The Oligopoly strikes back - Government spend with largest suppliers increasing, SME spend shrinking

The government’s spend with some of the market’s largest suppliers has steadily been on the increase since 2014/15. Since then, the government’s spend with SMEs has also begun to shrink and is on the decline.

It could be said, as was predicted a couple of years ago, the Oligopoly is striking back.

The trends and data are revealed in a new report by influential think tank Institute for Government (IfG), which has conducted an analysis of the scale and nature of contracting across UK government. The report is wide-ranging, but the information on where government spend is going is particularly interesting.

To address the headline of this article, the Oligopoly was a term thrown around a lot in the early days of the creation of the Government Digital Service - to address the imbalance in procurement spend with a select few, large suppliers, which were also typically underperforming. The likes of Liam Maxwell and the leaders of GDS were often quoted on how the ‘Oligopoly’ needed to be dismantled and that more power needed to be given to SMEs and brought back into government departments.

Whilst some disputed that the term ‘Oligopoly’ in itself was unhelpful - given that a lot of these suppliers are strategic to the delivery of government services - it can’t be denied that the intention was good. It was all about giving these companies, which had made billions over the years, sometimes for doing very little, a wake up call.

And for a while, it seemed to be working. New procurement mechanisms, such as the G-Cloud, spend controls and new targets forced government departments to rethink how they were spending the taxpayer’s cash.

The data

IfG’s report uses data published by the government on procurement spend for different types of supplier: strategic suppliers (the largest companies that receive over £100m a year) and SMEs. It notes that whilst there are difficulties in collating and analysing the data completely, it adds that the “trends will be broadly accurate and provide the best insight available”.

The report explains that there are currently 28 strategic suppliers, including the likes of BT, Capita, G4S, Microsoft, Serco and Vodafone. It states that strategic suppliers are winning a “large amount of government business”. For both central and local government, the proportion of published procurement spend has grown over the past few years.

Take a look at the below graph to see the trends. You can see that between 2012/13 and 2014/15 that spend declined by a few percentage points. Since then, spend has increased significantly.

IfG adds that whilst this doesn’t necessarily indicate that contract sizes are getting bigger, it may suggest that larger companies hold an advantage. It states:

“It may be that strategic suppliers have been particularly aggressive when bidding for contracts, lowering their prices to win business. Indeed, as discussed below, some of the strategic suppliers with most government business have struggled to turn a profit in recent years.

“It may also be that the structure of contracts or bidding processes increasingly favours larger providers. For example, it is easier for the largest firms, with big in-house contract bidding teams, to respond to tenders with short submission deadlines. Smaller suppliers, on the other hand, can struggle to manage payment-by-results contracts due to lower cash flow.”

With regards to which departments are spending the most with the larger, or strategic suppliers, the report notes that Defra, DWP, HMRC, the Home Office and the Ministry of Justice account for more than a third of this spend.

For example, 67% of DWP’s spend is with these strategic suppliers. HMRC stands at 55% of its spend. On the other end of the scale, DfE, DECC, BEIS, DCMS and HMT are all spending below 5% with larger suppliers.

A swing away from SMEs

As previously reported by diginomica/government, Whitehall’s ambitions to reach its spend targets with SMEs appear to be flailing.

In 2010, the coalition government set a target for 25% of central government procurement spending to reach SMEs by 2015 - both through direct spend and indirect spend via the supply chain. It implemented a range of initiatives to reduce the barriers face by SMEs, including the creation of a Crown Representative for SMEs and abolishing pre-qualification questionnaires for certain tenders. Frameworks on the Digital Marketplace, which transparently present SME services alongside those of larger suppliers, also aimed to help buyers in government more easily find smaller businesses hoping to work with government.

The Coalition Government met its target a year early, reporting that 26% of its spend reached SMEs in 2013/14. This increased to 27% the following year. Because the original target was reached, government increased its ambitions to 33% of all spend by 2020 (which was later changed to 2022).

The IfG report states that “meeting this will be a challenge”. It adds:

“Central government spending reaching SMEs peaked at 27% in 2014/15, before falling to 24% in 2015/16 and then to 22.5% in 2016/17.”

The below chart illustrates this:

My take

It’s worth stating that I do think strategic - or larger - suppliers have a role in government. It’s naive to state that they’re all bad, when a lot of them are underpinning critical public services. However, it’s also worth asking the question, why has the trend of spending more with SMEs, away from larger suppliers, started to swing the other way?

For me, there are two stand out things that have happened since 2015 that may have played a role in this. Firstly, Brexit. The UK’s exit from the EU is proving to be a distraction for departments and there is general panic about how to get new systems in place in time for god-only-knows scenario we may end up with in the future. I would guess that larger suppliers are benefitting from better the devil you know buying decisions when there’s so much uncertainty elsewhere.

Secondly, the centre has been weakened. We have discussed this at great length, but I would guess that the primary reason that the trend is being reversed is because of a weakening in authority of the Cabinet Office and the Government Digital Service. For those that what to understand why this is, I’d take a read of my write up of Tom Loosemore’s recent appearance in front of the Science and Technology Committee, providing evidence on the inquiry into digital government (Tom one of the founders of GDS).