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by GK Strategy 15th June, 2017

The Latest Trends in B2G – SME Growth Driven by Local Government, not Central

For years governments have been pledging to increase the proportion of government spending that goes to SMEs, but recent intelligence from across GK’s B2G associate network has shown that the level of direct spending from central government to SMEs may now, in fact, be decreasing.

This is contrary to the Government’s own statements.

In 2015, the Government announced it had met its target for 25% procurement spending to go to SMEs a year early, with Francis Maude and his Cabinet Office congratulating themselves on revolutionising the B2G sector in achieving this. They subsequently extended the target to 33% by 2020.

But GK’s recent B2G breakfast workshop indicated that small businesses are now faced with increasingly ruthless competition for tenders at all levels resulting in a decrease in direct spend with SMEs.

The Government is off-setting this decrease with an increase in SMEs’ subcontracting work from larger firms, meaning smaller firms are still at the mercy of prime contractors, who may use them as “tender candy” to make their bid look more attractive but without any guarantee of work further down the line. To compound this, the control and the customer relationship is taken away from the SME, preventing them from being able to shape services and putting them at risk of bad practices such as late payment – still an endemic issue.

The Government’s own estimates that suggest 60% of SME spend is indirect and that figure is growing.

A larger firm may win the contract, but that does not mean they will be able to deliver all aspects of it and this can be a valuable way for smaller businesses to build their credentials in helping to deliver public sector contracts. Sub-contracting can often also be more appealing for firms attempting to break into this space given the that the cost to companies wishing to bid for government contracts can now be around an eye-watering £50,000 per tender.

Despite this, the rise in sub-contracting public sector work is not risk-free for many of these smaller firms. Sub-contractors clearly have a more junior status, and larger firms may be ruthless in withholding work from smaller parties if they are able to. SMEs may also find themselves blamed for the failings of larger firms should the contract end acrimoniously, which can open the door to reputation damage.

Instead, the main growth area for SMEs is coming from local government.

In our experience, selling into local government is altogether a very different proposition. Anecdotal evidence tells us that many council leaders are often very ‘brand’-led; firms with a superior product can lose out to firms with a recognisable profile – especially at a local level – making engagement with council chiefs and finance directors critically important.

Similarly, those firms bidding for work seen as ‘less risky’, may often be more successful. Back office solutions rather than frontline public services are more palatable as they provoke a diminished backlash from a public wary of outsourced contract failure in areas such as health and education.

Interestingly, many council procurement exercises are also now increasingly concerned with exploring how procurement can be used to deliver social value, such as greater apprenticeships and trainee opportunities, and how it can better support small, particularly local, businesses.

This is clearly a benefit to SMEs, but does highlight the need for firms to keep in mind their social value offering and ensure that any pitch takes into account exactly what the council is looking for outside of the main aims of the tender.

While the Government’s target for SME spending to 2020 remains intact at around 33%, firms need to be aware of the changing trends around how this target will be met.

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