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Michael Keegan

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Michael Keegan is the executive director of Fujitsu UK & Ireland's Technology Product Group
By | Michael Keegan 18th May 2012 11:00

Can SMEs score those big gov contracts?

Public sector doesn't make it easy for smaller suppliers

The UK public sector spends £230bn on goods and services a year, roughly 15 per cent of the UK economy and £1 for every £7 spent in Britain. The procurement of these goods and services is a massively complex undertaking, fraught with inefficiency accumulated over successive governments.

When the Coalition government was elected in May 2010, it established the Efficiency and Reform Group to change the established culture of procurement and spending. It would centrally renegotiate major contracts to deliver economies of scale, improve project delivery – but continue to maintain frontline services to citizens despite inevitable budget cuts.

That objective has had wide-ranging implications for both large and small suppliers of goods and services, not least in the technology sector through, for example: a review of current projects underway to identify waste; a moratorium on new ICT contracts over £1m; new supplier frameworks such as PSN and G-cloud; and greater access to public sector business for smaller businesses.

The role of SMEs

But, two years on, has the Coalition delivered on its commitment to SMEs?

Francis Maude stated that, when the Coalition Government came into office in May 2010, SMEs accounted for 50 per cent of turnover in the UK economy but were winning only around 6.5 per cent of the value of the UK government’s total procurement spend of £230bn.

In a bid to end the age of the “oligopoly” of large suppliers, as he put it, his mission was to create a more level playing field for SMEs, aiming to put 25 per cent of central government spend through SMEs by the end of the current Parliament.

While we dispute the use of the term “oligopoly” – given the large number of companies that have traditionally competed for government tenders – the principle of opening up business to smaller companies is a noble one.

It would deliver multiple benefits to smaller businesses in the technology space, including value added resellers, opening the door into government where previously it has been closed. This will offer more rapid growth to existing businesses; provide opportunities to new technology start-ups; and support the drive to make the UK a hub for technology innovation being undertaken by the Department for Business Innovation and Skills.

The benefit to government, it is argued, would be a more competitive marketplace that isn’t occupied solely by larger suppliers, thereby contributing to a reduction in spend and ultimately delivering more value per taxpayer pound.

This can only be a good thing for the channel, independent software vendors and government. But all of the parties involved need to be willing to change. The government needs to accept that SMEs are incapable of taking some of the risks they have historically transferred to large suppliers. SMEs will have to adapt their approach to meet the requirements of trading with the public sector. Finally, larger companies with a long history of working on government projects will also have to adapt the way in which they tender for new public sector business.

The SME challenge

Government projects, for example the DVLA putting tax disc renewals online, are often inherently big and complicated. And that’s a reflection of the complexity of the civil service, and the technology it relies upon to maintain and constantly improve public services.

When it comes to the tendering process, there is some skill involved in completing 30- to 50-page tender forms. This is time-consuming for the SME that cannot support a professional bid team to help complete tender documentation.

Procurement turnarounds are still too long. Despite government assurances that it would reduce the length of the process, many are still taking up to 120 days and some of largest projects have taken several years to procure. That’s four months of uncertainty for the SME that cannot plan to scale up its resources until such times as a decision is made.

Payments are another bone of contention, particularly on services contracts. Payment is typically made on delivery so for the first two years, a supplier often has to operate in a cash-negative state. They only get a financial return at the back-end of the contract and/or delivery of milestones. This is difficult enough for large companies, as we know well, but it’s absolutely impossible for the smaller business to work on that basis.

There are also numerous penalties that could prove to be catastrophic for the smaller business. There are penalty payments due for late delivery, and more penalties if strict government SLAs are not met, ie, 99.9 per cent performance. There is good reason for having those SLAs in place – in terms of successful project delivery and business continuity – but they are harsh indeed for the average small business.

What next?

It’s great to know that the government is willing to open the market to smaller companies and see positive progress being made. In order to build on that progress, suppliers need to be flexible in the way that they deliver products and services to the public sector in future.

But the organisation that still needs to do the most is government itself. While the procurement process is still expensive, lengthy and risky, it will continue to deter SMEs from tendering for government contracts. They simply cannot do business in a cashflow-negative scenario where the penalty for failure is so high. ®

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