Do the UK government's SME spending figures make sense?

The government this week touted its success at delivering on a policy objective to put 25% of all purchased spend through SMEs – in 2013/14, that amounted to £11.4bn, slightly ahead of target at 26.1% of all spending.

But, at the same time, many SMEs are up in arms about the way they are being treated by Whitehall, and in particular the Cabinet Office procurement agency, Crown Commercial Service (CCS). The numbers published by the Cabinet Office tell one story, the market seemingly tells another. So which is true? Let’s examine the official figures that make up that 25%.

Direct vs indirect spending

First, it’s important to understand what the goal was. That 25% consists of direct spending – contracts between government and SMEs – plus indirect spending, which means large firms passing some of their government business to SMEs as subcontractors. Of the 26.1%, direct spend was 10.3% and indirect 15.8%. So in contractual terms, about 90% of all contracts by value still go to big companies.

But government relies on those big firms to report back how much they spend with SMEs – the number is not audited, and is based only on a survey of its 500 largest suppliers. The Cabinet Office admits that “the approach to indirect spend should be regarded as indicative”. The indirect figures add a few further caveats:

  • “MoD total procurement and direct spend figures are for the core department only, therefore excluding its Executive Agencies and NDPB.”

So, the Ministry of Defence – by far the biggest spending department – does not measure the SME spend through its many external agencies and non-departmental public bodies (NDPB), of which there are 29 different organisations.

  • “FCO direct spend is based on UK spend only”

The Foreign and Commonwealth Office (FCO) – most of which is, inevitably, housed overseas, does not measure direct SME spend in all those overseas operations.

  • “Data as reported by suppliers for central government with no departmental association”

This is the description given for £1.5bn of indirect SME spend – 22% of the total figure – that is not attributed to any Whitehall department. This means that large suppliers claimed they passed £1.5bn of money to SMEs, but cannot account for which departments that work is attributed to. Really? For more than one-fifth of all the sub-contracts to SMEs across all large suppliers, the prime contractor has no idea what department that work is for, or cannot associate the work with any department? That sounds somewhat convenient for those big suppliers, all of which have been pressured by the Cabinet Office to demonstrate an increase in their SME spend. The government admits that the indirect spending figures have not been supplied by departments, so it appears we are to take the word of the large suppliers entirely on trust over that £1.5bn portion of the spend.

Direct spend

Look next at the direct spend – the numbers for which the government can account for itself through contracts placed with SMEs. Those figures have flatlined – representing 10%, 10.5% and 10.3% of total spending respectively in each of the last three financial years.

In the year before – 2010/11 – only 6.8% of spend went direct to SMEs; the prior year it was 6.5%. The jump from 2010/11 to 2011/12 went from £3,200m to £4,439m – an extra £1.2bn. The Cabinet Office attributes that leap to the new coalition policies introduced at the start of the parliamentary cycle taking effect. It was suggested to me by a source that the measurement methodology for tracking SME direct spend changed between 2011 and 2012 – although the Cabinet Office denied this.

So what did cause that jump? The two main policies introduced in 2011, alongside some changes to process such as a mystery shopper service, were:

  • Advertising tenders below £100,000 (tenders greater than £100,000 were already advertised)
  • Abolishing pre-qualification questionnaires (PQQs) for contracts below £100,000 to make it less onerous for SMEs to bid for business.

So, in theory, the only real change for SMEs was in their ability to win contracts worth up to £100,000. There is not yet any published evidence to suggest that from 2011 SMEs suddenly won a greater share of the contracts above £100,000 that were already being advertised.

It’s true that in government IT there has been a push to smaller contracts, which opens up more opportunities for SMEs – but the main vehicle for that is the G-Cloud framework, which launched in February 2012, so cannot have accounted for any of the £1.2bn increase in the prior year.

G-Cloud has been widely applauded and has awarded more than 50% of its spending to SMEs – but the total amount spent through G-Cloud since its inception is still only £431m to the end of 2014. Clearly G-Cloud made no contribution to that £1.2bn leap in 2011/12 – and has not had a material effect as overall direct spending has flatlined since its launch.

How many SMEs?

So, we are left to assume that most of that £1.2bn additional annual spend came about as a result of SMEs winning more contracts worth up to £100,000. Even if you take a generous outlook and say that the average contract value was the highest amount of £100,000, that would imply 12,000 new contracts won by SMEs. That’s 1,000 per month, or about 50 every working day. Somebody in CCS would be getting through a lot of ink signing all that paperwork.

Of course, if a lot of SMEs won a lot of contracts worth over £100,000, that would account for a greater chunk of the £1.2bn – but that would have happened anyway, as the 2011 policy changes were mostly focused on opening up smaller contracts. If you were generous, then perhaps 1,000 SMEs won contracts worth £1m on average that had never before been won by SMEs, and that would account for most of the £1.2bn. That’s still four contracts every working day.

But the government has not been able to say how many SMEs have been awarded direct contracts – Computer Weekly has asked, we’ve not yet had an answer – but it seems unlikely to be 1,000 additional firms, and even more unlikely to be 12,000. So where are all the SMEs that won that extra £1.2bn?

It’s also possible the definition of an SME includes individuals providing temporary services through a company of which they are the only employee – fairly common practice for contractors, to reduce their tax burden. But does direct spend with individual contractors really support the ethos behind the desire to grow UK small businesses through the government estate?

If you apply the same logic to the indirect spend – which increased from £2,946m (6%) in 2011/12 to £6,909m (15.8%) in 2013/14 – that’s an increase of nearly £4bn annually. At an assumed average contract value of £100,000, that’s 40,000 additional contracts with SMEs let by large suppliers in a year. Again, you might ask – really? Where are they all?

Not lies, just statistics

There is no evidence to suggest the government is lying about its SME spending – but even a casual, entirely non-forensic analysis like the one above raises some significant questions over the extent to which government largesse has really been spread around the UK’s SME community.

Of course, the existence of a policy to increase spending with SMEs is welcome, and is clearly having an effect – even if nearly three-quarters of all spending still goes to large suppliers.

G-Cloud has been hugely popular – most SMEs that have engaged with it love it, and some have grown so much as a result they can no longer be categorised as SMEs. But G-Cloud was not created by CCS, which still appears to prefer old-style procurement frameworks managed by outsourcing giants such as Capita, which are coming increasingly under fire from disgruntled SMEs who say they are losing millions of pounds in revenue.

Plenty of SMEs who deal with CCS say they are less convinced that the purchasing agency has bought into the SME policy, and that CCS still feels more comfortable dealing with big suppliers where they can aggregate demand and use that to negotiate better prices.

The progress made on growing SME spending by the coalition government is very positive, let’s be clear about that – but it may not quite be as impressive as it wants us to believe. There is still much room for improvement.

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We explained that "leap" in 2012 here. http://spendmatters.com/uk/data-spend-smaller-suppliers-uk-government-departments-cabinet-office-be-trusted/
MOD and MoJ were responsible for the leap - MOD told us via FOI that they had no idea why and it was a change in measurement; MoJ gave us data that showed mis-classification. Large PFI entities were being classed as SMEs. But remember "its not a target, it's an aspiration". A line worthy of Sir Humphrey.
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