Why SMEs Can Help the UK Government with Huge Public Sector Contracts

When the UK government awards major public contracts for security issues, or other types of procurement, it is usually the mammoth companies that snap up the multi-million or billion pound deals.

But with the electronic tagging scandal rocking the public sector contract space, after the Ministry of Justice found out that Serco and G4S were overcharging the taxpayer for work, is it time that smaller companies got a slice of the action?

So, IBTimes UK decided to catch up with procurement specialists Comensura and speak to its Business Development Director Jon Milton to see how small to medium enterprises (SME) would benefit the country by becoming more of a part of the public sector.

Q: Why would the UK government benefit from SMEs help on huge contracts which are usually given to behemoths like Serco and G4S?

A: Traditionally, SME's have found it tough to compete for government contracts with many struggling to reap the benefits, citing red tape and the perception of being unable to compete against the major suppliers, who dominate the sector as major inhibitors.

As a result, small businesses remain sceptical about securing a share of government tenders. SMEs don't have to tender directly to win a larger slice of public sector contracts.

They can achieve this by forming strategic, mutually beneficial relationships with forward thinking contractors.

By operating as tier one or two contractors, SMEs can benefit in a number of ways, such as reduced costs of tendering, greater access to future opportunities and financial growth, improved business 'know-how' and an ability to better promote their specialist skills.

Q: What are the short givings of the major contractors having all the business?

A: Many buying organisations often subscribe to the notion that aggregating total spend with a large, single contractor will deliver the cheapest price and offer the greatest value for money.

The contractor is able to take advantage of economies of scale and book a regular flow of revenue over a set period of time.

While this approach can work well for homogeneous products and commodities it can be less effective for complex service categories, such as temporary recruitment, training as well as repairs and maintenance.

These examples of complex service categories realistically require significant levels of sub-contractor support.

In this situation, the major contractor will often look to build its delivery capacity based on the needs of each customer in order to maximise its profit, even where its existing infrastructure or specialist capability precludes this.

Invariably this 'square peg, round hole' approach will either adversely impact the customer or inevitably result in specialist sub-contractors being extensively engaged.

It is therefore important that through the procurement of any large, complex service contract, the customer should fully assess the major contractor's infrastructure and capacity to provide the full range of services, as well as their strategic approach to engaging with sub-contractors to ensure service consistency.

Q: Why SMEs would be a major benefit for government procurement?

A: SME's can provide government procurement with many benefits including local market knowledge, specialist skills, expertise and value for money.

We often find that SME's can also be far more agile than their larger business counterparts as they are not so encumbered by internal governance and compliance procedures. This means they can be more innovative, quick to respond to service requests and potentially provide better satisfaction and value for money.

It is encouraging that government is taking steps to remove bureaucracy from the tendering process.

This will help SMEs where contracts are broken down into smaller lots. For large value contracts, a major question still remains for government procurement, particularly in central government - what steps are being taken to ensure fair and open access for SMEs?

Our view is this should be given as a high a priority as cost savings or quality.

Q: To answer to the age old question, will the long supply chain lead to more complexity and therefore more risk?

A: A long supply chain only becomes complex and risky when effective measures of control and transparency are not in place.

Remember that if there is a long or complex supply chain, it's usually the result of a set of requirements that can't be met by anything other than a large supply chain, with each supplier providing specialist skills and capabilities.

It often makes sense to have a long supply chain when buying activity is:

  • decentralised
  • devolved
  • rapid
  • in great volumes and at low individual values.

For many complex spend categories, having a long supplier chain is an absolute necessity and a perfect operating platform for SMEs. From the customer's perspective, the challenge is to manage the risk and the complexity of operating with a large supply chain.

This requires specialist management capability however, so organisations should start to recognise this and make the decision to buy in external specialist support or develop capacity from within their organisation.

The latter option however may require significant investment in both technology and resource so may not be a viable option.