It was supposed to herald a widening of the goal posts: a pledge from Government last summer that proposed small firms should enjoy a much bigger bite of the new-business cherry.
A target was given to public sector finance departments: to spend 33 per cent of their budgets with small businesses by 2020. With the public sector spending around £200 billion each year on the procurement of goods and services from third parties, achieving such a figure could have a dramatic impact on the fortunes of the UK’s small firms.
According to new research by FSB, the Government still has some way to go to achieve this target. Just one year on, not only are there fewer small firms working with the public sector than there were in 2014/15 (24 per cent in 2015/16 compared with 27 per cent in 2014/15), but only 20 per cent of local Government contracts now go to small firms at all.
According to Mike Cherry, FSB National Chairman, the cards are stacked against small businesses before they even start, and he has called for procurement to be made “simpler and more transparent”.
“Despite Government efforts to reform public procurement practices, most small businesses still face a fixed system which is preventing them from getting a fair share of public contracts,” he says. “It’s no longer acceptable that they continue to be effectively excluded from the process.”
It’s a far cry from 2015, when the CEO of the civil service, John Manzoni, was publicly praising small firms, pointing to savings of £15 million made by the DVLA using two small firms – Kainos and Skyscape – to deliver an IT project, which was also completed in half the time. With recent enquiries also questioning the value for money of contracts going to large providers, the consensus seemed to be shifting that big wasn’t always best.
So what are the major obstacles? It sounds simple, but sometimes it’s not knowing the work is even out there. FSB notes that while central Government is required to publish all contracts worth more than £10,000 on its Contracts Finder website, local Government is not.
The benefit of Contracts Finder is that winning firms must be named, as well as the contract value, so small firms can at least see how close they were. But, even if they see work is available (the other place to look is the Official Journal of the European Community – or OJEC – where all public sector tenders above a certain threshold must be published, while those in Scotland can use the public contracts Scotland portal), many argue that’s just the start of the problems for smaller players.
“It’s a hugely lengthy process; our most recent tender reply took weeks to complete,” says Kim Hutchings, Business Development Manager of contract cleaning business Lakethorne Group, which serves schools and hospitals in north-west London.
“Sometimes, you literally have to decide if the time is worth it, especially if you have your suspicions the procurement team wants a bigger company.” Suspicions – not that they can be proved – she says, include requiring certain turnover or employee sizes, even though the job is well within the capacity of the business.
For Andy Thorne, Sales and Marketing Director at promotional merchandising firm Outstanding Branding – which has won work with Crossrail – other factors include what appear to be totally arbitrary demands. “In the past, we’ve pitched for work with local councils and lost, because they’ve wanted us to be a member of a certain trade body, even though many would argue it has no bearing on the product we provide.
“Others want carbon footprint reporting, statements about modern slavery and guarantees we train and develop staff. Over time, we’ve established all these things but, for firms just starting out, getting all this – for what seems like just a box-ticking exercise – can feel futile.”
Mr Thorne admits SMEs must – to some extent – “play the game”, although according to FSB research, these apparently over-zealous requirements are now putting them off. It finds those expressing an interest in competing for a public sector contract fell from 14 to 10 per cent between 2014 and 2017.
Another frustration from Mr Thorne is that procurement departments set all the rules –
“they require you to have everything presented by a certain date”, he says – but don’t honour their side of the bargain. “They sit on applications for months, move their deadlines, and take their time making decisions, meaning it’s impossible for us to plan.”
The clear inference is that small firms view dealing with procurement as a battle between non-equals. But is this the true picture? Carol Hustler is Director of TED’s Friend, a consultancy that advises small businesses on how to get better at winning public sector procurement bids. While she accepts small firms have to jump through hoops, she urges seeing things from the eyes of procurers too.
“When small firms complain about what health and safety policies have to do with the price of eggs, they’re not understanding why it’s being asked,” she says.
“Procurers are spending real money; they have to be seen to do it properly. Forms are generic; SMEs can’t expect a bespoke one to be made for them. SME bosses fear that if they ask a question it’ll go against them. But most are pleased to help, and a good procurement department will make a note of this, so they can improve the next one.”
Of all the advice she gives (see box, right), the key, she argues, is to explain the ‘how’ part better than others. “The point of procurement is being able to prove you can do something,” she says. “Don’t just give examples of previous work, but say specifically what you did.
“It’s worth remembering that many ‘requirements’ aren’t actually set in stone,” she adds. “If you can explain why you don’t, for example, pay the [voluntary, higher-level] Living Wage, it needn’t count against you. In this example, a business might say they would like to but it depends on whether the client is willing to pay for it too. In this sense, it pushes the issue back to them. Clients can’t ask for the earth but expect it not to cost anything.”
Another concern is that, for all the administrative foreplay, contracts are ultimately awarded on price, and that tender replies simply become a race to the bottom. Ms Hustler says firms can normally tell whether a contract is price-dominant by the language used, or if the scoring criteria is heavily weighted to it.
What Ms Hutchings cautions, though, is not to give up completely. “Even if cost is clearly a priority, we like to position ourselves as the local company. For us, we feel it’s a strong selling point; because we give a more personal service. A contract given to a large business is small fry. To us it’s a bigger deal and we’ll treat it accordingly.”
Of course, that’s not to say there haven’t been recent improvements. Prior to 2014’s EU Public Procurement Directive – the most recent shake-up of how procurement applies in member states – firms would have to give three years’ audited accounts prior to a contract being given. Now, they only need to do this after their tender is successful.
But this is not to say things can’t improve either. Tina McKenzie runs PeoplePlus NI, Northern Ireland’s largest employment training organisation. “Big contracts are still not being divided up into smaller jobs [as the EU directive also asks public bodies to do],” she says.
This, she adds, has knock-on impacts: “It means the requirement that firms have a turnover at least twice the value of the contract leaves many small businesses unable to bid.” Rules around employer liability insurance also need to change: “When contracts require, say, at least £10 million liability insurance, for a relatively small contract, this is not commensurate with the contract,” she says.
While the current outlook seems like a work-in-progress, it is at least better than in 2009-10, when just 6.5 per cent of central Government spend was with small firms. Ms McKenzie suggests one radical move could help Government reach its newer targets: encouraging small firms to join up with larger businesses, to go into a tender as partners. “Large businesses don’t always want to do everything,” she says.
“Also, it means the larger business submits its insurances, and turnover figures, so small firms can piggyback on these.”
It does, of course, require more work, but Ms McKenzie is also clear that while procurement is tough for small firms, they shouldn’t just expect work to be given on a plate. “We only win one in five tenders, but that’s life,” she says.
“You can’t grow your business by only answering one invite a year. The more you do, the more learn you learn, and, ultimately, the better you get.”
Carol Hustler, Director of TED’s Friend, offers the following tips on successfully tendering for public contracts:
You shouldn’t bid on contracts worth more than 25 per cent of your turnover. Buyers worry if they think their business is too dominant an account for an SME
Don’t play up being bigger than you really are. Just say what you do, and say it straight
If you’re bidding for an account that means you’d have to recruit more people, don’t be afraid of saying so. As long as you have a hiring strategy and cash flow, it makes you a very credible candidate because you’re creating new jobs
Don’t be afraid to seek clarification. Luckily, more tenders are now online, featuring chat facilities. Make use of it
A generic form may ask you questions around issues such as your gender pay gap. You’re within your rights to explain that, as an SME, you’re not required to report these by law, but if you work with them, you’d be willing to start
Don’t just say being small is good – say why. Perhaps it means clients can see you more, that you employ local people or contribute to the local economy. Assessors are dying to award small businesses more points, but they need to be given reasons to do so
FSB Legal Protection Scheme can help Business Essentials members with legal issues surrounding public sector contracts through the 24-hour Legal Advice helpline. For more information, see fsb.org.uk/benefits