NAO on Government Spend with SMEs – the Barriers to Business

We have read the NAO report “Government’s spending with small and medium-sized enterprises” more thoroughly now. (See our initial comments here). We would have been tougher on the problems inherent in measurement of SME business in the supply chain – not just how those firms do the measurement, but we would point out that if you count the spend Capita makes with second-tier SMEs towards the target, then you should really remove all the spend given to Redfern Travel (an SME) that goes out to huge second-tier providers that aren't SMEs (hotel groups, rail firms). Surely that must be logical?

However, in general the report is even more impressive than we thought at first sight. And that's because read carefully, it is really asking government to think a bit harder about what lies behind the policy goal to give a larger percentage of spend to SMEs. That may well in turn lead to some different actions around working with SMEs.

The stated policy goal is really about stimulating competition and getting better value from the market through using small firms who can offer excellent value and performance. So the NAO says that there needs to be more thought about in which industries and sectors this really going to be most feasible and useful. We will come back and pick up on this point in more detail in our next article on the report.

The report is also strong in terms of identifying some of the constraints and barriers that SMEs face. This is a topic we have commented on many times; indeed, 18 months ago, we wrote an article on our Public Spend Matters Europe website. We made eight points related to why SMEs struggle to win business. Perhaps NAO read this, as they certainly reflect some of our points. Here are three we made then.

  • In many countries, the austerity drive means more centralisation of procurement and aggregation of volume in order to drive better value (in theory at least). Central procurement bodies have become more powerful in certain countries. Unless those doing the centralisation are very careful, this tends to favour larger suppliers, and contracts end up being too large for SMEs in many cases.
  • Several years of spending cuts in most countries and certain spend sectors has squeezed many SMEs out of public markets already.
  • The same spending squeeze has reduced the procurement resource available within many contracting authorities around Europe. So they have been looking – not unreasonably – for ways of reducing workload. In the procurement space, that is leading to either greater use of collaborative deals or more use of prime contractor-type arrangements.

So how does NAO pick up on these and other points around barriers? Here is an (abbreviated but substantial) extract from their report.

“Commissioners must balance the government’s aspirations for using SMEs with other conflicting priorities… The SME agenda is only one part of significant ongoing changes in the way the government does business with its providers. Some of these trends may make it harder for SMEs to win contracts as commissioners seek to balance different government priorities in decisions about contracts, including:

Reductions in commissioner capacity

Our recent reports have highlighted gaps in government’s commercial capability. Most government departments plan to make further cuts by 2020, which is likely to affect capacity in commercial teams. Departments’ efforts to improve the way they manage contracts has focused on larger contractors. Government has not yet set out how it will manage smaller contractors ...

Greater use of government’s collective buying power

In many areas of government, particularly for common goods and services (such as office supplies and training), government is increasingly merging the spending of different departments and using its collective buying power to simplify procurement and cut costs. This allows it to standardise products and services so providers compete on the basis of price rather than quality… This can limit opportunities for SMEs that rely on their specialist services to secure business …

Pressure on departments to make savings

Government’s austerity policy means departments will need to achieve further cost savings by 2020 …When delivery is outsourced, commissioners can seek to transfer most of the financial risks of delivering the contract to the provider, by agreeing a fixed price at the start of the project. However, it means providers must be willing and able to take on financial risk. SMEs often do not have the resources or financial support (e.g. from a parent company) to be able to do this …”

The net result of these trends, says NAO, is that it is still difficult for SMEs to win direct business and “consequently, most SMEs working on government contracts are part of the supply chain and it is not clear that this will lead to increased competition and innovation".

This is the point we have made for some time - that spend down the supply chain is just not the same as SMEs dealing directly with government. Indeed, NAO points out that we just can't know whether any benefits are being derived from this second-tier use of SMEs. These are valid and fundamental points that lead into the recommendations made by NAO – more on those to come.

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