Government SME procurement needs Government health warning!

In this comment piece, Bev Hurley, Chief Executive of YTKO Group, discusses recent government figures on spending with SMEs and questions what SMEs looking to target government contracts can really do to be successful?

Reading the recent National Audit Office report on Government spending with SMEs, one might want to mark the report “must try harder”. I think it needs to try a lot harder.

Having decided that it had achieved its aspiration that 25% of procurement spending would reach SMEs by 2015, the government set a new target of 33% by 2020. It says it wants to make it easier for SMEs to do business with the government.

Yet the NAO reports 60% of the spend with SMEs is via large private contractors who use SMEs in their supply chain – so that’s not actually government spending then – and nearly half is by the MoD. It can’t even be certain whether the alleged increase in SME spending to 2015 is actually real, notes that the government has used 4 different ways to measure its spend in the last 5 years, and still don’t know how many SMEs work on government contracts.

SMEs are defined as companies employing fewer than 250 people, and there are around 5.5 million of us in the UK. But the vast majority of these small and medium enterprises, around 96%, employ 9 people or less, and 75% of them are sole traders.

But this vast majority aren’t the ones that government departments wants to deal with – too risky, too small, less financial resilience, and it’s just much cheaper and simpler to manage one large prime organisation, especially when you’re under pressure of budget cuts. My experience in both central and local government bidding over the last decade shows that SMEs thinking about this area as a route to growth must really see beyond lip service.

As the NAO report succinctly points out, the capability of commissioners who lack commercial expertise (most of them, in my experience) can be ‘more risk averse and less likely to seek out innovative approaches’ – one of the key advantages of using SMEs. There are lengthy tender documents, for example, 50 pages or more for the current procurement exercises for business support using European Strategic Investment Funds (ESIF) being managed by the Department of Communities and Local Government (DCLG). Much of this is about compliance and risk in one way or another, and very little about outcomes and impact and innovation.
SME’s discover that there are lots of conflicts of interest, particularly among Local Authorities, Local Enterprise Partnerships and their subcommittees, ‘old boys networks’, and lack of transparency of information and decision-making, especially around ESIF bid assessment. This is actually done by invisible committees, most of whose members have no business expertise and wouldn’t recognise innovation if they tripped over it in the street. Yet requesting innovative bids is standard practice.

Bidders can be told that previous experience/great track record/best practice can’t be taken into account (e.g. DWP process for New Enterprise Allowance phase 2 contracts), as this means there’s not a level playing field for new bidders! In that example, after the first round, there was also an online auction to drive the price down – really fair for SMEs, no? You’ll learn that competitors win contracts with half the outputs that you forecast but at the same price, and even that you may often be bidding against local government departments themselves!
And finally, there’s rarely any practical or detailed feedback from any commissioner as to where your bid went wrong; of course, often it wasn’t wrong at all – they just wanted to give it to someone else. So you’ll get spurious comments like “another bid had a better strategic fit”, or “further clarity on certain areas would have been helpful”, or there were thousands of marks and you just lost by a handful. After weeks of work, this sort of response is hugely gratifying for an SME.

However, if you’re successful in winning, for example, an ESIF contract – which are strictly not for profit – it actually gets worse. You will be requested to justify in writing why you wish to make a monthly claim to recoup your defrayed expenditure, which “goes beyond cashflow reasons”. And then you will be refused. A quarterly claim process means cash-flowing DCLG for about 5 months – hardly the actions of a government that wants to encourage SMEs!
It took a year of effort to get the government to overturn a decision by this same department who had decided it would no longer provide references for its previous suppliers looking for business elsewhere. As references are frequently a requirement to get new public contracts, this anti-SME stance was entirely unacceptable.

So, what can be done? You can appeal if there was a procurement error – but you won’t of course, as that means you’ll definitely never get any business in the future. You can complain about conflicts of interest; ditto. You can submit a Freedom of Information request and go to the local press; ditto. You use the government’s Mystery Shopping Service to investigate afterwards, which is anonymous so at least bidders have some protection.

Alternatively, you can try negotiating with the large ‘Prime’ contractors to get into their supply chain – just beware they don’t try to pass down the same payment terms, or squeeze you so hard on price to maintain their own profit levels that it’s unsustainable. That they’ll take a handsome additional fee out of the contract price just for managing you is the price that the government has chosen to pay to avoid directly procuring from small and medium enterprises, the lifeblood of our economy.

In conclusion, government procurement is not “caveat emptor” but ‘caveat venditor’ – seller beware!

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