SMEs supplying into the public sector - how high is the bar…?
public sector procurement
IT procurement specialist and Probrand MD, Peter Robbins, explores the barriers restraining the public sector from doing more business with SMEs. “The current process design and management results in duplicated requests for information, suppliers being engaged for an unnecessarily long time and SMEs being excluded as distinct requirements are being rolled up into larger procurements. This results in avoidable resource costs to suppliers and unnecessary barriers to innovation being introduced.”
This finding from section 4 of the Accelerating Government Procurement document published earlier this year in February 2011 by the Cabinet Office is missing some important points relating to an SME’s ability to practically compete for public sector contracts.
The first and most obvious barrier to SMEs bidding for public sector contracts relates to the 10% rule, which often excludes SMEs at the first hurdle – the Pre-Qualification Questionnaire (PQQ) stage. This rule is rarely addressed upfront in tender documentation and, as a result, many SMEs invest effort in bidding for business they will never win due to a simple financial check – namely, the total bid price exceeds 10% of their prior year’s turnover.
UK Department for Business, Innovation and Skill (BIS) numbers indicate that the UK business community consists of 4,828,155 businesses of which only 418,575 can hope to compete for tenders valued at £100,000 or more based on this 10% rule. Realistically, that is further reduced by the number of businesses large enough to invest in the requirements commonly demanded in PQQs. There are 80,955 businesses with between 20-50 staff and these are medium-sized businesses, not small.
The other barriers that exclude SME suppliers from public sector bids are based around lack of knowledge in the following issues; quality or the ISO9000 standard, environmental or the ISO14001 standard, equal opportunities policy, health and safety policy, sufficient insurance cover and third-party references for multiple contracts.
From an engagement perspective, these issues are core operating procedures important to larger organisations, big businesses and government departments but are less relevant in the world of the small, fast growing SME. Yet none of these issues are visible in either the Lean Procurement Project Diagnostic Findings or in the Accelerating Government Procurement document.
On top of these barriers faced by the SME audience, there are actual hard costs incurred whilst selling to the public sector. Typical public sector tender processes take significantly longer than an equivalent process in the private sector and cost considerably more. As always in any bidding process, there are winners and losers.
The core problem for the SME remains the cost of bidding and its correlation with win ratios within the public sector. Win ratios based on the above barriers are very poor and the return on the SME’s investment is unacceptably low. And if successful, the SME must tackle cashflow challenges, especially in framework agreements where there is no guarantee of business and payment speed. Furthermore, the cushion of trade credit insurance can sometimes be difficult for SMEs to acquire – there’s no point in having orders if the business can’t get credit to buy in goods to fulfil orders.
The SME also has to battle with vendor accreditation and bid reservation systems that provide only the very best pricing to highly accredited suppliers. The investment needed to achieve high-level vendor accreditation is significant and many SMEs are only on the bottom rung of that ladder.
So if it’s so difficult, you might ask, what, why and how can SMEs deliver into the public sector with cost containment dominating the business drivers?
It is a reflection of our economic climate that everyone is in a zone striving for cost reduction; improved efficiency, transactional speed, transparency, lower product and service prices.
However, tender costs in particular are high on both sides, from creation to response and judgement. In reality, taking costs out of this purchasing process will probably yield more cost reduction than savings on hardware price and this is not necessarily an area where any business can add value. It should be a subject of focus for the public sector at large.
Beyond the tender process, organisations that can offer strong unique selling points in reducing product prices and optimising micro processes should be in a strong position. Consideration should therefore rest on automating operational processes. In the IT sector the market is highly disparate and any business that can remove the pain points associated with this volatile supply chain, and support buyers in doing a better job faster, will again be welcomed.
So, just how can SMEs approach breaking the status quo – or break into the supply chain of the big 10+ vendors that dominate in the public sector…how can they differentiate and add value?
The public sector has recently announced its ICT strategy, which indicates a shift towards greater transparency, less bureaucracy and more engagement with small and medium-sized enterprises. Equally, it has indicated a move away from large programmes towards a greater number of smaller, more agile projects. This is where smaller, innovation-rich businesses should be able to offer cutting-edge competitive advantage and break what is a perceived status quo of supply from the big vendors and larger suppliers. Smaller, more agile businesses that can deliver greater return on the public sector’s declining budgets, and indeed impartial guidance in some cases, should stand every chance of winning business.
However, the public sector is risk averse, and debate continues as to whether the move is actually towards reducing the number of vendors and large suppliers, whilst using SMEs to provide sub-contractor support to the major players. An example is that the latest tender for office supplies is a single winner framework with huge financial risk that no SME can stomach, but larger vendors and suppliers can of course take it on and sub-contract any required support. In this case, the public sector is shifting perceived risk from itself to larger organisations, rather than SMEs, on the basis that larger organisations will engage with smaller suppliers to fulfil the implementation side of the framework. In which case, SMEs should perhaps focus their attention on best positioning themselves to engage as a sub-contractor rather than a direct supplier to public sector.
The final barrier to entry concerns the tacit strategy for public sector procurement teams to make ‘safe’ buying decisions. The need for the supplier to continue to exist and deliver the product or service ordered is paramount for many public service staff. Inherently that leads to larger, more stable companies winning tenders.
The question SME owners continuously ask themselves is whether the public sector is the correct market to channel and invest limited resources for growth? The answer to that question now is ‘no’.
Without solutions to these challenges, the ability of government departments to buy more products from SMEs will be limited by factors beyond their control.
Since 1992, Peter Robbins has retained an automated edge to grow a Tech Track 100 technology portfolio from his core growth IT reseller business. Peter’s greater vision for business transformation has spawned enterprise application provider, Mercato Solutions. Peter is outspoken on many technology issues from procurement to green IT and methodologies for helping organisations buy better, sell better or improve service delivery.