More on Government Spend with Smaller Firms – Why Isn’t It Growing?

While it was good to see Civil Service World picking up on the story about government’s declining spend with smaller suppliers (see our original story here), the lack of wider interest is disappointing. That is indicative of the national media’s lack of interest in any public sector story that isn’t about Brexit, cabinet firings or harassment. It is not only SMEs that seem ignored, but bigger topics; the NHS gets a little bit of coverage but nothing near what it deserves, so this is not just a lack of interest in procurement matters.

Anyway, it is worth looking at why the numbers are disappointing from the government's point of view. We mentioned a couple of factors in our original article. The measurement of the “indirect” spend (prime or first-tier suppliers spending money with SMEs in their supply chain) is very unreliable, as well as being pretty meaningless really, but that apparent decline in indirect spend was the reason for the overall figures slipping.

But even the direct spend seems stalled at around the 11% mark. Why?

Some of the problems are structural. As we have said before, the Ministry of Defence simply cannot give contracts for building ships or planes to small firms. And even the second- or third-tier suppliers in that industry are unlikely to be start-ups. In other cases, such as contracts for employment services in the Department of Work and Pensions (DWP), or rehabilitation and prisoner tagging in Justice, the service requirements tend to rule out SMEs. The demands in terms of capability, funding, and risk transfer are such that again small firms are simply not capable of winning the contracts.

These factors have always been considerations when looking at SME policy.  But we might suggest three more current and perhaps controversial ideas about why the SME imperative is fading:

  1. Brexit – yes, we’re back to that. In many government departments, the pressure is on ministers and civil servants who face a huge additional workload connected with Brexit issues. So, there is less time to look at what may seem “minor” policy issues such as supporting SMEs, and perhaps a tendency to look for large, established suppliers with less risk given the wider priorities and pressure.
  1. Large firms are good at lobbying – and perhaps getting better. Look at the revolving door between politicians, advisers and civil servants, and how firms like Amazon and Google position themselves in part by employing people with strong government connections. It has gone on for years in the military sphere, but now it happens in IT, in employment services and elsewhere. SMEs can’t compete.
  1. Centralisation of spend – despite the best efforts of Crown Commercial Services (CCS), national frameworks do tend to lead to larger suppliers doing well and smaller suppliers being squeezed out. And the mood has been for more consolidation and centralisation in recent years. CCS may say that “half the suppliers on this framework are SMEs”, but the key question is how much spend is actually directed through those firms.

There are also issues very specific to particular departments. Legal Aid spend has always been a good area for boosting the SME spend figures, but as that spend has dropped dramatically in recent years, so less money is going to those small law firms even if their share of Aid has been maintained.

If we are at all accurate in our analysis, it is not going to be easy to get the SME data moving in the “right” direction again, except perhaps by massaging the “indirect” figures (we wonder if large suppliers will start getting more pressure from government to declare a larger number)! So, a sensible government might take this opportunity to review the whole policy. Is the spend objective a useful target? Is there any evidence that the last few years has seen any measurable benefits from the SME focus? Should the priority switch to social enterprise, disadvantaged business owners, or one?  Firms with real innovation and future prospects?

But unfortunately, we doubt whether there is any appetite for creative and original thought in this area, as the obsessions we mentioned earlier continue to dominate the media, public and government agenda.

Voices (2)

  1. RJ:

    There are at least three more factors that can also militate against SME spend:
    (i) public sector procurement has to be completely transparent and objective in its award criteria. Whilst one of the award criteria might be an overt weighting in favour of SMEs, in most instances if a large organisation is simply better equipped to meet the requirement, then they should win the contract
    (ii) in some instances the mere award of a CCS contract can lift a supplier out of the SME threshold (albeit that SME status is maintained for a couple of years in such instances); and
    (iii) good SMEs are often acquired by larger organisations – I can think of one very significant example in this regard where a significant supplier has been taken out of our numbers this year
    Within the branch of central government in which I am working we are currently placing more emphasis on SME participation in bid processes than in the absolute volume/value of awards – this at least demonstrates that the supply market believes they will be given a fair shot at winning contracts

  2. Daniel Bromley:

    Perhaps some SMEs have done so well, they are no longer SMEs?

    Not entirely a flippant remark – perhaps Kainos/Methods and others who look to have won a fair bit looking at the Digital Marketplace transparency data have made that jump up?

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