Innovation in Rail Franchising
Innovation Support Pack 1
Table of Contents
1
Executive Summary .............................................................................. 2
1.1
What is Innovation? ........................................................................ 3
1.2
Why should Rail Innovation Matter to the Train Operating Companies? .. 3
1.3 Why should Rail Innovation matter to the companies bidding for the
ICEC Franchise? ...................................................................................... 3
2
What are the Challenges? ...................................................................... 5
2.1
2.1.1
History ..................................................................................... 6
2.1.2
Industry ambition ...................................................................... 6
2.2
3
Misalignment of commercial incentives in current franchise delivery ...... 7
UK Rail’s Response to the Challenges ...................................................... 9
3.1
4
Industry context ............................................................................. 5
Strategy ........................................................................................ 9
3.1.1
Funding.................................................................................. 12
3.1.2
Support.................................................................................. 12
Delivering Innovation in Franchising ..................................................... 13
4.1
Aims ........................................................................................... 13
4.2
How will this be achieved? ............................................................. 14
4.2.1
Franchise Innovation Strategy .................................................. 14
4.2.2
Innovation Fund ...................................................................... 21
5
Next steps ......................................................................................... 23
6
Contact ............................................................................................. 24
6.1
About the Future Railway Enabling Innovation Team ......................... 24
6.2
About IXC .................................................................................... 24
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1 Executive Summary
This document is aimed at Train Operating Companies (TOCs) bidding for the
InterCity East Coast (ICEC) franchise.
It is acknowledged that over the last 20 years TOCs have successfully innovated
within the scope of their individual operations increasing the numbers of rail users,
achieving all time high safety levels and record levels of punctuality. Passenger
satisfaction is up by 10% over the past decade. However there are still major
challenges ahead and additional support plus flexibility within the franchises is
required in order for TOCs to achieve the step change innovation required to
deliver the UKs future railway.
Implementing systemic improvements will require cross-industry co-operations
and necessitate de-risking investment all within a flexible franchise framework
which incentivises and rewards TOCs undertakings. The Department for Transport
(DfT) has introduced a programme to stimulate innovation through franchising as
outlined in the InterCity East Coast Prospectus that will mandate an executed
innovation strategy and provide a fund to facilitate TOC specific and system wide
improvements.
The delivery of innovation in rail franchising will be an important
element in the overall bid process for the ICEC and subsequent
franchises and thus requires careful consideration by the companies
expecting to tender
As part of the new tendering process for rail franchises, starting with the ICEC
bidders will be required to produce a Franchise Innovation Strategy. The DfT wants
to support franchisees to implement innovation in the management, and
development of the Franchise and thus potentially the wider network. As an
incentive to the bidding companies, credit will be given at the bid stage for this
strategy and any further proposed investment in innovation throughout the life of
the bid. Furthermore in order to support the strategy and in-life innovation
projects an Innovation Fund will be created from mandatory franchisee
contributions. In the initial pilot stage £50 million will be available for innovative
projects over the next three years covering the East Coast, TPE and Northern
franchises. The fund is aimed at innovations developed during the course of a
franchise which may not deliver a clear commercial return to the TOC during the
franchise, but will have an appropriate benefit to the TOC and wider rail industry
as a whole or in the longer term. The fund is not intended for incremental or
continuous improvement activities.
A planned programme of support and engagement explaining the mechanisms of
implementing innovation within the bid process through the course of the
invitation to tender (ITT) programme will be provided by the Future Railway
Enabling Innovation Team (EIT) supported by innovation experts IXC UK.
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This document is a white paper which describes the challenges faced by the UK
Rail Industry when implementing innovation processes and cultures (See section
2). Section 3 introduces UK rail industry’s approach to meeting these challenges.
How they are being met specifically when addressing the TOC franchises is
described in Section 4. This paper will be built upon with more detailed information
as it becomes available and will be disseminated in an even-handed way to the
bidding community and wider industry through a combination of dedicated and
existing Rail Industry forums.
1.1 What is Innovation?
For the purposes of the Innovation in Franchising Support Program innovation is
defined as:
The development and implementation of new methods, products, services,
systems and capabilities with the potential of delivering transformational change
in rail1.
•
Innovation can be realised at any or all stages of the value chain from
customer service through enabling data sharing to industry-wide
infrastructure projects
•
Successful innovation requires a strategy, corporate support, organisation
process, capability (competencies & culture), implementation process,
championship (technical, managerial, financial etc)
•
Leadership and an embedded innovation culture will result in a successful
and sustainable process for innovations
1.2 Why should Rail Innovation Matter to the Train
Operating Companies?
Investment in innovation will benefit TOCs through

Improving competitive advantage for future franchises

Increasing revenues and reducing costs

Increasing franchise value throughout the franchise and beyond

Improving performance and the customer experience

Exploiting UK rail innovations in global markets

R&D tax benefits
1.3 Why should Rail Innovation matter to the companies
bidding for the ICEC Franchise?

Innovation will be a key component within the franchise ITT and bid
A work stream is in place to further define the necessary metrics however it is envisaged that such
changes will have industry-wide benefits, return a many fold return on a portfolio of investments
that represent risk to the operator due to an unclear commercial case.
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
A percentage of the forecast franchise revenues will be ring-fenced for
investment via the Innovation Fund, which is estimated to be £6-£7million
per year2 for the ICEC.

The Innovation Strategy proposed by bidders in their bids will be
contractualised for the period of franchise

Step change innovation activities will realise the generation of IP and
increase of franchise value

There is an opportunity for the ICEC Franchise Operator to leverage the
Innovation Fund to become a leader in the UK rail industry. The successful
franchisee of the ICEC will have the benefit of utilising the Innovation Fund
to develop a capability advantage.
This estimation is based on the turnover reported for 2012 and 2013 by Directly Operated Railways
in their Annual Report and Financial Statements for the year ended 31 March 2013. Available online
http://www.directlyoperatedrailways.co.uk/PDF/DORReportAccounts2013.pdf Accessed 13 January
2013.
2
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2 What are the Challenges?
UK rail has an ambitious vision for the growth and development of the railway. To
deliver this vision in a complex framework the industry requires a
transformational, unified approach that manages the requirements of sometimes
conflicting interests. Promoting and supporting innovation across the rail industry
is felt to be a key element to achieving the growth and value for money desired.
Specifically in rail franchising despite the innovation and commercial successes of
the TOCs in their own right it is clear that historically there is little commercial
incentive for TOCs to take part in the network wide drive for innovation.
2.1 Industry context
Since the privatisation of British Rail 20 years ago passenger numbers in rail travel
have doubled, TOCs have achieved all time high safety levels and record levels of
punctuality. Passenger satisfaction is up by 10% over the past decade. However
there are still challenges to be faced in the
future. In terms of investment in innovation,
the UK rail industry has lagged behind other
We see a future that challenges
railways, other transport modes and other
the limits of our current
industries, all of which are investing
technical approaches. A future
considerably more. For example, Jaguar Land
where we must increasingly rely
Rover is investing £2.75 billion this year in
on our ability to exploit a rich
product development and facilities3, and Rolls
stream of innovation.
Royce has invested £7.9 billion in R&D over the
RTS
last 10 years4. Innovation in electric road
vehicles and platooning5, for example, presents
a potential threat to rail’s competitive and
environmental advantage.
The McNulty report6 concluded that more effective innovation in UK rail could
deliver savings across the whole industry of around £190 million pa2, additional
benefits such as customer satisfaction are also expected to be considerable. In
addition to the strong domestic business case for introducing industry innovation
enablers, the potential global market for rail innovation is also considerable7.
McNulty compared returns on investment in innovation in other industries and
found a return ranging from 3:1 to 10:1. He suggested that the rail industry should
be able to achieve at least a 3:1 return. Network Rail also identifies an 11:1 return
http://www.thisismoney.co.uk/money/markets/article-2453231/Jaguar-Land-Rover-post-recordinternational-sales.html
4 http://www.rolls-royce.com/about/technology/introduction/
5 Platooning is equivalent to a “road train” see The Times, 7 th October 2013 page 16 +
http://money.cnn.com/2013/09/04/autos/nissan-360-irvine.fortune/index.html
6 Realising the Potential of GB Rail, Sir Roy McNulty May 2011
7 Rail Value for Money Study – Improving Management & Delivery of Innovation Final Report
5098555-ATK-51-0030-1.7 May 2011
3
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on innovation investment in CP4, while recognising that this is unusual and
adjusting the expected ratio to 5:1 as the portfolio expands.
A multi-faceted approach to build a comprehensive support framework for
innovation in the rail sector has been taken and further details of the support
available to the industry are given in section 3.1.2.
2.1.1 History
Rail franchising has been under scrutiny since the commissioning of the Laidlaw
Inquiry8 into the West Coast Main Line franchise competition. The Brown Review9
of the rail franchising programme then identified significant scope for
improvement. Brown in addition to recommending a more robust approach to
franchising highlighted a need to introduce flexibility in franchising to allow bidders
to facilitate Government-initiated changes and a need to facilitate closer
partnership working, and alliancing between operators and Network Rail to unlock
improvements.
The DfT is aware that the TOCs are demonstrably ready and willing to participate
in cross industry innovation activities. They have played a significant part in
drafting the Rail Technical Strategy (RTS) while supporting the Technical Strategy
Leadership Group (TSLG) and played pivotal roles in directing the Rail Safety and
Standards Board (RSSB) research programme. The TOCs have also provided
significant input at a senior level in steering groups for specific innovation
demonstration competitions including EIT’s Radical Train and Customer
Experience competitions, and additionally ATOC has facilitated several workshops
which have resulted in a prioritised list of strategic projects which the TOCs wish
to support. The TOCs have highlighted their desire to drive a more prosperous
economy in the context of a railway that is open to greater innovation 10. The
establishment of the Rail Delivery Group as recommended by Sir Roy McNulty6
and its role in providing leadership on policy for the rail industry brings the
interests of the operators (both passenger and freight) and Network Rail closer
together. Such partnership working is a key feature of a highly capable industry.
In the light of the desire of government, industry and the operators for the
freedom to innovate in the context of franchising, DfT has introduced a number of
mechanisms to facilitate this in the rail industry.
2.1.2 Industry ambition
Report of the Laidlaw inquiry. Available online
https://www.gov.uk/government/publications/report-of-the-laidlaw-inquiry Accessed
23/12/13.
9
The Brown Review of the Rail Franchising Programme. Available online
https://www.gov.uk/government/publications/the-brown-review-of-the-rail-franchisingprogramme Accessed 23/12/13.
10
Growth and Prosperity: How Franchising helped transform the railway into a British
success story. Available online from http://www.atoc.org/latest-publications/ Accessed
23/12/13.
8
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UK rail has a set of ambitions for how the railway will look in the future, innovative
step changes will be required to realise these ambitions. The four primary areas
for the industry are customer satisfaction, capacity increase, cost reduction and
carbon reduction.
The transformed railway of 2040 is envisaged as contributing to the growth of the
economy, to be conducive to innovation and with a growing export market.
Key to realising this vision is overcoming inhibitors of innovation including the
misalignment of risk and reward11.
2.2 Misalignment of commercial incentives in current
franchise delivery
Although there has been significant improvement in supporting innovation within
Network Rail over the last few years through the specific allocation of resource
and the development of the Network Rail Innovation Management System key
actors in the industry, the TOCs, are not currently incentivised to take part in the
network drive for innovation.
As commercially focused organisations it is understandable that the TOCs primary
concerns is to deliver a good service to their customers and delivering a good
return on investment to their stakeholders. It is thus in their interest to minimise
the extent to which they are forced to consider sectoral, environmental and
regulatory pressures and allow these to drive innovation. They are far more likely
to innovate in areas that are under their direct influence and are adding visible
value to their customers, enabling them to enhance the value and profitability of
their services7.
In previous years franchises have been let predominately on price without fully
taking into account investment in innovations that would provide a return after
the end of the franchise or to other parts on the industry. Regardless of any
internal innovation strategies they may have, TOCs currently do not include risk
capital in bids to fund innovation as a normal private sector company would. They
also have little incentive to take part in national innovation programmes and
demonstration projects due to the structure of the industry and the noncommercial nature of the TOCs relationship with Network Rail. These often need
train operators to support trials which have national benefit but which offer little
or no benefit to the franchisee. The following case study highlights the
discontinuity in business pressures between the TOCs and Network Rail.
11
RTS
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Case study: A better rolling stock bogie5
1980s rolling stock could be sensibly life extended providing affordable capacity
without new build. Manufacturers might use this opportunity to provide new
bogie designs which ride and curve better doing less track damage (lower wholelife costs, safer), as well be being more comfortable for passengers (attracts
custom).
All these benefits are clear at a system level. However, who invests in the
development? Almost certainly the manufacturer, but from whom do they obtain
their return? Network Rail benefit but may not charge lower track access fees,
the TOCs benefit but will resist higher leasing fees from the ROSCO. There is the
risk of the opportunity not being realised at all, since the costs and benefits fall
unevenly.
The market for rolling stock provides an example where the current market fails.
TOCs are often constrained in their choice of rolling stock that they use and hence
in their ability to persuade the relevant ROSCO of the case for change. A leveraged
Innovation Fund will strengthen the TOCs position to negotiate innovative
solutions which involve modifications to rolling stock.
In the Brown review of rail franchising a key objective, the need to ”harness
private sector skills and innovation, to deliver value for money for taxpayers and
improved services which increase passenger satisfaction” was identified9. Brown
also suggested provisions which “encourage franchisees to come forward with
innovations”7. The DfT has responded positively to the Brown Review renewing its
commitment to the franchising process, introducing the Rail Franchise Advisory
Panel and implementing the Review’s recommendations as outlined in the
government’s response12.
It is understood that it is difficult for a bidder to make the business case to invest
in innovation where the returns are uncertain or fall beyond the franchise term.
The negotiation risk in agreeing the residual value (RV) of innovations can act as
a disincentive, especially if it is felt that bids are risk adjusted without taking
sufficient account of work planned to de-risk innovative approaches, for example
through trials and pilots. Feedback from potential ICEC bidders indicated that,
unless the DfT allocated significant weight to innovation when evaluating bids, the
innovation desired and needed by the network simply will not happen7.
Government response to the Brown review of the rail franchising programme. July
2013 Available online https://www.gov.uk/government/publications/governmentresponse-to-the-brown-review-of-the-rail-franchising-programme Accessed 13 January
2014.
12
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3 UK Rail’s Response to the Challenges
The strategic approach to innovation in the UK Rail industry is formed from the
RTS and the Network Rail Technical Strategy (NRTS). Both documents recognise
innovation as a core part of their framework identifying it as one of the Common
Foundations or Enablers. The strategy is supported by funding and specific support
agencies as detailed below.
The DfT is aware that the TOCs are demonstrably ready and willing to participate
strongly in cross industry innovation activities.
The DfT wants to ensure that franchisees have the freedom, capability and
incentive to innovate, to achieve continuous improvement to business
performance and passenger service throughout franchise life and beyond, as part
of a wider cultural change programme.
3.1 Strategy
The RTS expands on a vision of the railway that has a whole system approach to
fostering innovation recognising the Future Railway Enabling Innovation Team and
the Innovation Fund as key mechanisms to take innovation initiatives forward. As
the RTS describes, the industry, through the Future Railway team is looking to
enhance industry capability for innovation and is using the Innovation Capability
Maturity Model (ICMM) to track the industry’s approach to enabling innovation.
The ICMM details five stages of maturity and envisages the industry to be
integrated and adaptive by the end of CP6. Currently the industry is characterised
as competent but uncoordinated.
The move to support innovation in the rail industry is not limited to the UK. The
European Commission has recently launched "Shift2Rail"13, a new public-private
partnership to invest just under €1 billion in research and innovation to get more
passengers and freight onto Europe's railways.
"Shift2Rail" will manage a 7-year work programme of targeted research and
innovation to support the development of better rail services in Europe. It will
develop and accelerate the bringing to market of technological breakthroughs.
The UK strategy for enhancing industry capability as defined in the RTS is based
on three points
1. Design and develop effective mechanisms to translate ideas into
demonstrable, de-risked, system-level radical innovation projects.
2. Build upon existing materials and disseminate models of good practice.
3. Promote and provide culture change programmes
13
http://europa.eu/rapid/press-release_IP-13-1250_en.htm?locale=en
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NRTS recognises innovation as a process that can enable improvement across
their business and the whole railway
system. In delivering innovation NR has
Innovation is broader than the
recognised that there is a need to
exploitation of technical ideas and
collaborate across industry and through
is the process of generating all
the supply chain and a requirement for
business improvement ideas and
new management systems for R&D
transforming those ideas into
commercially successful products
projects.
and systems.
It is recognised that this is a unique and
timely opportunity to embrace and
implement
innovation
to
realise
commercial benefit through increasing levels of innovation maturity (see Figure
1).
Hand in hand with the TSLG and NR, the Office of Rail Regulation is working
towards better partnership working across the industry that will see successful
alliances between Train Operators and Network Rail, collaborative rollout of new
technology and the development of a framework that will encourage innovation
and whole industry collaboration14.
•
Cross industry initiatives (other TOCs, Network provider)
•
•
Alliancing with other TOCs, Network providers, supply chain
•
•
Enabling Innovation Team (EIT) challenges
Accessing innovations from outside the rail sector
•
14
Staffordshire Area Improvements Programme Alliance
Leveraging sources of funding, infrastructure & support
•
•
South West Trains & Network Rail alliance
Common transport sector challenges e.g. big data, positional /
location, materials & manufacturing, energy
ORR Business Plan Financial year 2013-1014, April 2013.
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Figure 1: RTS vision for raising UK Rail industry through levels of innovation maturity
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3.1.1 Funding
As part of the ICEC franchise funding proposal the DfT is asking TOCs to ringfence funds from its revenue to finance the Innovation Fund which will be
leveraged to support innovation within the franchise. TOCs are encouraged to use
the Innovation Fund to leverage additional funding from other funding pots directly
aimed at rail and beyond as shown in Figure 2 below.
Figure 2: Cross industry funding including rail specific and in-franchise funding
In addition to the above UK funding mechanisms, using "Shift2Rail", the European
Commission is more than tripling the financing for rail research and innovation to
€450 million (2014-2020) compared to €155 for the previous period. This will be
matched by €470 million from the rail industry. The net gains of this long term
collaborative approach will give a very substantial boost to innovation in the rail
industry, compared to previous co-funding of individual projects.
3.1.2 Support
The support available to the rail industry is also undergoing co-ordination and
integration at organisational level and through unprecedented levels of investment
across the UK Transport sector.
Support systems which enable partnerships, collaboration and innovation within
rail innovation are now in place and fully operational and are expected to be
familiar to the TOCs, they include:

Future Railway (Enabling Innovation Team, RSSB, TSLG)
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
Transport Systems Catapult

Other Catapults e.g. High Value Manufacturing, Future Cities

Associations including Railway Industry Association (RIA), Rail Freight
Group (RFG), Rail Research UK Association (RRUKA)

Rail Alliance

DBIS, Chambers of Commerce, UKTI

Technology Strategy Board (inc. Knowledge Transfer Networks, Knowledge
Transfer Partnerships

European Council (EC) Horizon 2020 including Shift2Rail

Innovation portals & initiatives including TfL, Network Rail
More information can be found at the EIT sharpcloud support tool for rail-relevant
funding bodies and mechanisms15.
4 Delivering Innovation in Franchising
The government and industry move towards embedding innovation in the culture
of UK rail has been spearheaded by the RTS and continues into the ICEC franchise
where the DfT introduces the concept of Franchise Innovation driven by the
operator. The following section details:

The requirement for a Franchise Innovation strategy, introducing potential
themes of interest, innovation enablers and open innovation as a strategy.

The Innovation Fund drawn from mandatory franchisee contributions, how
it will be used and its governance.

The approach to risk when measuring innovation performance.
4.1 Aims
With consideration of the barriers to innovation and the commitment of the TOCs
to engage the DfT wants to ensure that franchisees have the freedom, capability
and incentive to innovate, to achieve continuous improvement to business
performance and passenger service throughout franchise life and beyond, as part
of a wider cultural change programme.
This commitment to innovation will:
15

Support the innovation capability of TOCs.

Help incentivise TOCs to participate in cross-industry innovation projects
and to deliver innovative solutions in specific franchises (starting with ICEC)
by de-risking projects that would not otherwise have been funded.

Commercial benefits and business drivers for the TOCs
http://www.futurerailway.org/eit/Pages/Innovators.aspx
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
Delivering future railway (RTS)

Increase franchise value throughout franchise and beyond

Improving competitiveness for future franchises
4.2 How will this be achieved?
As briefly outlined in the InterCity East Coast Prospectus, released as part of the
Official Journal of the European Union Notice, the Franchise Tender process will:
1. Require bidders to produce a Franchise Innovation Strategy
2. Give credit, at bid, for this strategy and any further proposed
investment in innovation
3. Establish a fund from mandatory franchisee contributions to support
in-life innovation projects.
4.2.1 Franchise Innovation Strategy
A franchise innovation strategy should:

Align & synergise with top level drivers of the RTS/ NRTS

Support the specific franchise priorities and DfT objectives

Consider how the support and funding available could be used

Address the bidders approach to utilising the specific Innovation Fund
assigned to this franchise

Be refreshed during the franchise

Have credit given, at bid, and its delivery through the course of the
franchise period (& beyond)
The DfT fully expects that an Innovation Strategy is nothing new to the potential
Franchisees reading this. An integrated Innovation Strategy should be part of any
successful organisation’s Business Strategy. The DfT wants the lessons already
learnt by the potential bidders to be applied to the management, and development
of the Franchise and thus potentially the wider network. This will not only ensure
better returns for the Franchisee but also achieve over time the benefits sought in
Section 2 of this paper based on an economic analysis of the financial benefit
expected from a good innovation strategy.
Franchise bids will be required to show where the Franchisee will implement
innovation during the life of the Franchise and explain how the bidder’s approach
to innovation will support this strategy.
The DfT is conscious that by being too specific on what a TOC innovation plan will
look like could potentially stifle ambition and innovation. Innovation should not
only focus on the technical elements of delivering the Franchise but could also
address skills, management processes, sales structures etc. What should be clear
is that the bidders’ strategies and projects proposed at bid will gain credit to the
extent that they support the delivery of the RTS and specific franchise priorities.
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The RTS themes that the DfT has already highlighted as potentially part of an
innovation strategy include:









Transforming the daily customer experience
Simplifying ticketing that seamlessly integrates with other modes
Improving the door-to-door journey
Improving cost efficiency and value for money
Improving the level and consistency of performance
Providing step changes in environmental performance
Having a positive impact on local communities
Enabling data sharing to third parties, supply chain and small and medium
enterprises to encourage innovation
Contributing to agreed cross industry projects
Whether it’s the introduction of new technologies, products, services, capabilities
or business processes – innovation plays a critical role in reducing costs,
transforming customer experience and enhancing performance. This is why
successful UK companies invest on average 1.7% of turnover in research and
development16.
If innovation is to be valued in both the bid process and beyond potential bidders
should consider what “innovation enablers” are in place. Some enablers worth
addressing are covered in the next section.
4.2.1.1
Organisation Innovation Strategy
An innovation process manages investment risk over time with the object of
creating value to users and / or customers.
Many organisations find it hard to come up with truly ‘new recipes’ to achieve
organic growth. They rely on continuous improvement to fulfil their growth needs.
George S Day17 describes this as the difference between "BIG I" and "small i"
innovation. He argues that 80 per cent of US Chief Executives identify organic
growth as being at the top of their agendas. This organic growth, however, is
difficult to sustain.
Organizations have developed a range of ways to facilitate growth though
innovation. Some organisations adopt a holistic approach by reviewing and
innovating in all aspects of the organisation. Others target innovation in their core
products and services. Some encourage using internal resources to find ideas,
while others look externally.
16
The 2010 R&D Scoreboard, BIS, November 2010. Available online
http://webarchive.nationalarchives.gov.uk/20101208170217/http://www.innovation.gov.uk/rd_scorebo
ard/?p=3 Accessed 5 January 2013.
17 From Sustaining Corporate Growth Requires "Big I" and "small i" Innovation.
Published February 21, 2007 in Knowledge @Wharton.
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The most successful use an appropriate combination of these methods.
A truly innovative organization is one that values new and workable ideas in all
aspects of its operation. While product or technology innovation is important, it is
only part of the story. The need for innovation should apply to the whole
organisation.
A ‘whole-organisation’ approach to innovation requires:






A commitment to innovation as a core value within the leadership and at all
organisational levels;
Access to technical skills and knowledge to provide confident, creative, welltrained and technically proficient employees;
A culture that encourages and is willing to accept the ideas of all employees;
Systems that not only permit and reward innovation, but actively pursue
new ideas;
Managers who understand what is needed to be innovative and are
prepared to actively encourage it;
Employees and managers who have the skills they need for innovation.
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Case Study - NR Innovation Strategy
NR has responded to the RTS with its own technical strategy that includes an
overview on its approach to innovation within the organisation.
As part of their open innovation learning NR has identified the use of incubators as
an example of current good practice and the use of internal consultants to help
crystallise challenges and identify technologies that may lead to solutions.
NR has mapped its own development against the ICMM set out in the RTS and has
highlighted five key areas in its innovation strategy development. NR has also
acknowledged that its current process, Governing Rail Investment Projects, is not
ideally suited to managing technology development and is developing a more
appropriate process.
4.2.1.2
Open Innovation
An Open Innovation strategy can help operators locate, implement and where
necessary create global, best in class capabilities. An Open Innovation strategy
can add value





At the start of the bid
Over the life of the franchise
Beyond the life of the franchise
On the route
Industry-wide
Many companies are investing in collaborative
partnerships with universities, competitors
and
other
organisations
to
develop
innovations. This approach to innovation is
called Open Innovation and was first described
by Professor Henry Chesbrough as:
As a specific approach both RTS and
NRTS advocate Open Innovation for the
front end of the process. Key benefits
are:



‘…the act of connecting insights, resources
and
capabilities
across
social
and
institutional borders to achieve and
conceive what we can't do on our own.’
Open innovation suggests that you need to
leverage the discoveries of others and not rely
exclusively
on
internal
research
and
development. This is outlined in the following
case study from Proctor and Gamble.
January 2014


Reducing the cost of technology
acquisition by leveraging
investment by others
Improving the return on leveraging
internal investment through
exploitation with others
Maximising the pool of technology
and innovation from which to draw
upon
Increasing the flexibility and depth
of the R&D and supply base.
The DfT has indicated that bidders
are expected to collaborate with
other industry partners to deliver
innovation.
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Case Study Procter & Gamble: capturing a world of ideas
Procter & Gamble is a consumer product giant with a long tradition of powerful inhouse science behind its many leading brands. By 2000 Procter &Gamble (P&G) had
to acknowledge it was facing a problem that most mature companies need to
address. Creating organic growth of e.g. 5 per cent annually had become too difficult.
That often is equivalent to building a multibillion Euro business each year. Relying on
internal R&D to achieve such growth targets had been the standard in many
industries. P&G historically had created most of its growth by building and leveraging
global research facilities, hiring the best talent in the world and generating
innovations in its labs. Increasing competition, new technologies and the burden of
generating organic growth sufficient to influence the sales volume of a large firm,
required more than the innovation budget could provide.
Facing unprecedented levels of rivalry with stagnating R&D productivity and a 35%
rate of innovation success, i.e. the percentage of new products that met financial
objectives, led to decreasing financial performance and a steep decline in market
valuation. P&G was working with an innovation model from the 1980s, a globally
networked internal model which seemed no longer adequate to meet the targets, and
the costs to maintain this model were increasing rapidly. Spending more on R&D was
not an option. At the same time, it became clear that important innovations were
increasingly carried out by entrepreneurial companies, small start-ups or even by
individuals, and some leading firms started to engage in open innovation. In 2000,
P&G realized it could not meet its growth objectives by spending more and more on
R&D.
Most of P&G’s best innovations had come from connecting ideas across internal
businesses. And after studying the performance of a small number of products that
were acquired externally, P&G realized that external connections could produce
highly profitable innovations. P&G changed its approach to innovation, extending its
internal R&D to the outside world through the slogan “Connect & Develop”. “As a
result, they now have access to more internal technologies than any other consumer
products company. They multiply this internal innovation capability by reaching
outside P&G to a global network of nearly two million researchers in technology areas
connected to P&G businesses. This “Connect and Develop” collaboration results in a
bigger and stronger innovation pipeline”
Other notable companies such as Kraft Foods, and Mars have taken a strong
approach to Open Innovation employing Technology Scouts to seek externally for
new ideas, technologies and people to supply the resources the companies need
to innovate. One aspect of Open Innovation is a more proactive use of the supply
chain. Mars found that working in partnership and shared teams with a supplier
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helped to reduce development cycle times and built a shared understanding which
contributed process improvements for the next product.
Professor Chesbrough believes that companies under-use external knowledge and
that they must open their innovation processes to leverage these pools of
knowledge, instead of being closed to the pursuit of their internal agendas. At the
same time companies also under-use their own knowledge, they spend an
enormous amount of money on R&D, yet most companies restrict the output of
their work to their current businesses. They err by making too little use of others’
ideas in their own businesses, but they also err by allowing too little use of their
own ideas in others’ businesses. It must be noted though that this approach to
innovation is a ‘contact sport’ and requires resource to leverage it properly.
Although successful innovations can come from outside the industry successful rail
industry solutions should take specific care to avoid bespoking issues. Some rail
stakeholders have concerns that tried and tested technologies from other
industries have in the past cost significantly more when GB differentiation, widely
considered as unnecessary, is factored into the development cycle.
4.2.1.3
What Industry platforms/collaborations can be formed
which would enable network supporting innovations?
An innovation platform denotes a capability, asset or system which enables the
speedy execution and wide extension of multiple market applications:




Platforms facilitate and sustain long-term value;
Platforms take time to build, but are extremely difficult for competitors to
mimic;
Platform development is a managed risk involving the investment of time
and resources;
Value is created throughout development, but tangible returns only
appear when applications are launched.
Platforms to support innovation are not new to the UK rail industry and have been
used to generate significant export success to global markets. The development
of the world’s first Solid-State signalling interlocking (SSIs) in the 1980s by British
Rail was from collaboration with British Rail, Westinghouse and GEC. The two
industrial partners were given free access to the network to test the new system
and then received royalties from any offshore sales. Although the size of the
royalty was small, over 1,500 contracts were received as a result. Commercial
incentives were aligned to the degree that IP and even circuit boards were shared.
The collaborative relationship was not disrupted by the demands of procurement,
as no OJEU process was undertaken once the design had been stabilised. The net
result was that 10-12 times the number of contracts for SSI equipment was sold
to the overseas market.
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Attitude and willingness of the people involved to find a real solution is a key factor
of success. Platforms do not have a specific model which can be followed or
replicated. The basis of collaboration for collaborative challenge-led innovation
should be a flexibility regarding intellectual property rights, risk and exploitation
supported by a desire from all parties to make it work.
Case study: Improving overhead line reliability
Following a spate of OHL failures on the WCML after the introduction of a new
timetable and a 40% increase in traffic, a group of four senior stakeholders from
Virgin (as the affected operator) NR (as the infrastructure maintainer), Alstom (as
the train manufacturer) and Serco (as the contractor who would be carrying out
rectification works) came together to find a way forward to solve what was clearly
a systemic problem and not one that rested clearly in any one stakeholder's
exclusive purview. The typical approach would have been for responsibility to
have been disputed between the parties, but when the key group agreed to work
together to look at the whole system, they were able to discover that the source
of the problem was the need to reduce chipping on the carbon on the train
pantograph head, which was resulting in too many replacements. They kicked off
a £150k development project to find a workable solution and, nine months later,
this is now in successful operation with a drastic reduction in OHL dewirements
and resulting lost customer hours. No formal partnership was used, only informal
agreements for how IPR should be managed – in the end, it was agreed that one
party would provide the funding and take on the risk, retaining the IP for the
application in the UK, whereas another party would retain the rights to subsequent
worldwide sales of the technology.
The holistic approach to innovation support as described in Section 3.1 has been
put in place to support the formation of collaborative innovation platforms of this
type supported by the Innovation Fund described below and the other funding
mechanisms mentioned in Section 3.1.1 of this document.
4.2.1.4
Supply Chain Innovation
In many large delivery organisations it is the supply chain that, when incentivised
correctly, produces the bulk of innovations. The automotive industry has been
aware of this for some time and processes have been put in place which supports
the supply chain in specific areas of need. In 2007 the TSB established the Low
Carbon Vehicles Innovation Platform to promote low carbon vehicle research,
design, development and demonstration in the UK. They are now onto their tenth
competition under the innovation platform’s integrated delivery programme. The
programme aims to integrate the low carbon vehicle innovation chain, from the
science base, through collaborative R&D to fleet-level demonstration.
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At early Technology Readiness Levels (TRLs), The TSB also deploys a highly
successful collaborative research model called the Small Business Research
Initiative (SBRI) for public procurement of solutions to bounded problems posed
as challenges. The TSB poses the problem and then offers 100% funding for small
R&D contracts (typically £30-50k) to be carried out by organisations who think
they can solve the problem. The prospect for participants is the sale of a successful
solution to the government as a lead client along with retention of the IPR by the
SME. The EIT is currently leveraging the SBRI to garner ideas on improving the
design of gantry and cantilever structures for the electrification programme18.
Models of this type could be duplicated by successful franchisees among their
existing and potentially new supply chains.
The new Innovation Fund initiative fits in with the recently announced rail supply
chain forum, set up to promote the UK supply industry, since the industry will be
responsible for implementing and bringing to the market the innovative ideas
which are developed with the TOCs on the back of this new funding stream.
4.2.2 Innovation Fund
A pilot £50 million Innovation in Franchising Fund will be available for innovative
projects over the next three years covering the East Coast, TPE and Northern
franchises.
The Innovation Fund is being put in place to enable the de-risking of innovative
pilots or demonstrators etc. It will enable a more robust commercial business case
to be developed following these pilots. The fund is aimed at innovations developed
during the course of a franchise that would not have delivered a clear commercial
return to the TOC, but would have an appropriate benefit to the industry as a
whole or in the longer term. An example of this might be a rolling stock
modification that reduced track damage, or improving mobile communications on
trains or an eco-station.
Franchise revenue will be used for the Innovation Fund which is expected
to equate to between £6-£7million per year for ICEC alone.
An independent expert panel will consider all proposals during the life of the
franchise against clear criteria. Successful innovation proposals will be expected
to help deliver the RTS and to ensure sustainable projects are proposed, deliver a
total return on investment of between 3 and 5, beyond the life of the franchise.
Projects which are low risk/high commercial benefit will not be approved (as these
should form part of the TOCs’ normal commercial business) and high risk projects
Available online from the SBRI website https://sbri.innovateuk.org/competitiondisplay-page/-/asset_publisher/E809e7RZ5ZTz/content/aesthetic-overheadstructures/1524978?p_p_auth=0yJzbu5v Accessed 23/12/13.
18
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will not be approved (as such projects need research to determine their feasibility
first and other funds exist for this purpose).
The fund is required to support two different aspects of innovation. Firstly it needs
to allow TOCs to take part in national trials which have significant national benefit
(and zero net benefit to TOC shareholders). Secondly the fund needs to support
research, development and demonstration projects that it would be expected that
a normal high performing private sector company to carry out. The fund will give
bidders freedom to undertake projects that it may be difficult to agree risk and
residual value of. There will be therefore two elements of the Innovation Fund:

Local: The franchisee would make proposals to the independent expert
panel for approval. In the event that proposals of sufficient quality are not
presented by the franchisee, any remaining funds would be provided to DfT
who would make these funds available to other franchisees to bid for. This
is similar to a private company having its own innovation budget owned and
approved by its parent company

National: The franchisee would make their financial contribution to a
national fund. All franchised TOCs would then be free to submit proposals
against criteria set by the independent expert panel. This is similar to the
way TOCs currently fund RSSB’s safety and standards work. The national
fund could be used in two ways; to fund projects that franchises have bid
for in competition against other franchises or to fund nationally important
projects that are allocated to be piloted on a particular franchise area.
The local element of this fund partly solves the residual value issue with innovation
in franchising as the fund pays for local innovation that has a return after the end
of the franchise. The national element of the fund partly solves the issue of costs
falling in one part of the industry (to TOCs) and benefits accruing to other parts
of the industry (other TOCs or Network Rail).
4.2.2.1
Investment Criteria
The Innovation Fund activity is focussed on the middle TRL’s to bridge the
“innovation gap” between basic research and commercialisation. The investment
criteria developed by EIT are directly related to its aims and objectives and are
designed to ensure that programmes and projects are selected and prioritised
correctly.
All programmes and projects must fundamentally be delivering benefit to UK rail
aligned with the RTS.
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5 Next steps
The EIT has engaged IXC UK to act as the communications lead for the Innovation
in Franchising programme. Communications will be made through industry events,
the Future Railway website and social media.
To ensure that no one operator is given unfair advantage the same information
will be available to the entire market.
The DfT continues to prepare supporting documentation for the market on the
principles of innovation from their perspective. Further detail on the funding
mechanism and calculation of residual value will also be confirmed and
communicated to the market. This document has noted that bidders will need to
align their strategies to deliver the RTS, further guidance on this point is also in
preparation.
One to one engagement sessions will be held by the communications lead with the
operators. The engagement sessions will act as a guide to the innovation pack and
provide a forum for feedback and questions. The first round of briefings will be
held with the bid leaders starting in March with a second round to be held with the
wider organisation bid team following the issue of the ITT. The sessions will include
at least two members of the EIT team to ensure equality of information, and will
be minuted.
Questions and their answers will be also published on the RSSB website to ensure
equality of information.
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6 Contact
Please
feel
free
to
submit
bidder.engagement@futurerailway.org
To
register
interest
for
a
bidder.engagement@futurerailway.org
questions
briefing
at
session
this
please
point
to:
contact:
6.1 About the Future Railway Enabling Innovation Team
The Future Railway EIT has been set up by the rail industry to accelerate the
uptake of innovation. Our mission is to offer support to practical cross-industry
demonstrator projects, building on the work of the Technical Strategy Leadership
Group, but also seeking out innovative ideas and proposals from across the
industry. Our approach is to: understand the challenges that industry faces;
connect potential innovators with these challenges; and, where necessary with
potential funding. The Future Railway EIT is hosted by RSSB, and reports into
TSLG, and is supported by the Rail Delivery Group, Planning Oversight Group, and
RSSB’s Board as well as the Department for Transport.
6.2 About IXC
IXC UK is recognised as a leading practitioner of Open Innovation and collaborative
development, successfully delivering innovation initiatives to companies and
organisations in the Transport and other industry sectors. In supporting the
Department for Transport's (DfT) strategy for introducing innovation as a
significant component of future rail franchises, IXC will utilise its transport domain
expertise and track record in innovation and through working closely with the EIT
plus wider rail stakeholder network IXC will: develop the appropriate innovation
material; and engage with, and communicate this material to, the rail franchise
industry.
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