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Doing Business with Government – A Vision for Labour

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Simon Lydiard, a former Senior Civil Servant, offers some thoughts on his experience in government and developing a distinctive Labour vision for government business with SMEs.

In 2010, when the Coalition Government was formed, I was a Senior Civil Servant at the Department for Transport and responsible for procurement strategy across the Department and its Agencies. The new government set a target that 25% of government procurement should go to small and medium sized enterprises (SMEs). My department’s SME spend was 3%, way below target. This, therefore, presented something of a challenge, but fuelled my increasing passion for the value of small business.

I became the Department for Transports’ ‘SME Champion’, and and worked with colleagues to analyse the market sectors from which we bought, and our approach to contracting in each. I found that the right procurement strategy and proper market engagement prior to competition made some sectors highly amenable to SME participation. Information technology, for example, was an obvious candidate. In the past, government had been over-dependent on the big IT suppliers, but smaller IT companies were innovative, nimble and value for money. Properly engaging with them allowed us to make big strides with SMEs in our IT procurement.

But the largest slice of our procurement was construction, mainly the Highways Agency, and increasingly HS2. It wasn’t possible to let the largest construction contracts directly to SMEs, but SMEs are a major proportion of the construction industry and play a vital role in supply chains. A big issue for SMEs in construction – indeed in many sectors – is prompt payment. The Highways Agency pioneered a mechanism called Project Bank Accounts, whereby supply chain participants could draw down payment for work completed rather than waiting for the money to flow down the supply chain.  This made it cheaper for SMEs to do business, but also provided government with vital data: ee could now measure where the money was going, allowing us to properly identifying SME participation.

When I stepped down as my department’s SME Champion, our SME spend was 34%. I gained a reputation in Whitehall for my understanding of, and commitment to, helping SMEs to do business with government. Indeed, I was invited to join the officials committee which assisted Lord Young (Margaret Thatcher’s former Business Secretary and David Cameron’s Enterprise Tsar) in developing what became the Small Business, Enterprise and Employment Act 2015.

After I left the civil service, I produced a report for government on further improving procurement spend with SMEs. The 25% target had apparently been met (though the National Audit Office was not entirely convinced), and the government set a new target of 33%. I looked at a number of market sectors across several government departments. As with my analysis at the Department of Transport, I found there were different opportunities across various market sectors. Construction, again, figured largely. I found that 75% (by value of turnover) of the UK construction business was accounted for by SMEs, but only 5% of government spending on construction went to SMEs  a 70% gap. In contrast, the best performing departments were achieving 40%, meaning the government’s chances of hitting its 33% target overall were highly dependent on procurement strategies to unlock opportunities for SMEs for major infrastructure projects, particularly HS2,

If you’ve read this far, you’re probably thinking: where’s the Labour angle? Well here it comes. Everything I’ve written to this point relates to a time when I was either a civil servant (working to strict political neutrality) or a consultant to government. But I have a number of criticisms of this government’s approach to doing business with SMEs, and some suggestions which I hope will help Labour develop a distinctive vision.

The current government’s approach is shallow, target-driven, and not underpinned by a dynamic vision. Too many people in government know what they are aiming for but not why. The government continues to allow large companies to have too much sway, particularly the big consultancy houses. Senior staff from the major consultancy firms have Whitehall passes, allowing them to literally “walk the floors” drumming up business. To redress that balance, SMEs need better access and a role in governance. Departments should be required to appoint at least one Non-Executive Director with an SME background, who should be consulted on procurement plans and strategies, and informed of all access to departments by large companies.

The Coalition Government created an organisation called ‘Mystery Shopper’, through which SMEs could “shop” a public sector organisation acting against their interests.  But it has no teeth. To make it effective It needs greater powers and independence from government. SME Non-Executive Directors could play a role in overseeing it, along with involvement from trade associations such as the Federation of Small Businesses.

Prompt payment remains one of the biggest problems facing SMEs. The last Labour Government introduced legislation on late payment (The Late Payment of Commercial Debt Interest Act, 1998), but it needs revision and better enforcement. One idea might be to require public sector organisations to automatically pay late interest to SMEs, rather than requiring SMEs to claim it back themselves(which they are often loath to do, since they fear damaging relationships).

Those are a few technical ideas. But my experience tells me that  the current government has neither a natural affinity with SMEs, nor a vision for doing business with them. A vision is not just window-dressing, it is essential to not only convincing SMEs that government is on their side, but in persuading senior stakeholders in government that there is great value in doing business with SMEs.The Labour Party, on the other hand, can offer a genuine alternative

Here are my suggestions for Labour’s vision for government doing business with SMEs:

  • Delivering macro-economic benefit. Investment in large suppliers often results in money going off-shore, in excessive bonuses to senior staff or payouts to shareholders. Investment in SMEs injects money into the economy quickly, causing rapid local growth and boosting employment.
  • Releasing innovation, agility and productivity. Too often when buying from larger suppliers you are buying either a “playbook” or a legacy technology. Frankly, you are sometimes paying for something that has already been paid for, just adding profits on top of profits. With SMEs, you get genuine innovation.  Sometimes, SMEs can be a bit ragged around the edges and disruptive, but government needs to release that innovation, not bury it in bureaucracy.
  • Strategic partnering with SMEs. SMEs need to be involved in governance.  Their representative bodies should be invited to identify areas where SMEs can add value to government business, and to ensure their members are treated fairly. In particular, the playing field needs to be levelled, preventing larger companies gaining advantage through better access.
  • Government procurement needs to be more dynamic. Too much government procurement is done via “frameworks”, which lock up the market (often locking out SMEs) for long periods. On-line, dynamic buying can speed up procurement, making it cheaper and easier to do business with government. It can also enable government to release smaller packages of work, rather than “bundling” them up into larger contracts.

Labour can offer a distinctive vision for SMEs doing business with government, underpinned by specific policies that demonstrate to SME owners  over 99% of UK businesses  that we are on their side, the many not the few!