Government direct SME spend goes down – but do the figures actually tell us very much?

Profile picture for user ddpreez By Derek du Preez February 26, 2015
The breakdown of SME spend is a useful guide, and provides an element of 'stick' for departments to think about procurement, but are the raw numbers that useful?

The UK government has released its annual breakdown of figures detailing how much it spends with SMEs, both directly and via its supply chain (i.e. through large suppliers).

On the one hand the total SME spend now reaches £11.4 billion, meaning that the government has hit its target of more than 25% of total procurement spend going to smaller businesses.

But on the other hand, the amount of direct spend with SMEs has gone down since last year, which raises questions about how much the government is actually moving away from its large outsourcing contracts with big suppliers, towards a more agile working environment.

The direct spend figure – which has dropped from £4,577m (10.5%) last year, to £4,489m (10.3%) this year – is particularly pertinent, given the latest controversy surrounding Capita's dealings with SMEs, with accusations that the large SI is short-changing smaller businesses out of millions of pounds.

However, having looked at the breakdown of figures that is available, which details each central government department's total procurement spend, split into direct and indirect spend with SMEs, it soon becomes apparent that there is a lack of detail in the numbers that doesn't take into account the complex challenges facing Whitehall at the moment.

But first of all, let's take a look at what has been put out by the Cabinet Office.

For the year 2013/2014, central government spend with SMEs stood at £11.4 billion, which equates to 26.1% of all government spend. Some 10.3% was spent directly with SMEs, whilst 15.8% was spent indirectly.

The government has also launched a refreshed Contracts Finder website, which claims to have a much better search function, including the ability to search by location. The Finder covers current and future public sector contracts above £10,000 in central government and above £25,000 in the wider public sector.

New legislation has also come into force today, which is aimed at making doing business with government easier for SMEs. It requires:

  • everyone in the supply chain must comply with 30 day payment terms, including suppliers and sub-contractors
  • public bodies must publish an annual late payment report, making their accountability more transparent
  • the bidding process is simpler across the wider public sector – complex forms, such as Pre-Qualification Questionnaires, are now abolished for low value contracts
  • the procurement process for public sector contracts will be quicker

Minister for the Cabinet Office Francis Maude said:

As part of our long-term economic plan this government is overhauling public procurement to open things up to businesses of all sizes. I am so pleased that our reforms have ensured that innovative benefited from £11.4 billion of business last year alone. Over a quarter of our spend now goes to but we know there’s much more to do, and these new reforms show just how determined we are to finish the job.

Piers Linney, Co-CEO of Outsourcery and member of the government’s panel, added:

We know government business has been incredibly complicated and costly to bid for in the past, and that was reflected in the tiny proportion of spend going to. This new legislation and the new site create a huge opportunity for businesses with reduced cash flow risk. They need to educate themselves on their rights under the new legislation and really get under the skin of Contracts Finder to make sure they can seize that opportunity.

And here's the Whitehall breakdown of SME spend by each department:

Governemnt spend with SMEs
Government spend with SMEs 2013/14

Now, let's deal with the complexities that I think create more questions than answers for these figures.

First of all, many will be dismayed by the fact that direct spend has gone down, instead of up, since last year. And I partly agree. However, the amount by which the direct spend has gone down, in comparison with the total multi-billion pound spend with SMEs, is almost insignificant – 0.2%.

That doesn't mean that it's okay that direct spend is stalling or remaining stagnant, I just think talking about it 'going down' isn't entirely fair or accurate. Instead, we should be asking the question: Why has direct spend with SMEs barely increased since 2010/2011 when the coalition government's SME measures were first introduced?

My guess would be that the measures introduced allowed for departments to grab some of the low hanging fruit – via tools such as the G-Cloud and the Digital Services Framework – but the outsourcing arrangements many are tied into for the next year or two don't allow for much space for smaller companies to get a look in.

You get some indication of this from the spend chart above. Some of the departments with large outsourcing contracts – e.g. HMRC, DWP, the Treasury – all of which are making plans to transition away from the agreements, have very low direct and indirect spend with SMEs. This is just my interpretation, but I would guess that these departments have little control over where their spend goes if they are still tied into multi-year outsourcing agreements.

Some departments have between 30% and 60% of spend with SMEs, whilst others are struggling to reach 20%. Why? Again, my guess would be the outsourcing contract, but there is little detail of this available and is just an interpretation.

There could be a cultural problem at play, or a fear of dealing with multiple, smaller contracts, but my guess would be that the departments with less spend are still in a transition phase from single outsourcing provider to multi-source model.

Also, one of the criticisms that is often thrown at the G-Cloud is that the £400m+ spend to date is almost insignificant compared to the billions being spent in total each year. However, the whole point of the G-Cloud and spending with smaller providers is that they often can provide a quality, agile service, at a fraction of the price. Therefore, spend with an SME is likely to be a fraction of the price of the service being provided by a large provider elsewhere in Whitehall.

Also, the figures don't really give us an idea of how much of the SME spend is as a proportion of new spend compared to how much of the spend is tied up in existing multi-year agreements.

I'm not trying to make excuses for government here, because I do think the figures provide the Cabinet Office with a stick to go and force departments to get more of that spend with smaller companies. However, I do think it is important to remember that we are in a TRANSITION phase. Four or five years is nothing in the grand scheme of things and we are waiting to see how departments move away from their traditional models, to their new multi-source ones.

I believe a list of figures, without context of what's happening in each department, without evidence of new spend versus existing spend, actually tells us very little. If we don't see spend increasing as these outsourcing contracts come to an end, then that's a worry.

My take

Too soon to tell...