• Opinion
  • February 21, 2019
  • 7 minutes
  • 1

Three ways to increase innovation while minimising risk to taxpayer dollars

Opinion: Government agencies can encourage innovation from their partners — here's how

This piece was written by Ann Mei Chang, author of Lean Impact: How to Innovate for Radically Greater Social Good and former Chief Innovation Officer at USAID. For more like this, see our government innovation newsfeed.


We all know that innovation involves taking risk and accepting the possibility of failure. Both of these can be difficult for public servants, who must be responsible stewards of taxpayer money.

And yet by confining ourselves to well-trodden paths, we can miss the potential for greater impact and fall far short of the needs we aim to serve. If no one had taken the risk to try the first polio vaccine on a human being, millions of lives would have been needlessly lost. Not seeking better solutions is also irresponsible.

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So, what can government agencies do? The good news is that agencies can encourage their non-government partners to innovate, with minimal risk to the public purse, through a number of approaches to public procurement and contracting.

Let’s take a look at three common techniques:

  1. Tiered Funding

Contemplating any risk at all is scary when failure might result in an exposé on the front page of the paper. Part of the problem is that government programs tend to be large. When we fail, we fail big and waste a lot of money.

A simple, but crucial shift can make all the difference — start small. This is exactly how venture capitalists (VCs) fund tech startups, deploying multiple rounds of financing that increase based on demonstrated success.

At the US Agency for International Development (USAID), we modelled our Development Innovation Ventures (DIV) program along similar lines, with three stages of grants starting at $100,000 and expanding up to $5 million.

This tiered funding structure allows USAID to place riskier bets on a wide range of potentially game-changing new ideas, all while limiting any potential loss. Larger investments are contingent on clear evidence of traction.

Not seeking better solutions is also irresponsible

Despite the risk entailed, we found many fans in Congress who recognise the innate necessity of experimentation to develop better solutions and didn’t blink at the numerous failures along the way given the relatively small sums involved.

In instances where administrative overhead may preclude the issuance of many smaller awards, an equivalent effect can be achieved by crafting an innovation window within a larger grant. This might represent 10%, 5% or even 1% of the total funding, set aside to experiment with alternative ways to address the problem at hand that could be less expensive, more effective, or more scalable.

  1. Prizes

When the parameters of a desired solution are clear and measurable, making payment contingent on success can further shift the onus of risk management onto partners. One such mechanism is an incentive prize that offers a cash award based on achieving the specified performance characteristics for a desired invention or advancement.

The publicity typically associated with prizes can attract fresh talent and ideas to crucial problems. And if no one is able to deliver? The money simply remains in the government coffers.

Under the America COMPETES Reauthorisation Act of 2010, over 800 competitions have been held by federal agencies on issues ranging from revitalising America’s solar industry to preventing opioid abuse in pregnant women (see challenge.gov).

Prizes can also be an opportunity for public-private collaboration, such as the $1.75 million Water Abundance XPrize to alleviate the global water crisis, co-sponsored by the Tata Group and Australian Aid. At the end of 2018, Skysource/Skywater Alliance won the grand prize with a generator capable of extracting over 2,000 litres of water a day from the air for less than two cents per litre using renewable energy.

  1. Paying for Outcomes

Even with more mature interventions, outcomes-based financing can be a powerful tool. Rather than focusing on prescribed activities and compliance, paying for results redirects attention to building the feedback loops that can drive improved cost-effectiveness. As with prizes, the financial downside is limited, since payments are contingent on success.

Although social impact bonds (SIBs) draw disproportionate attention, far simpler mechanisms can often be more practical while still injecting an incentive for performance improvement.

For example, with the support of Third Sector Capital Partners, King County in the State of Washington offered their outpatient mental health and substance abuse providers a 2% performance bonus based on benchmarks for timely intake and transition to routine care. Providers are also aware that by 2020 an even greater portion of payments will be linked to outcomes, further compounding the reasons to improve if they want to stay competitive.

Innovation has sadly become conflated with dreaming up some flashy new thing

Amid all the hype, innovation has sadly become conflated with dreaming up some flashy new thing. Ultimately what counts is not the style, but the substance — improved impact. Government is in a strong position to drive dramatically better results for the populations they serve by playing to win, rather than not lose. — Ann Mei Chang

(Picture credit: Unsplash)

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