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Most governments and public sector bodies (contracting authorities) have an objective to increase the share of public sector expenditure that goes to smaller firms (SMEs / small and medium enterprises).

There is an interesting economic, political and philosophical debate to be had in terms of whether this is a good objective, but we will not cover that today. Rather, let’s look at some of the reasons why governments have struggled in many countries to increase the percentage of business going to these smaller firms.

  1. There are many long-term legacy-type contracts in Government. Even if an organisation wanted to get out of them and substitute with lots of smaller SME-friendly contracts, they can’t achieve this quickly or easily. For a large government department, for instance, over 50% of the spend is probably tied up in long-term contracts of three years or more duration.
  2. Central Government is, by its very nature, large in scale! In some countries, that is more so than others – some have a more devolved structure, others like the UK are very centralised. If there is a national approach to a topic like benefits, for instance, you inherently end up with large, national benefits systems and therefore large contracts to develop and support them. And some goods and services central Government buys are just unavoidably huge – any SMEs want to build a warship? Or an Olympic Stadium?
  3. Most public servants – and many politicians – are risk averse by nature. “No-one ever got fired for buying IBM” is still a prevalent attitude. Who is going to take the risk, for example, to break up a large organisation’s IT contract with Siemens, Cap Gemini, or Accenture and split it into 100 pieces with various SMEs? Would you feel like taking that risk?
  4. In many countries, the austerity drive means more centralisation of procurement and aggregation of volume in order to drive better value (in theory at least). Central procurement bodies have become more powerful in certain countries. Unless those doing the centralisation are very careful, this tends to favour larger suppliers, and contracts end up being too large for SMEs in many cases.
  5. Several years of spending cuts in most countries and certain spend sectors has squeezed many SMEs out of public markets already. While the public may feel delighted that spend on government contractors, consultants, advertising agencies or recruitment firms has declined, for instance, these were actually industry sectors where SMEs are probably stronger than the average. SMEs in these areas who relied on government work have had to re-orient themselves or have disappeared, so some capacity has probably gone from those markets completely.
  6. The same spending squeeze has reduced the procurement resource available within many contracting authorities around Europe. So they have been looking – not unreasonably – for ways of reducing workload. In the procurement space, that is leading to either greater use of collaborative deals (see point 4 above) or more use of prime contractor type arrangements.
  7. Large firms who do a lot of public sector business are, in general, good at selling to Government. They have friends in high places, they invest in the sector, and they’re good at influencing the direction of government policy. SMEs generally don’t have the time or money to do this. While this has always been true, it may be that in times where money is tighter, that competitive advantage of large firms becomes more pronounced.
  8. Procurement processes can often be unfriendly to SMEs and firms who are not experienced in the work. Processes are complex, lengthy, or have direct barriers to SMEs or new market entrants who try to win the work (“give us ten examples where you have done this sort of project before”).

Now, this does not mean that it is impossible for governments to encourage smaller suppliers or actually do more work with them. But it does indicate some of the barriers.

So in the next part of this series, we will look at some of the steps procurement professionals and contracting authorities can take to encourage a diverse and dynamic supply base, including SMEs and other types of suppliers.

Image Courtesy of Pexels

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