The importance of increasing the numbers of SME’s supplying to the UK government is of critical strategic importance, yet in practise the numbers winning government contracts remains small. This article explores why this is and what can be done to increase the numbers of smaller businesses winning contracts.
Francis Maude MP has an aspiration that they “ would deliver 25% of our central Government procurement spend through SMEs by the end of this Parliament”. Lord Young reinforced this aspiration with a subsequent report highlighting the needs to drive improvements via procurement with particular emphasis on facilitating further SME access.
So why the focus on SME's?
SME's are a crucial engine for growth: 99.9% of the UK’s 4.9 million businesses are SME's. SME's also drive innovation and help ensure markets are competitive. From a local government perspective, many are small locally based firms so money spent with them is more likely to be circulated in the local economy. Hence the reasons for supporting SME’s are compelling.
Yet when viewed through the lens of ‘suppliers to the public sector’ they are severely under represented. The reasons for this are all to clear. For most engagements above a certain threshold the contracts need to be published so as to allow the market to participate. However, most time pressed SME's believe procurement exercises are too bureaucratic, too time consuming and too complex for them to even countenance participating in. They simply view the odds of success as being too slim to even warrant looking for opportunities.
Contract sizing and tender design also impact participation rates as they may not have the capacity to supply what is required. For example, in recent years, there has also been a tendency in procurement towards collaboration and (demand) aggregation as a means to elicit much sought after cost savings. However, this approach works against small suppliers, and narrows the supplier base (often to a few large providers who can then behave opportunistically). Wearing my ‘economics hat’ for a minute; creating an environment which reduces the competitive set and facilitates a 'winner takes all' approach leads to the creation of monopolies. And one does not need to be a student of economics to understand why this is not ideal.
Facilitating Greater SME Access
Successive UK governments have recognised that placing SME access at the heart of their procurement agenda is of vital importance. However, the steps needed to deliver same have been less assured. In some instances subcontracting has been viewed as a good solution. But from an SME perspective, the value and type of work subcontracted is often lower value less attractive work, and they can also suffer from payment delays given the extra chain in the process.
Why not strive to have more SME’s win parts of contracts in their own rights?
The key here is to recognise that some spend categories are suited to having multiple suppliers, while others are not. Extra suppliers will need to be managed, and internal resources impact on the ability of local government to manage additional suppliers. However there is a nuance here, I am not advocating that the supply base jumps from 1 to 10, just that aggregating demand into ‘one lot’ so that it is a ‘winner takes all scenario’, plays into the hands of larger firms and creates an environment where they can (and often do) behave opportunistically.
The Political Will is There
The good news is that many of the issues SME's face when looking at procurement opportunities are being gradually eroded. Leadership in this space is strong with Francis Maude, Lord Young and Stephen Allott (UK’s Cabinet Office Crown Commercial Representative for SMEs) all aligned in their determination to solve some of the issues SME’s face in terms of securing access to government contracts.
Many changes are beginning to take place as government departments weary from a succession of problems from large suppliers behaving opportunistically, recognise the need to take some urgent action.
G-Cloud is one example of a much lauded framework from which the government can procure IT services on a much more competitive basis by allowing government to procure in a way that “encourages a dynamic and responsive supplier marketplace and supports emerging suppliers”. In effect, this shifts procurement to a Software as a Service (SaaS) pay-as-you-go model rather than rely on large system integrators (SI’s) build over engineered and cost prohibitive solutions.
Within the procurement process, Pre-Qualification Questionnaires (PQQ’s) are becoming less onerous and they have been removed for almost all central government contracts below £100,000. Smaller changes that also benefit SME’s; include a greater emphasis on early notification of contracts, and the increase in supplier awareness days.
But what else can be done?
In many respects, Stephen Allott hit the nail on the head when he declared ‘aggregating demand is sensible but it shouldn’t necessarily lead to aggregation of supply’ . There is a very subtle nuance here that can get missed but which can have a profound impact on procurement outcomes. Tender design can play a huge role in the outcome. While aggregating demand can help drive efficiencies through economies of scale, aggregating the supply also plays into the hands of the few large suppliers.
Breaking demand into smaller lots represents a great starting point. (Ironically emerging EU procurement proposals encouraging lotting again aligns with this philosophy and approach.)
From here smaller suppliers can then bid on lots that they are particularly strong and where they are more likely to have the capacity to service the contract.
Medium players can be encouraged to bundle and package bids and offer discounts that ratchet up as they win more business. The only concession the procuring body has to make is to be willing to accept an outcome with more than one supplier. While this may not work in certain spend categories it should work in most. (On the other side I am not advocating having tens of suppliers either).
Technological Advances can play an important part
The one challenge with this approach is that it can be more complicated to evaluate. However, using innovative procurement evaluation software like that which is offered by Keelvar, those procuring can procure much more efficiently while also facilitating greater SME access.
On evaluation the Keelvar software application can run through the thousands of permutations resulting from an increase in the supplier base, and the addition of the various conditional discounts these suppliers offer. This can all be done at the click of a button, and the various conditional discounts invariably lead to a more efficient outcome.
Under this approach smaller players can bid aggressively on numerous lots (while adding side constraints signalling the maximum number of lots they can service given their capacity constraints). The procuring body can add constraints along the lines that ‘no one winner can win more than 60% of all business’ or ‘we want no more than 2 suppliers to win’. This approach facilitates greater SME access, while also driving additional efficiency gains (typically in the range of 5-15%).
In other words, aggregation of demand married to disaggregation of supply can drive better outcomes where SME’s can play a productive role.
Those familiar with Redfern Travel who won a lot in the central government’s travel management tender (Redfern Travel Limited was awarded 4 year contract in November 2011 to deliver national travel services to government) will note that examples remain few and far between.
"We split Government travel into two lots allowing the SME Redfern to win a contract for domestic travel. What’s more they offered a price that is a saving of over 70% compared to current costs- saving us over £20 million in four years." Francis Maude
At Keelvar we believe that technology will play a more important role moving forward and that examples like Redfern will become more common.
We believe that SME’s can play a more meaningful role in the procurement of goods and services in the public sector space be that at local or central government level. A report by the Federation of Small Businesses, ‘Local Procurement: making the most of Small Businesses’ highlights that in excess of 90 per cent of local authorities are taking action to assist local SMEs. Processes have been simplified and contracts have been broken into lots.
This new approach does not need to be as a trade off against cost nor does it mean more work for procurement officers. In fact, it means the opposite, broadening the supplier base even slightly can produce more efficient outcomes. Using tools like Keelvar’s can save you time evaluating outcomes, as the most efficient outcome is computed at the click of a button. But this article is not about the software, it is about recognising that there are ways that SME’s can actively participate in many procurement opportunities. And we all agree that is something to continue to strive for.