysed.

Data Sharing

It is not much use accepting a standard of data if that data is not easy to move between platforms and systems. API technology is standard and available with most ERP, P2P and S2P systems. Leveraging this means you can reduce the supplier burden further by taking data from accreditation bodies themselves, rather than requiring a supplier to submit the data separately for each buyer it wants to supply.

Analytics and Benchmarking

With the two previous steps of a common data requirement and standard data sharing in place, procurement teams can easily analyse and draw conclusions from the data. Data science teams can demonstrate strengths and weaknesses of suppliers individually, and as groups or chains aligned to specific products, or by their size, country of trading or other factors. Armed with these tools, procurement organizations can easily extract information required for reporting, such as how many suppliers can demonstrate their raw materials are mined in conflict-free zones.

Every business purchases goods and services to operate, and each purchase a business makes provides an opportunity to add value. As an organization grows and matures, the race to increase value through balancing the organization’s people, processes and technologies require skillful navigation.

This blog details a Procurement maturity model to help the organization understand where they stand today and when to plan for moving to higher stages towards best-in-class to spend smarter by tapping into the power of advanced sourcing negotiation to drive business innovation.

Procurement Maturity Model by Stage

Stage 1 – Tactical and Operational

In Stage 1, organizations are buying goods and services, but there is no strategy in place behind these purchases, and work performed is purely tactical and operational.

Purchases are made by employees who source their own solutions. The finance team manages budgets that are tasked to process invoices and pay suppliers—and not ask questions around pricing, service levels, demand management, or quality.

With no formal Procurement team members or processes in place, at this stage the organization does not have any sourcing, Contract Lifecycle Management (CLM), or P2P (Procure-to-Pay) technology in place and relies on the ERP for very limited spend analytics, mostly driven by GL expense accounts.

Stage 2 – Sourcing Mastery

In Stage 2, organizations begin to capture value from the purchase of goods and services. They start hiring procurement professionals to support purchases, manage contracts, and oversee contract negotiations. Organizations begin to think about business spend as an opportunity to create value.

Finance and procurement teams reach out to help stakeholders run a handful of formal sourcing events—building Sourcing Mastery. These events quickly generate value for the business and build support for adding technology to increase the number of events held per quarter and the value delivered.

At this stage of maturity, it quickly becomes clear that technology is needed to scale the wins from early sourcing events and to manage multiple sourcing events per quarter. To streamline processes across P2P, organizations at this stage look to add Business Spend Management (BSM) technology and Contract Management solutions to streamline processes across sourcing, procurement, contract management, invoicing, and payments.

Stage 3 – Category Strategy

In Stage 3, with more advanced resources and capabilities for procurement and sourcing processes, organizations can add additional value by focusing on Category Strategy. The value that category managers provide at this stage can be limited by the technology available to support scaling.

Lack of or limited technology can impede not only the number of events run but also the scenarios that can be modeled to achieve the best results for the business, as well as the analytical capabilities to provide multiple award scenarios to the business based on facts and data.

Strategic sourcing technology should be considered at this stage to help category managers quickly increase the value of the organization and provide transparency and optionality when it comes to award scenarios, using various constraints. At this stage, procurement is equipped with advanced sourcing capabilities, allowing for multi-factor award scenarios, expressive bidding by using RFP management solutions, and business constraints.

Stage 4 – Business Innovation

In Stage 4, organizations have captured the maximum amount of value from each category.

Procurement and Sourcing leaders are working closely as partners within the organization, helping stakeholders not only get the most value out of their purchases and ongoing supplier relationships but also identify opportunities to drive business innovation in partnership with suppliers.

Best-in-class organizations have all of their spending flowing through one BSM platform with Invoice Management solutions that manage all spend and spend processes—including sourcing, procurement, invoicing, contracts, risk management, payments, and expenses—in one place. It also taps into the power of “community intelligence” data, enabling organizations to spend smarter, benchmark performance, access supplier insights, and optimize all aspects of spend.

Advancing in the Procurement Maturity Model

Success in developing any organization is achieved by refining three key elements by the procurement team: People, Processes, Technology.

Moving to the higher stages of the Maturity Model lets the organization manage spend effectively and optimize the way that the company purchases goods and services, delivering results straight to the bottom line. While some organizations are ready to move to higher levels of maturity, moving from Stage 1 to Stage 2 may be the right objective for a smaller organization with limited spend. A company gains significant value over time by moving the organization toward best-in-class (Stage 4).

The Travel & Tourism Industry is operating at reduced capacity. The retail Sector is closing physical locations and building its e-commerce operations. Many businesses — big and small, young and established — are closing their doors for good.

In a few industries, such as travel, costs will go down due to decreased demand. In most sectors, however, sanitization needs and supplier failures will drive costs up. More companies will turn to group purchasing organizations to strengthen their sourcing & procuring lines. What does all this mean for your sourcing & procurement operations?

In this article, you’ll learn about the top seven mega-trends that’ll rule sourcing & procurement 2021.

Key sourcing and procurement trends that will settle future challenges:

Rather than looking back at all the ups & downs, our industry has faced this year, here are some of the exciting trends that will pick up momentum in 2021:

1. Strengthen Sourcing & Procurement Resilience

With sourcing & procurement becoming more global and interconnected, organizations face a range of challenges, including climate change, the rise of a multipolar economic system, added geopolitical risks, and the risk of mass healthcare events. Companies with complex supply-chain networks, such as automotive and technology manufacturers, are especially vulnerable.

Companies are trying to do a thorough assessment of their sourcing & procurement risks and are managing them more thoughtfully. Companies are creating better transparency by working with suppliers to gain information about their next-tier suppliers and their upstream value chains.

Business-continuity planning has taken on a new meaning, designing contingencies not just for a single supplier plant to go offline, but for entire countries to be inaccessible.

2. Enhance Sustainability

With clearly defined business and vendor requirements, your vendor selection team would be able to easily find suitable vendors, who can deliver the service /product that you wish to outsource. Ask your team to compile a list of possible vendors, but remember that not all vendors would meet your requirements. 

After conducting interviews and researching suitable vendors’ backgrounds, you will have to select a few vendors from whom you would like more information. Your vendor selection team can then write a Request for Information (RFI) and send it to the selected vendors. The next step would be to evaluate the responses from the vendors and create a shortlist of vendors.

3. Sourcing & Procurement as a Service (ScaaS)

While many organizations manage their supply chain activities in-house, executives in the industry predict that more and more businesses will adopt supply chain as a service (scaas) models, outsourcing the likes of manufacturing, logistics, and inventory management.

It is expected that as supply chain management teams become smaller, companies will have a team of skilled individuals focused on strategic decisions to improve the supply chain.

4. User-Driven Artificial Intelligence & Digitization

Procurement has integrated various e-marketplaces to ensure the delivery of products and services on demand. The process and user interface have gone through radical change with AI/ML, and usage of NLP (Natural Language Processing), where the requesters can order with great ease. The speed of the procurement process has increased leading to a shorter fulfillment cycle time in comparison with what it was a few years ago. Adoption of technology has been one of the key aspects.

Procurement teams are designing and delivering intelligent bots to complete most run-of-the-mill procurement tasks with minimal human intervention. From managing large-volume orders to running repetitive sourcing events, from negotiating with suppliers for low-value items to updating inventory lists, AI will undertake all these activities, thus putting mundane tasks on auto-pilot mode.

5. Integration with Circular Supply Chains

Soon to replace the linear supply chain, organizations that adopt the circular supply chain approach stand to gain from reduced costs in the long term, reduced waste, and reduced impact on the environment.

A key driver in the adoption of this approach is stricter regulations when it comes to recycling and waste disposal, as well as potential incentives for sustainable efforts made.

6. Localisation of Suppliers

The adoption of local suppliers is gaining prominence due to pandemics like Covid-19. Organizations have started to venture and look at the local suppliers – especially suppliers under Small or Medium Scale and even some regional groups (such as local tribes, etc.). The idea is to encourage diversity of thought and participation.

7. Future-Ready Organization

To lead in the next normal, procurement & sourcing departments need to transform how they operate and collaborate with internal and external stakeholders. Adopting an agile operating model could help procurement functions scale up or down quickly to respond to sudden supply challenges. This will require attracting new talent and upskilling the existing talent. Leading organizations are adopting virtual training methods and gamified digital tools to engage experienced workers and develop their talent. The winning procurement organizations will adopt a continuous learning culture as a way of life.

The Path Forward

With all of the insights that sourcing and procurement bring to the table, technology will become a stronger strategic advisor to the business units. The more we automate, companies will speed their supply execution speed and gain more business.

Regardless, sourcing & procurement lines will resume slowly but surely. As they do, sourcing & procurement leaders will need to shift their spending and adopt new technologies to stay competitive.