Procurement · 19 August 2015

Small companies face uphill struggle when it comes to public procurement contacts

What will it take for small businesses to be let into the Treasury?
What will it take for small businesses to be let into the Treasury?

New research compiled in partnership by Spend Network and innovation foundation Nesta has shed light on how much larger, and older, businesses dominate when it comes to winning bids for both local and central government contracts.

Statistics, using data from between 2012 and 2014, have shown that £68bn was spent during those three years. When it comes to small businesses in the first five years of operation, only three per cent of government spend was allocated to the space. This trend was made worse when only the first two years were taken into account – it stood at less than 0.5 per cent.

In an article in The Guardian, Tom Symons, a principal researcher in the policy and research team at Nesta, said the research was carried out because the success of small companies will not only produce a “positive impact” on the economy, but also help “unlock innovative solutions” to major social challenges facing the UK.

From care services to construction, and from transport to legal support, public procurement contracts provide a way for companies to access secure and regular business – helping greatly with the formative years of growth.

However, the arduous compliance criteria, and ongoing auditing, often puts small and young companies off trying to access these kind of contacts. Furthermore, on a local and central basis, governing bodies seem reluctant to place the responsibility of satisfying procurement contracts into the hands of the five million-odd micro and small businesses within the UK.

The Nesta study found that the North East leads the way when it comes to procurement spending for companies less than five years old. Over the investigated period, nearly £400m was spent by the region in this way. In second, third and fourth place were the South East, London and the East of England – all of which hovered around the £200m mark.

Central government spend when it comes to young companies under five years-old was dominated by contracts in the management and business professionals and administrative services, and financial accounting service spaces.

For small and young companies combined, the trend centred more on spending in the financial and insurance services, legal services, and management and business professionals and administrative services.

Local government spends most on young companies in management and business professionals and administrative services, and building and facility construction and maintenance services.

For small and young companies, at the same local government level, it is building and facility construction and maintenance services, and personal care services.

In his piece in The Guardian, Symons went back to a speech made by former Cabinet Office executive director Chris Chant in 2011, when he said just five suppliers won 80 per cent of all government IT procurements, as evidence of the problem.

A quick glance on the government website perhaps explains why. The procurement process involves four stages: the open procedure when a business is asked to return a tender by a set date; the restricted procedure where suppliers have to fill in a questionnaire and then are invited to respond to an invitation to tender; the competitive dialogue procedure where a buyer negotiates with suppliers and invests chosen companies to put in a bid; and finally the negotiated procedure when the buyer entered into contract negotiations with one or more suppliers.

HP is the largest single supplier to government
HP is the largest single supplier to government

It’s no surprise that smaller businesses are put off from becoming involved in this complicated and convoluted process, and government spenders are averse from becoming engaged with firms which don’t have a designated team to handle these kinds of exercises.

The statistics don’t lie, and spend directed towards large companies which are five years and older has been on an upward trajectory since 2011. Whether they are older or younger than five years-old, spend directed at small companies is on its way down.

It is understandable that central and local government procurement professionals might be averse to taking a gamble on a newish company. There is the risk that it not actually be able to handle the contract, go out of business or not know how to deal with constant auditing.

However, if we are ever going to see an end to the cartel-like set up that exists in the public procurement space, then young and small businesses have to be given a chance.

While it will cost more in admin fees, perhaps portioning out big contracts into smaller slices would be a a way of effectively bringing different firms into the fold?

Returning to Symons and the Nesta/Spend Network data, he pointed to the cities of Philadelphia and Barcelona as those which have experimented and opened up government contracts to a wider selection of companies.

It is important that pieces of research like this, by independent bodies, are carried out. Let’s just hope the next time data is collated, we will see micro and startup businesses enjoying a far bigger share of the spoils.

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Hunter Ruthven was previously editor of Business Advice. He was also the editor of Real Business, the UK's most-read website for entrepreneurs and business leaders at the helm of growing SMEs.