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Small IT companies still struggling to win public contracts

Despite all the government's rhetoric about supporting start-ups and small businesses with tax breaks and funding schemes, there appears to have been precious little progress when it comes to public sector procurement. If SMEs are the lifeblood of the economy and IT start-ups the oft lauded future for Britain, then surely government should be first in line to buy their products?

As a technology start-up or small business in the UK, securing a contract with the government is notoriously difficult. This is largely down to entrenched public sector procurement processes, as well as unspecified project aims, massive-scale tenders and huge amounts of paperwork.

Over the past few years, the government has apparently been working to open up access to contract opportunities, and has promised that 25 percent of government’s spend will go to SMEs by 2015. Internal figures published in February 2013 show that direct SME spend increased from £3.2 billion (6.8%) in 2010/11 to £4.4 billion (10%) in 2011/12.

However, many smaller suppliers are still struggling to make headway into the public sector market, with large contracts effectively eliminating SMEs from the tendering process. The government fulfils its obligation to these companies by pairing them up with larger companies, so that the smaller company effectively becomes part of the supply chain.

Speaking at the launch of the Enterprise Hub at the Royal Academy of Engineering last week, Minister for Skills Matthew Hancock, admitted that the government still finds it a lot easier to interact with big companies than small ones.

“That's not an intentional feature of government, it's just a natural feature of government that we constantly have to be driving against, because big bureaucracies can talk to big businesses much more easily because of their nature, and because of the nature of the people in government who tend to have come out of university and tend not have been through the sort of experience that [entrepreneurs] have been through,” he said.

Asha Peta Thompson, founder of Intelligent Textiles, recounted her own experience of trying to secure a major contract with the British Ministry of Defence (MoD). Intelligent Textiles has developed a number of techniques for weaving conductive fabrics that can, for example, incorporate sensors that respond to pressure, transforming a piece of cloth into a computer keyboard.

Thompson explained that, when the company first applied for a contract with the MoD, it was asked to work with a bigger company as part of a project. However, once the larger company had accepted the contract and added its 35 percent overhead, it decided that the product was not relevant to its “core business,” so Intelligent Textiles was effectively dumped.

“They then go and spend another £200k to go after the next pot of government money, so you feel a bit used,” said Thompson. “If only those companies had a better mindset - ie. it's not core business but we're going to have an innovation budget this year, it's going to be money that we don't spend going after a research grant, it's actually internal money that we're going to invest in ourselves.”

Mike Lynch, founder of Invoke Capital and previously of Autonomy, pointed to the American model, whereby large providers that win government contracts are obliged to give a certain amount of that contract to small providers.

“The important point is that big companies will charge very large amounts to the government for whatever they're doing, all they want to do is win that business. If you have a clause which says you have to use a certain amount of small businesses, it's incredibly effective, because all of that you're working against with the big companies suddenly is on your side,” said Lynch.

“Admittedly you'll probably end up doing 90 percent of the job for 10 percent of the money, but that's fine, it's still a massive profit margin from where you would have been anyway, and you get a reference and the relationship goes forward.”

Adopting a similar approach in the UK would allow civil servants to buy from whichever suppliers they wanted to, but would force those suppliers to behave in a better manner towards small businesses, according to Lynch. However, there is still a risk that the larger companies become like the systems integrators, which are effectively the puppet masters of government IT spending.

What's needed is an attitude adjustment, not just within government but within these large public sector suppliers themselves, because if they continue to walk all over small companies that are providing innovative solutions, they will ultimately lose out.

If the large suppliers are too blinded with self-interest to recognise the opportunities that SMEs present, then the government needs to intervene - either with a carrot or a stick - and put its money where its mouth is to ensure that these smaller suppliers become part of the pipeline.

It is simply absurd that a government that is so keen to support small businesses is still failing so miserably to buy from them. While archaic procurement processes remain in place, the government will continue to fall behind on technological innovation, and the economy will continue to suffer.
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Tags: business, business and economy, government, public sector, royal academy of engineering, small and medium enterprises, small business, subject-matter expert

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