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National Audit Office casts doubt on government SME spending figures

The National Audit Office (NAO) says government changed how it estimates spending with small and medium-sized enterprises (SMEs) four times in five years

According to a National Audit Office (NAO) report, government figures saying it has increased its spend with SMEs over the last parliament may not be correct.

The government reported its total spend with SMEs in 2014-15 as 27%, exceeding its target of 25% by 2015.

But the NAO report said that, due to the the government changing the way it estimates spending – four times over the least five years – there is no way of knowing if the figures are right.

“It is not possible to know how much of the reported increase is due to the changes in approach and how much is an actual increase in SME activity,” the NAO report said.

“The reported annual increases in spending with SMEs happened in parallel with the Crown Commercial Service’s work to improve government’s understanding of its spending with SMEs.”

The government aims for 33% of all procurement spending to go on contracts with SMEs by 2020. This encompasses both direct and indirect spending, meaning contracts with large suppliers passing on some of their government business to SMEs as subcontractors can be counted.

Of the 27% of spending reported in 2014-15, only 10.9%, or £4.9bn, was direct expenditure; some 16.2%, or £7.3bn, of taxpayers' money was spent indirectly.

“Consequently, most SMEs working on government contracts are part of the supply chain – and it is not clear that this will lead to increased competition and innovation,” the report said.

“These SMEs make up 60% of government’s annual £12bn estimated spending with SMEs. They work for larger prime contractors and may not compete directly for government contracts.”

Read more about government IT and SMEs

Incomplete figures

As Computer Weekly wrote in 2015, the government relies on suppliers to report the indirect spend, a figure which is not audited and is based only on a survey of its 500 largest suppliers. 

The NAO report said that the government’s understanding of its indirect spending with SMEs remains “incomplete” and there is no way of verifying the accuracy of the figures.

Suppliers sometimes only have data on their spending with the next tier of the supply chain – meaning they don’t report spending with SMEs in lower tiers.

“Furthermore, suppliers may have different approaches to collecting and validating data and identifying SMEs, leading to inconsistent measurement,” the report said.

When it comes to direct spending, the government does not know how many contracts were awarded with SMEs in 2014-15.

The Cabinet Office’s purchasing agency, the Crown Commercial Service (CCS), has worked at improving the quality of information and collecting data from larger providers on spending with SMEs.

“However, there are gaps in these data so it is not possible to be sure of the actual number of SMEs working for the government, nor the types of SMEs involved,” the NAO report said.

The CCS changed the way it estimated direct spending in 2010, from using quarterly data reported by departments, to a spending analysis tool called Bravo. However, the NAO report said that, while it’s improving, the data in Bravo “are known to be incomplete”.

Removing barriers

The NAO reported that, while government initiatives to reduce barriers faced by SMEs had made some positive changes, they were not sufficient to ensure SMEs picked up more work.

“The barriers most commonly cited by SMEs – and echoed by government departments – have not significantly changed,” the report said.

SMEs still struggle to find contracting opportunities and often don’t have the resources to complete the tender documentation. Delays in payments also affect SMEs, as they don’t have the financial capacity of larger firms.

While the government’s Contracts Finder aims to bring together all procurement contract in one place so it’s easy to find, the NAO said it was only able to find 45 of the government’s 56 open contract opportunities on the portal.

TechUK’s survey of SMEs found that 62% did not think Contracts finder had helped small businesses access opportunities in the public sector. 

The NAO urged government to take a more concerted effort, “not on not only to remove barriers to bidding, but to ensure that what and how government procures achieves the desired benefits of using SMEs”.

Commenting on the report, associate director of techUK, Naureen Khan, said the government needs to focus on “opening up the market and creating a level playing field”.

The industry body’s own SME report found 96% of respondents did not think civil servant buyers had a good understanding of how SMEs can meet their needs.

A Cabinet Office spokesperson said that SMEs "are the lifeblood of the UK economy and this government is determined to open up public sector procurement to businesses of all sizes".

"We welcome the NAO’s recognition of our efforts, including reaching 27% of spend going to SMEs last year, exceeding our target. But we know we can go even further, and that’s why we’ve set an even more ambitious target of spending £1 in every £3 with small businesses by 2020," the spokesperson added. 

In 2015, Computer Weekly reported that IT SMEs had lost “tens of millions of pounds” after refusing to sign up to a controversial £2.45bn Cabinet Office agreement with services giant Capita for sourcing temporary staff across the public sector.

More than 20 affected companies complained to CCS about the contractual conditions, with some accusing the procurement agency of deliberately attempting to undermine their relationship with government. The Cabinet Office is now looking for a replacement for the contract.

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