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By | Kat Hall 31st May 2016 09:04

UK.gov's promise to pour cash into SMEs was just hot air

Professor lays spending blame at Crown Commercial Services' door

Analysis Every government has always claimed to be the friend of SMEs – and with 5.2 million of them in the UK it makes an easy vote winner. But promising to do more business with smaller providers and handing over cold, hard cash are two very different things.

Earlier this month the National Audit Office reported that what little steam was left in the government's promise to pump more of its £45bn annual spend through SMEs has evaporated.

Despite its promise to spray 33 per cent of its cash over small providers, the watchdog found: "We continue to see larger providers dominating; for example, the government’s top five IT providers received over half of government’s total spending on contracted out IT."

Government figures shared with The Register showed that in 2014/15 central government splashed £6.3bn with IT suppliers for the year 2014/15 – with 42 per cent going to just three suppliers.

Previous claims that the government aced its previous SME targets have also been trashed by the watchdog, not least because of its dubious methodology of counting indirect spend with large suppliers.

According to Professor Andrew Cox of the International Institute of Advance Purchasing and Supply, the problem lies with the government's procurement body, the Crown Commercial Service.

CCS' remit specifically states it will "work closely with the wider public sector to ensure that the benefits of aggregation and centralisation are shared across the public sector to maximise savings for the taxpayer." But that practice often locks out SMEs.

Cox says that while that approach can generate short-term reductions in cost, it can also create a number of problems for users and may not always be the most effective approach to reduce costs for some categories of spend.

He notes that the disaggregated structure of the government militates against CCS' addiction to aggregation – as seen in its recent mega framework for commodity tech valued between £2bn and £4bn.

Many of the frameworks are underused because diverse bodies such as the NHS prefer to cut their own supplier deals, he says.

"CCS has taken a standard view to lower costs by aggregation. The government has set up a body raison d'être to aggregate. But CCS has no executive powers to force bodies to put anything together."

When they are used SMEs rarely get a look in, as they are designed to attract large suppliers. Not only that, but they often fail to yield value for money, he says.

"It is true that higher volume can lead to better deals but only in certain circumstances. Even if could have a central body with power and responsibility to make decisions effectively, aggregation does not always lead to best cost," he says.

"Certainly it's true if you buy bulk chemicals, for example, you will get a lower price particularly if your demand fits with the high capacity of the supplier. So everyone thinks aggregation leads to economies of scale – but that is not always the case."

Buying locally from smaller suppliers can be much more cost effective, he says. That can even be true for a relatively commodity-based purchase. "Many years ago I worked with IBM to help it source multiple local deals for paper – rather than use one supplier."

He adds: "People talk about economies of scale, but big companies also have diseconomies. They employ people with large salaries that manage complex structures of the companies who are flying all over the world and staying in five star hotels," he says.

"CCS wants to aggregate, that is why it ends up with the same suppliers. Yet there is no evidence that these companies are more cost effective. For example, there are plenty of small software companies with bright young people who do not have diseconomies of scale.

"I'm not saying you can’t get better deals sometimes if by aggregation. For example if everyone is buying a product with a specification you can't control such as Microsoft Office. Then it makes sense to come together and negotiate. But the point is buyers need stop taking a one size fits all approach."

Cox believes the G-Cloud has been a successful portal for allowing government to buy more intelligently, giving notoriously risk-averse public sector bods the opportunity to dip their toes in the water with smaller suppliers.

But its total sales of £1bn, is a drop in the ocean for the public sector's £16bn plus annual spend on IT. "The downplaying of G-Cloud approach frustrating," he says.

"There is lots of evidence from experience that disaggregation and open markets to suppliers provide better value for money. Sometimes that will include large companies and sometimes they will be small; sometimes buyers should aggregate and sometimes they shouldn't."

He says: "What we need is CCS is to work with the G-Cloud approach and understand what the relative benefits are to the market – they need to look at lot optimisation. The current approach does not amount to joined-up thinking." ®

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