Is the government right to focus on buying IT from SMEs?

Should the government be putting all its energy into encouraging departments to buy from SMEs? Alice Watson from Porge isn’t so sure

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If we are to believe the headlines of recent months, the ICT market has gone badly wrong at the top, with a few major players dominating public sector contracts, to the detriment of SMEs. Cue a major Office of Fair Trading investigation, and general flogging of big business. But is this really where the problem lies?

The government wrote some big specifications for big systems that were won by big companies, and rightly so. With major contracts comes major risk – and do we really want that to sit with SMEs? Indeed, do SMEs themselves really want it?

Don’t get me wrong. I’m all for the government’s drive to support the SME market – after all, I run one. And I’m certainly not knocking the aspiration for a more competitive and diverse supply chain that encourages innovation and drives value for money, but I don’t believe big-business-bashing is the way to achieve it – and I would question whether the IT Transformation Programme in its current form will help, either.

Let me explain. I was at a Cabinet briefing last year. The room was full of SMEs – 20- or 30-man bands with niche software products, and genuine innovations. There was a real sense of optimism and excitement about the potential for a direct relationship with the government, but I fear they will be disappointed by the actual outcome of the programme.

The aspiration for the IT Transformation Programme is to break up big ICT contracts into smaller service towers, triggering a higher penetration of SME providers. But although this will undoubtedly shake things up, it isn’t going to result in contracts being awarded to really small businesses – or at least not those that the government itself defines as small, namely organisations with a turnover of less than £50m and fewer than 250 employees. Instead, it will be medium-sized businesses, such as Agilisys, Liberata and Civica – those organisations that sit just under the Capita tier – that will benefit.

Emerging trend

This trend is already emerging. Porge Research's data relating to actual invoice expenditure shows Agilisys claiming the sixth biggest slice of the local government ICT pie in the 2012/2013 financial year, with only the major players sitting above them.

The breaking up of the Treasury’s single supplier framework – which was signed with Fujitsu in 2009 for "core IT services" – further underlines this point. According to the Office Journal of the European Union (OJEU), a key objective of the exercise was to increase SMEs' ability to respond. But it is NTT Data UK, part of the Japanese NTT Global Communications Group which won Lot One and estimated in the OJEU to be worth £250m, which is 98% of the framework’s value. Not really in the spirit of small contracts being awarded to SMEs, is it?

There is an opportunity here for prime contractors to engage genuine SMEs to deploy sub-systems. This doesn’t give small businesses the direct relationship with government that they crave – but it is preferable. Why? Because it protects the government from the risks and potential inefficiencies of dealing with lots of suppliers – something that the Department for Work and Pensions itself recognises as being at loggerheads with its overarching objectives, in its 2014 SME action plan.

Protects small businesses

Of course, putting a prime contractor between government and the SME protects small businesses from the risk of dealing directly with government, too. And believe me, it is a risk – a fact that Buddi, an SME that recently walked away from a Ministry of Justice bidding process, describing it as “unproductive and frustrating”, would no doubt be pleased to explain. Buddi, which had achieved preferred bidder status for a £1bn GPS tagging scheme, felt under pressure to both hand over intellectual property and pursue further development work without being paid. It was unsustainable.

If the government really wants to award more business to SMEs, it would do well to intervene and encourage a market at an intermediate level, instead of trying to contract directly with SMEs. This would ensure that SMEs still get a look in, but the prime contractor carries the risk – after all, that’s what they’re being paid for. 

We’ve seen a strategy of government intervention successfully deployed in the construction sector to ensure fair payment terms for SMEs, so surely government can also intervene to support small business in the IT sector? This would need to take the form of sustained intervention, in which the government oversees the relationship between major players and small business, but it could just be the sustainable solution we need.

It is misguided to believe that the current IT Transformation Programme will in any way benefit specialist small software suppliers and unique sub-system providers. It’s time to challenge the status quo.

Alice Watson is the founder of Porge Research, a specialist in public sector spend data

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