- Email: [email protected]
Public bodies as entrepreneurs
SUMMA
The
public
sector
through
its
purchases most of the equipment disabled.
The
from problems grow
slowly
development in that:
because
private
equipment deal with
of such
diverse ment
the social service budget
living
term market specialise
conditions.
reliable
a casestudy
aids
for
is usually
(6)
to
and their
to short
sales outlets the
elderly.
how these problems
to the development
The
the develop-
in relation
(c) Few firmsand
supplying
in relation
suffers tend to
and flexible
of the elderly
In consequence,
and
the supplier
be difficult.
to be expensive
opportunities. in
between
to
to be robust,
tends
The paper outlines overcome
tend
the diverse disabilities
effort
equipment
(a) Sales of new products
purchasers needs
institutions
used by the elderly
under pressure and communications and
various
RY
were
of a commode
designed for use by the elderly.
Research Policy 8 (1979)
154-163
North-Holland
public
bodies as entrepreneurs
by C. M. CANNON Faculty Kent,
of Social
Sciences,
University
of Kent
at Canterbury,
Canterbury,
UK
and K. GROSSFIELD National 68L,
Research
Development
Corporation,
66 Victoria
St., London
SW1 E
UK
A recent article
[l]
describes the difficulty
in introducing
new products
to
the local government market. The difficulties arise because: (a) firms supplying the market have little experience in innovation; (b) firms supplying the market have a low innovation capability; (c) sales prospects of a new product tend to be low in relation to the costs of developing and marketing the product; (d) purchasers, mainly for historic reasons, prefer to purchase using a competitive tender and accepting the lowest offer rather than the “best” product; (e) purchasing officers do not like to take risks because they are blamed in case of failure and gain little acknowledgement in case of sucess. The study below describes the development of the “Hassa Commode” for the local authority and hospital market where all the above difficulties operated. In this particular case, the difficulties mentioned by Mr David Roessner were overcome because a public body made available innovation innovation capability; the balance of profit to costs to firms sharply reducing costs; the risks to purchasers were reduced thoroughly tested product with sufficient evidence of quality
experience and was altered by by providing a and reliability;
purchase was encouraged by providing evidence of the benefit of the new product to users together with an official indication that the product is a good buy. The study markets.
may
be relevant
to product
developments
in local authority
THE PROJECT NRDC’s function is to promote the adoption by industry of new products and processes invented in Government laboratories, universities and elsewhere, to Research Policy 8 (1979)
154-163
North-Holland
156
C M. Cantmz and A’. Grossfield
assist firms in developing their own inventions and projects by providing joint development finance and to promote potentially useful inventions. As part of this latter activity the Corporation set up a small working party in the mid 1960s to forecast future needs that might be satisfied by technological developments supported by NRDC. This group formed the expectation that income of -pensioners would increase sharply, based on an analysis of the 1960-1967 increase in life assurance ordinary business income from &730 m to 21,640 m and of the increase in Government expenditure on retirement pensions from &687m to &I ,401 m [2]. It drew attention to market prospects for equipment required by the elderly. Discussions were initiated with voluntary and public organisations concerned with the welfare of the elderly, and as a result the Working Party became aware of several separate needs for improved equipment. One such was for mobile toilets suitable for use by the elderly and disabled. In private homes such toilets might ease the problems caused by reduced mobility and inaccessible WCs. In hospitals they might ease the discomfort of patients and reduce the workload of nurses caused by the use of bedpans. The Working Party discovered that the available equipment - developed principally for use in the caravan and boat trades - lacked necessary qualities including sufficient stability and support for patients, and height adjustment. It commissioned from the Industrial Design Department of the Royal College of Art - possessed of considerable experience in designing hospital equipment ~ an exploratory study that concluded that dealing with excretory requirements is a source of a real breakdown in basic nursing care and that there is a good basis for developing substantially improved commodes for hospital care. The NRDC executive principally involved became strongly convinced that satisfactory mobile toilets could be developed much more rapidly with NRDC support than otherwise because of the expense and difficulty of the development and testing programme when compared with the expected market potential. He sought close cooperation both with organisations able to advise on technical merit and with those able to influence purchase. The Reabilities Trust and The King’s Fund agreed to cooperate. The Supply Division of DHSS was approached (October 1968). It has wide experience and powerful expertise in the fields of testing and developing health care equipment in cooperation with manufacturers. It takes an active part in equipment design and has experience of methods of encouraging manufacturers to contribute to design as well as to produce equipment. DHSS did not seek to make profit from the commode in the commercial sense. Instead, on the benefit side of proposals it considered savings in institutional care costs, and
Public bodies as entrepreneurs
the relief given to patients
157
throughout
the community
as well as to those in
hospitals. In April 1969 the Assistant Director Supply Division wrote that the proposals, “would contribute to the easing of one of the most intractable problems in the service”. On the cost side DHSS wanted a simple, low cost but efficacious design that would be ordered in quantity both within the NHS and outside it. Mr J. F. Hunt (one-time Controller of Supply Division) who had retired late in 1968 became the Chairman of a Steering Committee designed to direct the research and development programme (June 1969). The Committee directed the RCA to develop a chemical commode designed in the first instance for hospital use because the equipment could be adequately tested in this environment. By March 1971 the Committee was agreed that the RCA team had developed a novel hospital commode design embodying substantial advances towards solution of the problem of transfer of patients from bed and seat on and off the commode. Seven prototypes were ordered from a manufacturer. After a
Cost of commode
project
Table 1 to public and charitable 1968-1977
institutions
at current
prices,
f Invention, development of commode for hospitals and relevant trials in hospitals Investigation and development of suitable chemical systems Modification of commode for home use Manufacture of prototypes, mechanical testing, modifications, user trials in homes Tooling costs Initial order to evaluate user response (includes a contingency allowance)
27,000 18,000
10,000 18,000 17.000 14,500 104,500
Total
Financial
Table 2 contributions made to the commode project by public institutions at current prices, 1968-1977
and charitable
_ Institutions NRDC Charitable Trusts Water Pollution Research DHSS Total
&
Laboratory
29,500 5,000 8,000 62,000 104,500
158
C. M. Cannon and K. Grossfield
six month trial RCA reported that the equipment were promising but too large for typical ward bed spaces. It recommended development of a more compact version. Up to this stage NRDC contributed about $20,000, i.e. about 75 per cent of the cost of the project (tables 1 and 2). In May 1971 the Minister, Sir Keith Joseph, was impressed by the potential of chemical commodes as an aid to the elderly and disabled living with external or badly placed WCs, and DHSS agreed to purchase for trial 1,000 commodes of types available on the market, including 200 based on the RCA design [3] . Trials were commissioned from RCA and the DHSS Research Unit. These showed that no commercial commode was satisfactory, and suggested that the RCA hospital commode, suitably modified, could provide most of the desirable features required for home commodes. Altogether, DHSS approved a total of 262,000 for research and development of chemical commodes. Redesign and development of the hospital commode for home use was undertaken by the RCA under the control of the Steering Committee. The Water Pollution Research Laboratory was able to recommend a safe and effective chemical. It was sufficiently interested in the pollution aspects of chemical toilets for it to incorporate the necessary evaluation in its own research programme. Discussions were initiated with two well-established firms producing hospital equipment regarding manufacture of the commode under a licence agreement. In parallel the firms were contracted to manufacture five of the redesigned commodes each, in order to provide an opportunity for them to design modifications to facilitate low-cost production. The number was kept at two in order to make market opportunities for the firms attractive. For different reasons, including the possibility of litigation about property rights - not unknown to DHSS when dealing with one firm acting alone - some degree of competition was thought desirable. Trials began in December 1973, with very encouraging results. After completion of the trials (June 1974) difficulties arose in licensing negotiations. The basic cause was poor commercial prospects arising from heavy initial expenses of injection moulding tools for manufacture of plastic components and from deteriorating sales prospects as government expenditure was threatened with cut-backs. One of the firms withdrew (January 1975) and an attempt to interest a third soon failed. This third firm was a manufacturer of lightweight toilets for the caravan and boat trade. Discussions with the remaining firm, a manufacturer of hospital beds, reached a crisis because the firm stated that it could not hope to recover all investment required to exploit the licence in less than three years, as it wished to do. The difficulty
Public bodies as entrepreneurs
Three stages in pricing
159
Table 3 of the commode
(expressed
at 1976 prices)
Stage I Manufacturer obtains quotations for tools Total tooling cost Manufacturer’s sale price per commode excluding any tool recovery charge Manufacturer seeks a tool recovery charge of &30 per commode during the first three years of sales. Sales price per commode Commercial prospects are unattractive to the manufacturer because total tool recovery in 3 years is expected to be significantly less than total tool cost since sales are likely to be less than 1,000 at a price of &94
& 30,000 64
94
Stage 2 NRDC obtains quotations for toolsa Total tooling cost Manufacturer seeks a tool recovery charge of &30 per commode during the fist three years of sales. Total tool recovery on initial order of 200 Manufacturer’s sale price per commode designed to recover tool costs completely from 800 further sales expected in fust three years (i.e. tool recovery charge per commode of E13.75) Commercial prospects remain unattractive because price of E77.75 is inconsistent with 1.000 sales in 3 years
17,000
6,000
77.75
Stage 3 NRDC finances purchase of tools at a cost of E11,OOO jointly with E6,OOO contribution to tooling included in price of DHSS’s initial order of 200 unitsa Total tooling cost Manufacturer’s sale price per commode excluding any tool recovery charge NRDC’s tool recovery charge per commode Sale price per commode Commode manufacture is viable a
These calculations are based on estimated three years of the project’s life
sales of 1,000
17,000 64 3 67
commodes
during
the first
centred on recovery of tooling expenses: agreement was reached without difficulty on a unit cost of plastic and steel components, assembly and packaging including profit on these items, but excluding tooling costs and profit on tooling; the agreed figure was ti4 at 1976 prices. Bargaining went through three stages, described in table 3. In Stage 1 the manufacturer obtained quotations of C30,OOO for tools. He wanted to recover this over not more than three years. This meant a tool recovery charge of $230 if sales
C. M. Cannon and K. Grossfield
160
NRDC revenue
and expenditure
Table 4 on the commode
(A) Yearly revenues at 19 76 prices Expected sales to Yeara Royalties & UK public sector capital recovery charges on UK public sector sales (Nos.) (&I 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986
(R)
300 300 400 800 1,100 1,500 2,000 2,500 3,000 3,000
project
as foreseen
in 1976
Royalties & capital recovery charges on private & foreign salesb
Total royalties and recovery charges
&I
(E)
55oc 1,650 2.200 4,400 6,050 8.250 11,000 13,750 16,500 16,500
1976 value of all NRDCrevenues, 56,500
discounted
to 1976 at a real interest rate of 5%d 56,500
113,000
(0
1976 value of NRDC expenditures, brought to 1976 prices by means of the wholesale prices index, and accumulated at 5% real interest rate 49,500
(D)
1976 net value of NRDC cash flows arising from the commode
project 63,500
Further sales after 1986 are expected, although they are not forecast in detail. Capital recovery charges will end in that year. Royalties will end several years later. Cash inflows from royalties and charges on private and foreign sales are expected to equal those on sales to the UK public sector on a present rdhe basis. Nevertheless, they are expected to flow in much more slowly than public sector sales in the early years. NRDC will not charge royalties or capital recovery charges on the initial DHSS order of 200 units. Each subsequent sale will bear a percentage charge for royalty and capital recovery. 5% real interest rate is a commercially attractive rate. In Table 4 it is chosen for the purpose of illustrating the profitability of NRDC’s financial contribution to the commode project. Discount rate wouldhave to be far in excess of 5% for profitability to be eliminated. NRDC is not subject to the Treasury Test Discount Rate or any other Treasury rate.
161
Public bodies as entrepreneurs
within
three years could be expected
to reach 1,000 units. Everyone
was
agreed that a sales price of 294 (i.e. JZ64 t &30) would reduce sales to a level far below this; in particular DHSS held strongly to the belief that a price in excess of &75 would seriously damage prospects of sales to public authorities. At that time NRDC offered a loan at commercial rates for purchase of tools but with charges accumulating for five years and repayable if required by offering the tools in lieu of cash, and DHSS offered to contribute some of the tooling cost by means of a higher price on its initial order of 200 units. This offer proved unattractive. In Stage 2 NRDC using its extensive contacts obtained quotations for tools of El 7,000 but at a commode price of 275 even this sum could not be recovered by the manufacturer within the first three years of sale. In Stage 3 NRDC and DHSS decided to purchase the tools themselves. DHSS Supply Division contributed part of its allocation for the initial order, (&94-.f64) X 200 = 26,000, as before. NRDC contributed &I 1,000 and hopes to recover this with interest and risk premium by means of a &3 per unit sales levy over nine years (table 4). This arrangement enabled commodes to be sold at g67 (1976 prices). In addition, DHSS agreed to place a ‘call-off contract’. This is a contract that closely defines the product (in this case including patented features like seat shape) thereby guaranteeing quality. Also it published the seller’s product price. It is therefore an official indication that the product is a good buy. Although it does not guarantee sales, it estimates them and lists the possible demanding authorities; in that sense it can be called-off. Also, as it is written on patents, it strengthens the position of the licensee in relation to competition from other non-licensed firms. Accordingly, licence contract and tooling contracts were exchanged (March 1976). The first production model commodes were produced in March 1977. The 200 commodes purchased by DHSS will be placed in various localities and with patients who suffer from different degrees of disability in order to evaluate and publicise the situations where the equipment will prove most helpful. ANALYSIS Why had not private companies invented similar equipment on a commercial basis and why were they initially reluctant to take a licence? There are privately produced commodes available which are based on models used for holidaying. These lack the safety and convenience obtained from a product specially designed for the needs of the elderly or disabled. The principal reasons for the lack of private interest that resulted in the
162
C. M. Cannon and K. Grossfield
absence of a suitable private product and the reluctance to license the public invention were as follows. First, initial investment and specialist facilities required for a comprehensive invention, development, evaluation and exploitation effort were of a high level. The promoters paid about g87.000 over six years for research and development and 337,000 for tooling (table 1). Secondly, the firms that showed interest all lacked important resources: some lacked experience in manufacture of health care equipment; others lacked experience of manufacture of plastic components. NRDC was able to cut estimated tooling costs by half by finding suitable sub-contractors. Moreover, firms were cautious. When planning, they drew a horizon at about the end of the third year of manufacture, and required recovery of investment by that time if not earlier. In consequence firms found that even taking a licence was unattractive if they had to pay for tooling costs. Thirdly, all parties concerned expected sales to rise from low levels only slowly. They expected sales of about 1,000 units altogether in the first three years, compared to 6,000 sales per annum in the ninth year (table 4). Furthermore, DHSS forecast that a price above &75 (1976 prices) would seriously undermine such sales because it would have the result that many public authorities would prefer a “bucket” costing &15-g20. At such a price net cash expected over three years from a private project to take a licence and to buy tools appeared heavily negative to these firms: this inability to break-even before the end of Year 5 at the earliest was a strong disincentive. Fourthly, NRDC and DHSS did not charge the project significant costs relating to administration and product evaluation. Why did public institutions
want to meet the need for this equipment?
NRDC was interested in seeking out needs that might be satisfied tions of technological developments on a profitable basis. DHSS was interested because it has responsibility for the NHS in sense. It knows the size and intensity of need for a solution of intractable problem”, and it knows the limitations of “bucket”
by promothe widest “this most products.
Moreover, it wants to minimise the cost and troubles arising from toilet in hospitals, homes, hostels and private dwellings. Experience DHSS has gained from cooperative development of many health care products led it to the firm conclusion that no private manufacturer would act alone to commit resources to advanced design commodes. In particular, the Minister was interested in chemical commodes as a cost-effective way of alleviating the misery of the large number of elderly and disabled people revealed by surveys to be living alone in housing with external or badly placed WCs.
163
Public bodies as entrepreneurs
The Water Pollution Research Laboratory justified as a relevant study in relation to its responsibility system and the potential How
were public
its research contribution to the UK water supply
impact of chemical commodes.
institutions able to develop this product
and to encourage
licensees when no private firm could make an acceptable profit out of it?
NRDC was the only public institution involved that was obliged to seek a profitable return on its investment. It accepted the risk that it would lose its money if either DHSS failed to support the development or markets failed to materialise. It was able to create a commercial opportunity out of an unpromising situation: First, it had staff able to undertake the task of entrepreneurship in initiating the venture in guiding the project through its various difficulties and in encouraging the Reabilities Trust, the King’s Fund, DHSS and the Water Pollution Research Laboratory to cooperate. These institutions were not primarily interested in a commercial return: e.g. DHSS’s share of royalties was translated into a price reduction. Second. in DHSS NRDC obtained a partner that was experienced in evaluating equipment, ready ultimately to finance the major part of costs and also encourage potential customers. Thereby NRDC obtained economies in trials, competence and confidence. Third, NRDC’s attitude towards risk and uncertainty, encouraged by its extensive portfolio of investments, enabled it to seek recovery of investment, including investment in tools, over nine years. Fourth, by finding suitable sub-contractors and by financing tools it encouraged a manufacturer to undertake production. DHSS cooperated by jointly financing development, by supporting extensive trials, by placing an initial order and by writing a call-off contract. Price of the commode
&94 can be described as the 1976 private seller’s price of the advanced design commode. Intervention by public bodies brought price down to Z67. It is too early to tell whether these bodies made a sound evaluation. But the initial response of the market has been in accord with their expectations. REFERENCES [l] [2] [3]
J. D. Roessner, The Local GovernmentMarketasaStimulus to IndustrialInnovation, (National Science Foundation, Washington DC, AnnualAbstractofStatistics, C.S.O. (1966) Table 361; (1969) Tables 42 and 368. Parliamentary Debates (Hansard), Fifth Series, Volume 817, House of Commons (21 May 1971) 1756-1758.
The
public
sector
through
its
purchases most of the equipment disabled.
The
from problems grow
slowly
development in that:
because
private
equipment deal with
of such
diverse ment
the social service budget
living
term market specialise
conditions.
reliable
a casestudy
aids
for
is usually
(6)
to
and their
to short
sales outlets the
elderly.
how these problems
to the development
The
the develop-
in relation
(c) Few firmsand
supplying
in relation
suffers tend to
and flexible
of the elderly
In consequence,
and
the supplier
be difficult.
to be expensive
opportunities. in
between
to
to be robust,
tends
The paper outlines overcome
tend
the diverse disabilities
effort
equipment
(a) Sales of new products
purchasers needs
institutions
used by the elderly
under pressure and communications and
various
RY
were
of a commode
designed for use by the elderly.
Research Policy 8 (1979)
154-163
North-Holland
public
bodies as entrepreneurs
by C. M. CANNON Faculty Kent,
of Social
Sciences,
University
of Kent
at Canterbury,
Canterbury,
UK
and K. GROSSFIELD National 68L,
Research
Development
Corporation,
66 Victoria
St., London
SW1 E
UK
A recent article
[l]
describes the difficulty
in introducing
new products
to
the local government market. The difficulties arise because: (a) firms supplying the market have little experience in innovation; (b) firms supplying the market have a low innovation capability; (c) sales prospects of a new product tend to be low in relation to the costs of developing and marketing the product; (d) purchasers, mainly for historic reasons, prefer to purchase using a competitive tender and accepting the lowest offer rather than the “best” product; (e) purchasing officers do not like to take risks because they are blamed in case of failure and gain little acknowledgement in case of sucess. The study below describes the development of the “Hassa Commode” for the local authority and hospital market where all the above difficulties operated. In this particular case, the difficulties mentioned by Mr David Roessner were overcome because a public body made available innovation innovation capability; the balance of profit to costs to firms sharply reducing costs; the risks to purchasers were reduced thoroughly tested product with sufficient evidence of quality
experience and was altered by by providing a and reliability;
purchase was encouraged by providing evidence of the benefit of the new product to users together with an official indication that the product is a good buy. The study markets.
may
be relevant
to product
developments
in local authority
THE PROJECT NRDC’s function is to promote the adoption by industry of new products and processes invented in Government laboratories, universities and elsewhere, to Research Policy 8 (1979)
154-163
North-Holland
156
C M. Cantmz and A’. Grossfield
assist firms in developing their own inventions and projects by providing joint development finance and to promote potentially useful inventions. As part of this latter activity the Corporation set up a small working party in the mid 1960s to forecast future needs that might be satisfied by technological developments supported by NRDC. This group formed the expectation that income of -pensioners would increase sharply, based on an analysis of the 1960-1967 increase in life assurance ordinary business income from &730 m to 21,640 m and of the increase in Government expenditure on retirement pensions from &687m to &I ,401 m [2]. It drew attention to market prospects for equipment required by the elderly. Discussions were initiated with voluntary and public organisations concerned with the welfare of the elderly, and as a result the Working Party became aware of several separate needs for improved equipment. One such was for mobile toilets suitable for use by the elderly and disabled. In private homes such toilets might ease the problems caused by reduced mobility and inaccessible WCs. In hospitals they might ease the discomfort of patients and reduce the workload of nurses caused by the use of bedpans. The Working Party discovered that the available equipment - developed principally for use in the caravan and boat trades - lacked necessary qualities including sufficient stability and support for patients, and height adjustment. It commissioned from the Industrial Design Department of the Royal College of Art - possessed of considerable experience in designing hospital equipment ~ an exploratory study that concluded that dealing with excretory requirements is a source of a real breakdown in basic nursing care and that there is a good basis for developing substantially improved commodes for hospital care. The NRDC executive principally involved became strongly convinced that satisfactory mobile toilets could be developed much more rapidly with NRDC support than otherwise because of the expense and difficulty of the development and testing programme when compared with the expected market potential. He sought close cooperation both with organisations able to advise on technical merit and with those able to influence purchase. The Reabilities Trust and The King’s Fund agreed to cooperate. The Supply Division of DHSS was approached (October 1968). It has wide experience and powerful expertise in the fields of testing and developing health care equipment in cooperation with manufacturers. It takes an active part in equipment design and has experience of methods of encouraging manufacturers to contribute to design as well as to produce equipment. DHSS did not seek to make profit from the commode in the commercial sense. Instead, on the benefit side of proposals it considered savings in institutional care costs, and
Public bodies as entrepreneurs
the relief given to patients
157
throughout
the community
as well as to those in
hospitals. In April 1969 the Assistant Director Supply Division wrote that the proposals, “would contribute to the easing of one of the most intractable problems in the service”. On the cost side DHSS wanted a simple, low cost but efficacious design that would be ordered in quantity both within the NHS and outside it. Mr J. F. Hunt (one-time Controller of Supply Division) who had retired late in 1968 became the Chairman of a Steering Committee designed to direct the research and development programme (June 1969). The Committee directed the RCA to develop a chemical commode designed in the first instance for hospital use because the equipment could be adequately tested in this environment. By March 1971 the Committee was agreed that the RCA team had developed a novel hospital commode design embodying substantial advances towards solution of the problem of transfer of patients from bed and seat on and off the commode. Seven prototypes were ordered from a manufacturer. After a
Cost of commode
project
Table 1 to public and charitable 1968-1977
institutions
at current
prices,
f Invention, development of commode for hospitals and relevant trials in hospitals Investigation and development of suitable chemical systems Modification of commode for home use Manufacture of prototypes, mechanical testing, modifications, user trials in homes Tooling costs Initial order to evaluate user response (includes a contingency allowance)
27,000 18,000
10,000 18,000 17.000 14,500 104,500
Total
Financial
Table 2 contributions made to the commode project by public institutions at current prices, 1968-1977
and charitable
_ Institutions NRDC Charitable Trusts Water Pollution Research DHSS Total
&
Laboratory
29,500 5,000 8,000 62,000 104,500
158
C. M. Cannon and K. Grossfield
six month trial RCA reported that the equipment were promising but too large for typical ward bed spaces. It recommended development of a more compact version. Up to this stage NRDC contributed about $20,000, i.e. about 75 per cent of the cost of the project (tables 1 and 2). In May 1971 the Minister, Sir Keith Joseph, was impressed by the potential of chemical commodes as an aid to the elderly and disabled living with external or badly placed WCs, and DHSS agreed to purchase for trial 1,000 commodes of types available on the market, including 200 based on the RCA design [3] . Trials were commissioned from RCA and the DHSS Research Unit. These showed that no commercial commode was satisfactory, and suggested that the RCA hospital commode, suitably modified, could provide most of the desirable features required for home commodes. Altogether, DHSS approved a total of 262,000 for research and development of chemical commodes. Redesign and development of the hospital commode for home use was undertaken by the RCA under the control of the Steering Committee. The Water Pollution Research Laboratory was able to recommend a safe and effective chemical. It was sufficiently interested in the pollution aspects of chemical toilets for it to incorporate the necessary evaluation in its own research programme. Discussions were initiated with two well-established firms producing hospital equipment regarding manufacture of the commode under a licence agreement. In parallel the firms were contracted to manufacture five of the redesigned commodes each, in order to provide an opportunity for them to design modifications to facilitate low-cost production. The number was kept at two in order to make market opportunities for the firms attractive. For different reasons, including the possibility of litigation about property rights - not unknown to DHSS when dealing with one firm acting alone - some degree of competition was thought desirable. Trials began in December 1973, with very encouraging results. After completion of the trials (June 1974) difficulties arose in licensing negotiations. The basic cause was poor commercial prospects arising from heavy initial expenses of injection moulding tools for manufacture of plastic components and from deteriorating sales prospects as government expenditure was threatened with cut-backs. One of the firms withdrew (January 1975) and an attempt to interest a third soon failed. This third firm was a manufacturer of lightweight toilets for the caravan and boat trade. Discussions with the remaining firm, a manufacturer of hospital beds, reached a crisis because the firm stated that it could not hope to recover all investment required to exploit the licence in less than three years, as it wished to do. The difficulty
Public bodies as entrepreneurs
Three stages in pricing
159
Table 3 of the commode
(expressed
at 1976 prices)
Stage I Manufacturer obtains quotations for tools Total tooling cost Manufacturer’s sale price per commode excluding any tool recovery charge Manufacturer seeks a tool recovery charge of &30 per commode during the first three years of sales. Sales price per commode Commercial prospects are unattractive to the manufacturer because total tool recovery in 3 years is expected to be significantly less than total tool cost since sales are likely to be less than 1,000 at a price of &94
& 30,000 64
94
Stage 2 NRDC obtains quotations for toolsa Total tooling cost Manufacturer seeks a tool recovery charge of &30 per commode during the fist three years of sales. Total tool recovery on initial order of 200 Manufacturer’s sale price per commode designed to recover tool costs completely from 800 further sales expected in fust three years (i.e. tool recovery charge per commode of E13.75) Commercial prospects remain unattractive because price of E77.75 is inconsistent with 1.000 sales in 3 years
17,000
6,000
77.75
Stage 3 NRDC finances purchase of tools at a cost of E11,OOO jointly with E6,OOO contribution to tooling included in price of DHSS’s initial order of 200 unitsa Total tooling cost Manufacturer’s sale price per commode excluding any tool recovery charge NRDC’s tool recovery charge per commode Sale price per commode Commode manufacture is viable a
These calculations are based on estimated three years of the project’s life
sales of 1,000
17,000 64 3 67
commodes
during
the first
centred on recovery of tooling expenses: agreement was reached without difficulty on a unit cost of plastic and steel components, assembly and packaging including profit on these items, but excluding tooling costs and profit on tooling; the agreed figure was ti4 at 1976 prices. Bargaining went through three stages, described in table 3. In Stage 1 the manufacturer obtained quotations of C30,OOO for tools. He wanted to recover this over not more than three years. This meant a tool recovery charge of $230 if sales
C. M. Cannon and K. Grossfield
160
NRDC revenue
and expenditure
Table 4 on the commode
(A) Yearly revenues at 19 76 prices Expected sales to Yeara Royalties & UK public sector capital recovery charges on UK public sector sales (Nos.) (&I 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986
(R)
300 300 400 800 1,100 1,500 2,000 2,500 3,000 3,000
project
as foreseen
in 1976
Royalties & capital recovery charges on private & foreign salesb
Total royalties and recovery charges
&I
(E)
55oc 1,650 2.200 4,400 6,050 8.250 11,000 13,750 16,500 16,500
1976 value of all NRDCrevenues, 56,500
discounted
to 1976 at a real interest rate of 5%d 56,500
113,000
(0
1976 value of NRDC expenditures, brought to 1976 prices by means of the wholesale prices index, and accumulated at 5% real interest rate 49,500
(D)
1976 net value of NRDC cash flows arising from the commode
project 63,500
Further sales after 1986 are expected, although they are not forecast in detail. Capital recovery charges will end in that year. Royalties will end several years later. Cash inflows from royalties and charges on private and foreign sales are expected to equal those on sales to the UK public sector on a present rdhe basis. Nevertheless, they are expected to flow in much more slowly than public sector sales in the early years. NRDC will not charge royalties or capital recovery charges on the initial DHSS order of 200 units. Each subsequent sale will bear a percentage charge for royalty and capital recovery. 5% real interest rate is a commercially attractive rate. In Table 4 it is chosen for the purpose of illustrating the profitability of NRDC’s financial contribution to the commode project. Discount rate wouldhave to be far in excess of 5% for profitability to be eliminated. NRDC is not subject to the Treasury Test Discount Rate or any other Treasury rate.
161
Public bodies as entrepreneurs
within
three years could be expected
to reach 1,000 units. Everyone
was
agreed that a sales price of 294 (i.e. JZ64 t &30) would reduce sales to a level far below this; in particular DHSS held strongly to the belief that a price in excess of &75 would seriously damage prospects of sales to public authorities. At that time NRDC offered a loan at commercial rates for purchase of tools but with charges accumulating for five years and repayable if required by offering the tools in lieu of cash, and DHSS offered to contribute some of the tooling cost by means of a higher price on its initial order of 200 units. This offer proved unattractive. In Stage 2 NRDC using its extensive contacts obtained quotations for tools of El 7,000 but at a commode price of 275 even this sum could not be recovered by the manufacturer within the first three years of sale. In Stage 3 NRDC and DHSS decided to purchase the tools themselves. DHSS Supply Division contributed part of its allocation for the initial order, (&94-.f64) X 200 = 26,000, as before. NRDC contributed &I 1,000 and hopes to recover this with interest and risk premium by means of a &3 per unit sales levy over nine years (table 4). This arrangement enabled commodes to be sold at g67 (1976 prices). In addition, DHSS agreed to place a ‘call-off contract’. This is a contract that closely defines the product (in this case including patented features like seat shape) thereby guaranteeing quality. Also it published the seller’s product price. It is therefore an official indication that the product is a good buy. Although it does not guarantee sales, it estimates them and lists the possible demanding authorities; in that sense it can be called-off. Also, as it is written on patents, it strengthens the position of the licensee in relation to competition from other non-licensed firms. Accordingly, licence contract and tooling contracts were exchanged (March 1976). The first production model commodes were produced in March 1977. The 200 commodes purchased by DHSS will be placed in various localities and with patients who suffer from different degrees of disability in order to evaluate and publicise the situations where the equipment will prove most helpful. ANALYSIS Why had not private companies invented similar equipment on a commercial basis and why were they initially reluctant to take a licence? There are privately produced commodes available which are based on models used for holidaying. These lack the safety and convenience obtained from a product specially designed for the needs of the elderly or disabled. The principal reasons for the lack of private interest that resulted in the
162
C. M. Cannon and K. Grossfield
absence of a suitable private product and the reluctance to license the public invention were as follows. First, initial investment and specialist facilities required for a comprehensive invention, development, evaluation and exploitation effort were of a high level. The promoters paid about g87.000 over six years for research and development and 337,000 for tooling (table 1). Secondly, the firms that showed interest all lacked important resources: some lacked experience in manufacture of health care equipment; others lacked experience of manufacture of plastic components. NRDC was able to cut estimated tooling costs by half by finding suitable sub-contractors. Moreover, firms were cautious. When planning, they drew a horizon at about the end of the third year of manufacture, and required recovery of investment by that time if not earlier. In consequence firms found that even taking a licence was unattractive if they had to pay for tooling costs. Thirdly, all parties concerned expected sales to rise from low levels only slowly. They expected sales of about 1,000 units altogether in the first three years, compared to 6,000 sales per annum in the ninth year (table 4). Furthermore, DHSS forecast that a price above &75 (1976 prices) would seriously undermine such sales because it would have the result that many public authorities would prefer a “bucket” costing &15-g20. At such a price net cash expected over three years from a private project to take a licence and to buy tools appeared heavily negative to these firms: this inability to break-even before the end of Year 5 at the earliest was a strong disincentive. Fourthly, NRDC and DHSS did not charge the project significant costs relating to administration and product evaluation. Why did public institutions
want to meet the need for this equipment?
NRDC was interested in seeking out needs that might be satisfied tions of technological developments on a profitable basis. DHSS was interested because it has responsibility for the NHS in sense. It knows the size and intensity of need for a solution of intractable problem”, and it knows the limitations of “bucket”
by promothe widest “this most products.
Moreover, it wants to minimise the cost and troubles arising from toilet in hospitals, homes, hostels and private dwellings. Experience DHSS has gained from cooperative development of many health care products led it to the firm conclusion that no private manufacturer would act alone to commit resources to advanced design commodes. In particular, the Minister was interested in chemical commodes as a cost-effective way of alleviating the misery of the large number of elderly and disabled people revealed by surveys to be living alone in housing with external or badly placed WCs.
163
Public bodies as entrepreneurs
The Water Pollution Research Laboratory justified as a relevant study in relation to its responsibility system and the potential How
were public
its research contribution to the UK water supply
impact of chemical commodes.
institutions able to develop this product
and to encourage
licensees when no private firm could make an acceptable profit out of it?
NRDC was the only public institution involved that was obliged to seek a profitable return on its investment. It accepted the risk that it would lose its money if either DHSS failed to support the development or markets failed to materialise. It was able to create a commercial opportunity out of an unpromising situation: First, it had staff able to undertake the task of entrepreneurship in initiating the venture in guiding the project through its various difficulties and in encouraging the Reabilities Trust, the King’s Fund, DHSS and the Water Pollution Research Laboratory to cooperate. These institutions were not primarily interested in a commercial return: e.g. DHSS’s share of royalties was translated into a price reduction. Second. in DHSS NRDC obtained a partner that was experienced in evaluating equipment, ready ultimately to finance the major part of costs and also encourage potential customers. Thereby NRDC obtained economies in trials, competence and confidence. Third, NRDC’s attitude towards risk and uncertainty, encouraged by its extensive portfolio of investments, enabled it to seek recovery of investment, including investment in tools, over nine years. Fourth, by finding suitable sub-contractors and by financing tools it encouraged a manufacturer to undertake production. DHSS cooperated by jointly financing development, by supporting extensive trials, by placing an initial order and by writing a call-off contract. Price of the commode
&94 can be described as the 1976 private seller’s price of the advanced design commode. Intervention by public bodies brought price down to Z67. It is too early to tell whether these bodies made a sound evaluation. But the initial response of the market has been in accord with their expectations. REFERENCES [l] [2] [3]
J. D. Roessner, The Local GovernmentMarketasaStimulus to IndustrialInnovation, (National Science Foundation, Washington DC, AnnualAbstractofStatistics, C.S.O. (1966) Table 361; (1969) Tables 42 and 368. Parliamentary Debates (Hansard), Fifth Series, Volume 817, House of Commons (21 May 1971) 1756-1758.