SMEs Archives - Bad Buying

Congratulations to Shirley Cooper, CIPS Past President, who has become the UK government’s “Crown Representative for small businesses”. In that role, she will represent the interests of smaller firms, particularly in terms of their ability to win government contracts. “She will work with the Cabinet Office’s Small Business Advisory Panel, departments, suppliers and trade bodies to further level the playing field for small businesses, start-ups and social enterprises and ensure they can compete for and win more government contracts” says the announcement.

The government’s policy goal to increase the amount of spend going to SMEs is a long-running failure. I worked with Sally Collier of OGC on the implementation of the first review of small business and government procurement, the Glover review, way back in 2009. We recommended that there should not be a target or targets set for spend with SMEs – we felt targets would distract and take resources away from actually doing real stuff that would help SMEs. But the new coalition government disagreed, so a target of 25% was set, with no real logic behind it.

It wasn’t hit in the first few years, but ridiculously, the Tories said they would increase the target to 33% in the 2015 election manifesto, purely to say something that sounded good to appeal to the small business lobby. Everyone in public procurement knew it was a ridiculous move. But surprisingly, the Tories won the election and the target was increased. Even the Public Accounts Committee in 2016 concluded “it is not clear how the Government decided on 33% as a target or how achievable it is”.

The answer to the achievability question is that the target is impossible to hit because a few organisations dominate the overall spend figures – particularly MOD and National Highways (previously the Highway Agency). Because SMEs can’t build aircraft carriers or the M25, even if every other department does really well, the target won’t be achieved because of those big spenders.

So the government decided that the target should include second tier spend, the money big suppliers spend with smaller suppliers of their own. Of course, if you are going to add this in, then following the logic, really you should subtract the money SME first tier suppliers spend themselves with big suppliers! Anyway, many of the large suppliers to government don’t really track their own spend with SMEs. I suspect when government asks its first tier suppliers for the data, many of them just make up the numbers.

So in 2021/22, the total spend with SMEs went down from 26.9% to 26.5%, including that indirect second tier spend. Direct spend went down more dramatically from 14.2% to 12.3%. But what happened in 2022/23, you say? We don’t know yet. The data tend to come out around 18 months after the end of the period in question, either because it is so difficult to put together or because if you publish it really late, it takes some of the potential political heat out of the report. Maybe both.

The decline may be due in part to another trend that has been reported by the National Audit Office. More spend is not competed these days, with more use of frameworks, direct awards and single supplier contracting. Whilst SMEs are on many frameworks, that mechanism makes it easy for buyers to just choose their favourite (usually large) firm.

There is talk about how the new Procurement Act will help SMEs, and to be fair, there are a couple of positive factors there. “The Act places a requirement on contracting authorities to assess the particular barriers facing SMEs throughout the entire procurement lifecycle, and to consider what can be done to overcome them”, for instance.

Tougher “rules” on prime contractors paying sub-contractors could also help if policed. A single registration system for potential suppliers is a good move for everyone (Sally and I suggested that in 2009). But the idea that the greater flexibility for buyers and contracting authorities will suddenly lead to a boom for SMEs is just wishful thinking in my opinion.

There are also a whole range of arguments around whether supporting SMEs is a sensible policy goal at all. Might it be better to support diverse, minority owned business? Or social enterprises? Or innovative start-ups? Or firms based in deprived areas? Is simply looking at size a sensible way of targeting assistance?

So really, the role of the SME Crown Rep has historically been as a figurehead to show the government “cares” about SMEs, and get some votes from small firm owners. In fact, big firms have continued to rule the roost in terms of actually winning contracts. Maybe Cooper can change that – we’ll see, but I wish her luck and hope she can have an impact. It woudl also be interesting to know how she plans to measure her effectiveness.

Without fanfare or comment, in the middle of the holiday season, the UK government recently published the data for spend with SMEs (small and medium enterprises) for 2021/2 2. This covers central departments, and some associated bodies, although the definition of what is in and what is out is not always clear. The data is given as direct spend – money that goes straight to the small firms – and indirect, the spend that goes via larger firms that then use SMEs in their supply chain.

It is not unusual for it to take over a year from the end of the period in question before data is published. That is in part because it does take a while to gather the data, but I suspect the publication might have happened sooner if there had been a positive story to tell.

But the headline number was that SME percentage spend declined in 2021/22 compared to 2020/21. The total was down from 26.9% to 26.5%, and the direct spend was down from 14.2% to 12.3%. That does not look good against the government target of 33% of spend.

Indirect spend was up by 1.4% but that was not enough to compensate for the drop in direct spend. It looks like the main reason for the overall decline was a big drop in the Department of Health and Social Care (DHSC) SME spend year on year. I suspect that is the “PPE effect” – as we know, there was lots of PPE bought in 2020 and 2021 from smaller firms. They were often crooks, chancers and friends of ministers, but they were SMEs, nonetheless.

Until the pandemic, the DHSC spend was relatively small compared to MOD and Transport – the two “traditional” big spenders. Most health spend was out in the Trusts so not captured in this data. But the huge amount of “central “ buying, on PPE but also track and trace and other projects, pushed up the significance of DHSC in the overall numbers.

In 2019/20, DHSC spend was just £3.1 billion against MOD’s £21.1 billion. But the figure shot up to £13.3B in 20/21 (MOD was £19.5B) and was still £11.5B in 21/22. In 20/21, 23.3% of the DHSC total was direct SME spend, so that made the year look better, but by 21/22 that dropped to 14.2%, pulling down the whole percentage.

I’m going into some detail there because it does demonstrate how ridiculous looking at the overall number actually is. When one factor – PPE – in one Department can skew the whole data set, it is pretty useless. But let’s go back in time and look at how this target emerged.

Supporting smaller firms was one of the first “social value” type issues government embraced. I worked in the Office of Government Commerce (part of Treasury, the UK finance ministry) as a consultant back in 2009 on the implementation of the 2008 Glov er report – “Accelerating the SME economic engine: through transparent, simple and strategic procurement”. (That link took some finding!)

But Sally Collier (OGC’s Policy director) and I didn’t really like the idea of targets for spend with SMEs for various reasons. One was the difficulty of setting sensible targets, which really needed to vary by department to be meaningful. We were interested in departments and buyers simply doing the right things, and therefore also worried that targets would mean effort going into the data, not the real action. But our advice was ignored and after the 2010 election a 25% target was set.

It quickly emerged that 25% was unachievable. The Ministry of Defence and the Highways Agency (Transport) accounted for almost half of central government procurement spend and there was no way an SME was going to build a warship or the M25 motorway. So the target was changed to an “aspiration”, a classic Francis Maude fudge, and then indirect spend was included to make it easier to hit the target.

But many of the first-tier suppliers to government have no idea really how much they spend with SMEs, so the data is pretty dodgy. Then the 25% target – which had never been achieved – was stupidly changed in 2015 to 33%, purely because the Cameron government wanted to say something positive for the “small business” lobby in their election manifesto. And 33% is unachievable too, as we’ve seen, even including indirect spend.

The other issue is whether supporting SMEs is the right target today. We have become much more sophisticated in the 15 years since Glover and now most large private firms are interested in supporting diverse suppliers, not simply small firms.

So why not shift the focus to using government procurement to support charities and social enterprises, minority owned firms, innovative businesses, firms in deprived areas or those that employ lots of disabled people? You don’t see Unilever or other admired private sector businesses defining some prospective suppliers as special just because they are small. Indeed, many SMEs are small because they want to be, or because they just aren’t very good.

But there has been good work in government over the years in terms of helping SMEs. For example, even back in 2009, MOD led some impressive initiatives to promote SMEs through their supply chain. But really, this element of public procurement policy is crying out for a refresh, a more nuanced set of objectives and – if we must have targets – something that is realistic and motivating, not a painful data collection exercise that is bound to end in failure.

Tag Archive for: SMEs

15 years of government policy failure – can Shirley Cooper change that?

UK Government Spend With Smaller Firms Declines