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 in Feb 2011 by the Cabinet Office is missing some important points relating to a SME’s ability practically to compete for Public sector Contracts.
The first and most obvious barrier to SMEs bidding for Public Sector contracts relates to the 10% rule, which is often used by the public sector to exclude SMEs at the Pre-Qualification Questionnaire (PQQ) stage. This rule is rarely addressed up front 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.
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, 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 cash flow 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 fulfill 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.
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.