UK Government’s Spending with SMEs – NAO Report Hits the Mark

The National Audit Office issued a report this morning titled "Government's spending with small and medium-sized enterprises". It considers the progress around meeting the targets set by Ministers for UK central government procurement spend to go to smaller firms (SMEs). The original target was 25%, set in 2010, and that was reportedly achieved last year. The target is now up to 33% for this parliament.

We tried to get an advance copy of the report but were told in no uncertain terms that would be "breach of parliamentary privileges". As we don't fancy getting hung, drawn and quartered on Tower Hill (we think that is still the punishment for upsetting Parliament), we backed off pretty sharpish. So this is very much an initial view on the report, having had just an hour or two so to consider the contents.

We won't go into the whole question of whether supporting SMEs is actually a good idea in itself, although that is not as simple a question as it might sound. NAO takes as read the official set of policy goals behind the whole concept of promoting SME usage, which is that SMEs can offer more flexibility, better value for money and stimulate competition in public service delivery. Note that the policy goal is not to drive employment and economic growth in the UK through supporting dynamic, innovative small firms, as some might think.

But there is another really big strategic question here about the whole concept of trying to support SMEs. Is it the outcomes - so 25%, 33% of spend, or whatever number you want to achieve - that matter? Or it is the actual actions that are taken to open up the market for SMEs that are important, whatever the subsequent outcomes might be?

In other words, if we take lots of positive steps to encourage SMEs, remove barriers to entry and barriers to bidding, educate and support these firms, disaggregate contracts and define smaller "lots" to meet our needs, is that enough? Should government be happy to describe that as their success, even if the outcome might be that SMEs don't actually come through and win a higher proportion of contracts and gain more spend? Alternatively, if we hit the target, is that all that matters - even if we don't actually in truth do very much?

It is the need to hit the targets that has led to the highly dubious tactic of counting "spend in the supply chain" (the money that prime / first tier suppliers spend with SMEs themselves) towards the target. In this area, as in others, the NAO report is scrupulously fair. It does not perhaps examine how accurately prime contractors are measuring their spend with SMEs - data that then gets incorporated into the government reported figures. That indeed is about the only weakness we can see in the report at first sight. But it does point out that even if SMEs are being used by primes, that in itself does not necessarily promote better value for the public sector - and has other issues too from an SME perspective.

The report contains a very interesting section on the conflicting priorities which may constrain using SMEs, such as reductions in commissioner capacity, which has tended to drive more use of larger prime contractors.

It is also very good on the data and reporting issues. It highlights that in five years, Cabinet Office has measured SME spend in four different ways! It suggests that a bit of stability might be in order now. It also points out that the baseline back in 2010 was so unreliable, we can't be certain that spend with SMEs increased at all during the last Parliament. It may well have done, but we cannot be certain as it may just be a result of the different measurement approach. However, it is reasonable to say, as the report does, that measurement has improved over time and there does seem to be a desire in Cabinet Office to improve the methodology further.

In terms of hitting the target, the NAO is doubtful if the 33% can be achieved unless there are major changes in MOD. That department now accounts for close to 50% of all central government spend, so plays a huge role in the overall figures. Even if we include the spend through the supply chain element, it is hard to see that MOD and its huge prime contractors can suddenly increase the amount they spend with SMEs by 30% or more, which is probably required to hit the target.

The report is also interesting when it looks at whether those underpinning changes to make life easier for SME suppliers and potential suppliers have worked. Whilst actions have been taken, such as the introduction of Contracts Finder, the NAO work found only a limited sense amongst actual SMEs that they were finding winning work (or even trying to do so) easier than previously.

Overall, at first sight, this appears a very balanced, insightful and thought-provoking report. We will come back to it again and look in more detail at some of the discussion, the findings and perhaps most importantly, the recommendations.

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