SMEs – the “great oaks” of the future, or just a nuisance?

The debate around SMEs here got a bit heated last week in the “comments” section. By the way, if you don’t check the “comments” regularly, you’re missing out – often much more incisive and funnier than the main articles!

It was a post from a couple of weeks back that provoked it, when we commented on the UK Government programme to arrange job swaps between large suppliers and Whitehall Departments. Reader Steve Bagge had a bit of a go at SMEs in the context of previous supportive comments:

How naive. I wish people would start treating the whole SME debate in a more logical way… no-one ever seems to clearly articulate what SMEs can and cannot realistically do for government.

I tend to agree with him on that actually, as I’ll explain, but he finished by slagging off a previous comment:

I’m sorry but “They should be increasing the gap between government and big plc – not integrating them..”,  is short sighted, ill-informed, emotional nonsense.  (These are my own views not those of the large company – which employs 20,000+ UK citizens by the way – for which I work).

He then got shot down by a couple of anonymous commentators, who drew attention to the mixed record of large suppliers to Government. esd then raised some of the issues facing small firms, such as cash flow, but pointed out that some of them will be the “great oaks of the 21st century”.  Then BJkson212 summed up superbly:

“I think to varying degrees each view stated here has elements of truth. Huhh? is right in saying that IT projects have had a poor delivery track record in government and that things need to change. Final Furlong is also right in saying that there needs to be close control over who can participate so as to avoid inappropriate behaviours. Steve Bagge is probably right in saying that the route to market for other smaller companies may well be via partnering with a large company (due to size and sheer number of SMEs) and that this is the most likely reason for the programme. Clearly there is no one-size-fits-all answer…. I do have some sympathy for the Government in these situations though as it seems whatever they do, people will find a way to criticise it. Am interested to hear alternative suggestions?”

Great stuff.

But let’s just analyse this a bit further. I would suggest SMEs are small for three reasons.

1. They’re not good enough to get bigger. They’re just another small builder, retailer, whatever, who has nothing special to offer, no competitive advantage.

2. They don’t want to get bigger – like my consulting firm. I had no desire to become another KPMG. Even if I could. Of course many firms fall into both categories 1 and 2!

3. They deserve to be bigger – in terms of their capability, innovation, cost advantage – but are held back somehow by funding, lack of opportunity, knowledge of how to win contracts.  Or they are growing, but more slowly than they deserve.  But the key point is that they offer some advantage, such that if they were bigger, it would benefit the overall local / national / global economy as well.

Now obviously it is category three that we and Governments want to support - and there’s no point in pouring money at categories 1 and 2. But telling the difference is often tough, and Mr Bagge was right when he said that much Government work, for instance, is simply unsuitable for smaller firms. But on the other hand... other readers were right to point out that a focus on large suppliers has not always paid off either!

In the UK, I’m not a great fan of the Government’s 25% of business aspiration for SMEs, particularly since we’ve already seen gradual hedging around the target (see here). What we could really do with, is a more nuanced approach to look at where and how SMEs can really bring benefit. How do we (and that means procurement people in large private sector firms as well as in public sector) identify category 3s as opposed to 1 and 2s, and then help them succeed and grow faster?

Voices (6)

  1. Life:

    Speaking as a SME professional service firm here (who do procurement ironically)(we don’t actually perform the services ironically but you know what I mean).

    I always thought, I’m now sure naively reading these comments, that the SME agenda was more to do with ensuring SMEs overcome bias in the Gov procurement process – but granted this of course does pre suppose they ultimately have some worth in terms of delivery. It might go down like a lead balloon on a procurement website (even one as excellent as this 🙂 ) but in Government professional services procurement there is often a ridiculous but legal bias in terms of everything from upfront demands for massive insurance cover that could never possibly be drawn down (because of the actual size and potential loss associated with the work) to just straightforward exclusions based on turnover that make no reference to benefit, outcome or capacity (which typically in my game don’t have much to do with turnover). I do realise that sometimes some of these things do matter to clients and are appropriate but very often they don’t and even, dare I say, may be the result of intermediating procurement people who may not differentiate between tanks and toffee. By the by, I don’t support positive discrimination in any sphere but I do believe very strongly that subscribing to an opposing view places a very demanding responsibility on those in a position of power. Equality of approach needs to be linked to fundamentals and this can present all sorts of problems practically…. And it does matter – still being a nation of shopkeepers (small businesses) when the highstreets are empty can only be possible because, while individual SMEs may indeed be saplings, they together already form a collective mighty oak, or more recently a stag one, the political import of which no doubt compelled our ministerial friends to push forward the “agenda” in the first place.

    Thank you. Not so much War and Peace as The Cherry Orchard…

  2. Cheryl Grassam:

    Of course, another reason for SMEs being small in terms of employee numbers could also be to do with lean-ness, agility and efficiency. Smaller companies, by necessity, can often achieve as much as larger companies with fewer resources. This is frequently the case in emerging industries, and where their larger competitors have grown through M&A rather than through organic progress. The SMEs cannot afford to have those productive, key staff involved in the often needlessly bureaucratic, bloated and speculative bidding processes which are already off-putting by their implication of bias towards large company methods. This is often why they do not even bid for, let alone win, public sector contracts.

    The same problem exists for SMEs that wish to bid for contracts with large corporations. A further problem for them is the cost and availability of indemnity as they start to take on the bigger contracts – due in part to a distorted view of risk within the financial sector.

    Across many industries and sectors, I have seen the tender process influenced by the perceived ‘risk’ associated with SMEs, and a failure to acknowledge that there are significant risks also associated with concentrating large contracts in to fewer, larger companies. I have even seen this expressed as naively as the tender evaluation question “has the potential supplier undertaken a contract of this size/type before?” with no reference to how well it was executed, and of course this procludes SMEs from winning this type of contract, even if they have not already been screened out before ITT during pre-qualification. It also explains why the same poorly performing companies keep winning public sector contracts and amazing no-one. A better screening criterion would be demonstrable competence rather than experience.

    The risks and benefits are there for all types of organisation, and it is the purchasing professional’s job to establish and mitigate what those are. At least with SMEs there is the ability to spread risk, and to promote competition within sectors.

  3. Aph shreeve:

    I sense innovation as a key criteria for drawing SMEs into solutions to public sector procurement.
    2 yrs ago I worked at the transformation lead for a £1/2 bn ITS/BPO bid in the UK sadly pipped at the post by one of the bigger US corporates. A critical evaluation criteria was ability to draw in fresh thinking for problems which dogged previous regimes and we found the edge came from SMEs of various siZes.
    Aha i hear you say, why did the corp win then? Well a bigger is safer attitude prevailed, but guess who the corp is comming to for ideas now?
    Aph

  4. Steve Bagge:

    Peter

    Reading your synopsis above, I just wanted to clarify a couple of points that I made in my previous post (which admittedly may have been a little strong) as I think they may have been misunderstood.

    Firstly, I was not disparaging SMEs, far from it… SMEs are a key employer and so vital to UK economic growth. This is why I was agreeing with Government’s secondment approach for large companies as through their Business Partner programmes I believe they can help SMEs enter the marketplace. I really do think Government understands this so to say Govt should distance themselves from large companies is, in my personal opinion, not the right answer.

    My point about suitability of SMEs in Government procurement was that there are certain areas where SMEs can and should play a role and others where they are not suitable either because their size means they cannot carry the delivery risk the contract terms and conditions require them to or because the type of procurement requires significant bid spend which the SME simply cannot afford on their own. As an example, short, low delivery risk, commodity-based procurements are a potential area SMEs could thrive in. There are undoubtedly others.

    I think another reason for this secondment approach is because Government has previously stated there needs to be a more intelligent customer function within Government departments and particularly procurement. They realise that large companies often have skilled practitioners in their own procurement departments and via 2-way secondments can share this experience for the benefit of Government and the UK taxpayer, thereby helping to lower procurement costs, identify value rather than focusing purely on cost and subsequently improve delivery outcomes. I don’t think anyone would disagree that these are worthy ambitions. After all, neither party wins from delivery failure.

    The reason I reacted so strongly to the points of view that Government should distance itself from large companies is because I really do think that large companies have a vital role to play. If SMEs are to play a bigger part in Govt procurement, large companies can help by priming the contract and bringing the SMEs in for specific areas of expertise or innovative new products/solutions. This approach helps the SME as it reduces their bid costs and makes the chance of them winning Govt business more likely than if they bid on their own. Again, I think Government gets this.

    You asked how do we therefore identify category 3 SMEs…. The company I work for has a business partner network of ~6000 companies in the UK most of which are SMEs and in some cases includes companies of only a handful of employees. We examine their solution, stability and growth potential to understand how we can mutually benefit from a partnership. We also have Entrepreneur programmes to identify new partners; last year we helped 40 new companies establish themselves and this year are on track to help 60 more.

    We offer our business partners access to free training, free use of development resources, free use of research facilities to showcase their products to other customers as well as assistance with solution development. Other large companies have similar programmes so as I said before, to say that Govt should distance themselves from large companies is overlooking some of the benefits they can provide to SMEs, Government and the UK taxpayer.

    I hope this clarifies my view and apologies for the War & Peace response.

  5. Ian Makgill:

    Peter,

    You overlook the possibility that large firms may not grow because they are not good enough or they’re unwilling to grow.

    Surely spending money on a large firm with a questionable future is just as pointless as spending money on a small firm with a questionable future?

    The issue of size is a bit of a red herring, growth potential is what we need to look for.

    Ian

  6. Dan:

    I believe in the USA they ringfence 25% of spend for SME’s. This helps companies grow and prosper.

    And then, quite often, stop.

    What happens is that they get to the boundary where they will no longer be able to apply for those contracts and will lose their privileged status, and then simply refuse to grow any further. The aspiration, therefore, also acts as a barrier to SME’s. I think we need to find a better way forward.

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