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The government is trying to woo SMEs..

Will it work?

New Statesman
The government is wooing SMEs. Photograph: Getty Images

Amid all the heat and light of the changes this government is implementing, one has received surprisingly little mainstream coverage. And that is the big pitch it is making to small and medium-sized enterprises (SMEs) as part of efforts to woo them into bidding for government work.

When it came to power, this government announced an aspiration for 25 per cent of central government procurement spending to go to SMEs. Indeed, this goal was even set in stone in the Coalition Programme for Government, which is peppered with references to start-ups and small firms.

The government claims that funnelling more of its money to SMEs will provide it with access to the latest innovation, stimulate growth and jobs, and perhaps most importantly, reduce the amount spent on public sector contracts.

Aside from the stated reasons, there are other sound motives for championing SMEs in a recession, suggests market-watcher Stephen Roberts of Kable. "The SMEs which politicians dream of as replacements for giant global IT firms are British as well as innovative. Procurement is restricted by European legislation, but championing SMEs is the acceptable face of protectionism."

And, true to its word, the government –in particular the Cabinet Office- has been beavering away at the policy ever since.

It has pushed the adoption of "lean" procurement practices across Whitehall, set up a "Mystery Shopper" scheme where businesses can raise concerns if they notice unfair practices in public procurements and launched "Contracts Finder", a website which lists past, current and future contract opportunities in the public sector.

Indeed, it even recruited someone whose sole job is to focus on championing SMEs in government- with the rather grand title of "Crown Representative for Small and Medium Enterprises".

But how successful has it been?

Figures released last week show that the central government departments spent a total of 20 per cent of their budgets with SMEs last year.

However, of that 20 per cent, only just over half (10.5 per cent) went to SMEs directly. The remainder- 9.4 per cent - filtered down to them indirectly (via larger companies subcontracting some of their work to smaller companies).

And the indirect figures do come with a health warning- they are estimated numbers taken from quarterly supplier surveys, and only started being collected in the last couple of years- so we have virtually nothing to benchmark them against.

So looking at just direct spending with SMEs, this increased from 6.5 per cent in 2009/10 to 10.5 per cent in 2012/13. By that measure, Whitehall has increased its direct spending with SMEs by a respectable 4 per cent, with 0.5 per cent of that increase being achieved last year.

So if you do choose to include indirect spending, the government spent 20 per cent with SMEs last year and it sounds like it is indeed, as it claims, "on track" to hit its 25 per cent target by 2015. If you don’t, it has rather further to go.

And it is not an easy task. Departmental resistance is strong, warns Roberts. "The Civil Service is risk-averse, and SMEs carry risks that larger suppliers do not. The collapse of IT services firm 2e2 this year left a number of public sector clients in difficulties. Pragmatic concerns like this can trump political pressures."

However, there is no denying the level of aspiration, and it seems the government is stepping up efforts to advance the SME cause, for example by appointing lead ministers and senior civil servants to drive the agenda forward across the 17 government departments.

And nowhere has the push to buy from SMEs been more pronounced than in the area of technology where a new aspiration is for 50 per cent of spending on new government IT to go to SMEs.

The government has admitted that it doesn’t actually know how much of its IT budget goes to SMEs at the moment, but considering a report in 2011 found that 80 per cent of central government IT work was undertaken by 18 suppliers- all large multinational firms- it’s safe to say the 50 per cent goal is highly ambitious.

Those working on achieving this transformation are keenly eyeing up a tranche of the biggest IT contracts due to expire in the next two years, viewing this as an opportunity to break them up into smaller, more SME-friendly contracts, a process known as "disaggregating".

In addition, the government is keen to push a programme called G-Cloud, which promotes public sector adoption of cloud computing, as a vital route for smaller companies trying to get into bidding for government work.

At the heart of G-Cloud, which was launched in 2011, is the "CloudStore", an online catalogue (think of it as Amazon for government contracts) containing details of each of the suppliers on the framework, and their services. The list is updated at least twice a year with the aim of making sure the content is kept fresh and accommodate the rapidly-changing pace of technology.

The programme has seen its sales gradually tick upwards, from £4m in December 2012 to £11m in March 2013, £18m in April, £25m in June and £31m in July.

And it can boast some pretty impressive statistics, with SMEs winning 56 per cent of total sales by value, and over 60 per cent of contract wins.

With less than two years to go until the next election, many in government are aware that time is running out for them to cement SMEs into the government procurement mix.

The bottom line is that there can only be one winner. If SMEs are to gain more business, the government’s traditional suppliers will have to cede some of their Whitehall territory.

Indeed, some SMEs are rubbing their hands in glee at the prospect of long-term, inaccessible government contracts running out over the next few years. Already the Cabinet Office, led by Minister Francis Maude, has weighed in with rhetoric saying contracts will not be renewed.

The government is preparing to go to battle on SMEs behalf- whether they will win remains to be seen.