Short-term Risks in Exchange for Long Term Innovation: Government's SME Dilemma

By 2020, the government aims to increase the amount it spends on products and services provided by small and medium size business to a third (up from a quarter) of all spend.

“This is such an amazing opportunity for the country’s diverse and innovative small businesses, and today I urge them to get stuck in.” Says Matt Hancock, Minister of State for Digital.

Believe me Matt, we are trying.

The government’s Digital Marketplace, through which it procures technology products and services, has been successful in furthering the government’s aims. G-Cloud, the largest of the various frameworks by far, has awarded half of its business to SMEs since its inception in 2012. The others average out at around a third. So far so good. The trouble, however, is that less than 10% of government spending on ICT is done via Digital Marketplace.

How do things look when the other 90% of government spending is factored in? It’s hard to tell based on the data available, but almost certainly not as good. Progress is being made on some fronts, but probably not quickly enough for most people’s liking. For example, spend with the largest suppliers has been falling significantly and continuously since 2010. However, the somewhat alarming, if also understandable truth is that just five suppliers were the recipients of 51% of all central government spend on IT in 14/15 (which amounted to over £6.3bn in the same period) according to the House of Commons Committee of Public Accounts in 2016.

So what is holding Whitehall back?

tech UK’s 2016 survey of SME GovTech suppliers found that 94% of respondents did not think that civil servant buyers have a good understanding of how SMEs can meet their needs. Which, perhaps, is polite way of saying that civil servants do not always believe that SMEs can or will deliver. My personal suspicion, for what it is worth, is that there are at least three reasons for this mostly justified lack of confidence.

Firstly, buyers don’t always understand what they have decided to buy (or what they have been advised to buy) and are prepared to pay a premium to a big, safe brand that does. Or says it does. In doing so, they overcompensate for their lack of expertise and protect themselves against the risk of failure. No-one ever got fired for procuring from a large multinational, as the saying goes.

Secondly, and somewhat obviously, SMEs are not always able to deliver as much or absorb as much risk as the larger players within the required timescales. Put simply, big contracts sometimes need big suppliers. While disaggregation is helpful, central government departments remain enormous clients for SMEs to wrap their arms around.

Thirdly, and related to the first two points, small companies are often unable to offer the financial and other guarantees that the big firms are able to, and which government feels it needs.

More wise words, this time from John Manzoni, Chief Executive of the Civil Service: “Further opening up our marketplace to small businesses is good economic sense all round – making it easier for them to access and win government business opportunities, whilst encouraging increased competition and market innovation to deliver best value for the taxpayer.”

Surely, talking of best value for the taxpayer, not-for-profit SMEs should be among the most deserving. With no profit motive (ultimately) and in an many cases exactly the same objectives as the government, third sector suppliers should be regarded as independent allies rather than mere suppliers or partners. Furthermore, not-for-profit SMEs should be able to deliver more for less, not least because they are able to happily break even or invest any surpluses that would normally be lost to shareholders back into the cause. Historically, however, some have not managed to have much of a positive impact on society. Others have, but not as much as the private sector. A small number of others, at last, are leading the way, pan-sector.

New approaches to commissioning have helped. For example, the emergence of payment-by-results contracts, as tricky as they are to get right, have forced a growing number of third sector SMEs to match the capabilities and performance of their private sector competitors. Although a less than helpful and stubborn reputation on both fronts lingers, proven capabilities and performance are no longer insurmountable barriers to winning business for well-run not-for-profit organisations.

The real challenges for the best third sector SMEs are exactly the same as those for private sector SMEs, but the not-for-profit sector still has further to go in some respects. Although it is growing fast, there are still only around forty charities that turnover £100m or more. Furthermore, while the £15bn that third sector organisations receive from government (about a third of all its income and mostly in exchange for contracted services) may seem significant, it only accounts for 2% or so of government spend.

Just as SMEs (and particularly not-for-profit SMEs) must continue to invest in their capabilities and continuously improve their performance, the government must help them, not least by giving them more responsibility and accepting more risk. At the same time, the government must have the courage to hold SMEs (and again, particularly not-for-profit SMEs) to account and if necessary, and regardless of the short-term political risk, let them fail. Only then will the playing field be truly level and only then will Hancock’s “amazing opportunity for the country’s diverse and innovative small businesses” bring about Manzoni’s “increased competition and market innovation”.


Jude Sheeran is a member of tech UK’s Public Services Board and CEO of Eduserv, a not-for-profit SME that delivers cloud infrastructure, applications, data and security services to central and local government and the third sector. Eduserv’s primary aims are enabling its clients to get the most out of technology for the sake of society and in doing so, help close the UK’s digital skills gap.

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