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If you look at the Business Population Estimates published by the Department for Business Innovation and Skills (BIS) in November last year, small and medium sized enterprise, or SME, is a definition that includes nearly everyone.
At the start of 2014, 99.9 per cent of the 5.2 million private sector businesses were classed as small or medium sized. Put another way there are only 6,700 firms in the UK economy that are not in this category. Closer inspection reveals that the medium sized businesses, those employing from 50 to 249 people, are also a relatively small demographic. Our economy has just 31,000 medium-sized enterprises, meaning that small firms make up 99.3 per cent of the UK business population.
So, when people say ‘SME’ what they are really talking about are the Micro and Small Enterprises (MSEs) that make up the vast majority of the business population. We talk of the importance of small business with good reason. At the start of 2014 small businesses accounted for 48 per cent (12.1 million) of UK private sector employment and their combined annual turnover was £1.2 trillion - 33 per cent of all private sector turnover.
At a national level, small firms generate wealth, drive innovation, create jobs, train apprentices, and provide the tax revenues that support a smorgasbord of social and economic policy that benefits the nation as a whole. Small firms are just as important to local economies and communities as they are to the national one. They provide essential goods and services for local communities, and often provide the focal point for social activity, either collectively through local high streets, or individually as in the local pub.
Public service delivery
The importance of small firms is not limited to broad economic considerations. In the vast majority of cases, what ever you need, there will be a small business somewhere that can supply it better, faster and cheaper than a large supplier can provide it for. Small businesses are nimble, and able to respond quickly to their clients’ needs, making them better able to adapt to your specifications rather than relying on selling you the solution that is most convenient for them to provide. Use of small businesses can help to improve public service delivery directly as suppliers and indirectly through competition pressure.
Small firms are particularly valuable suppliers to the public sector for smaller contracts. These low value contracts may be viewed as something of an inconvenience by large suppliers, but for a small firm, a public sector contract is often the largest that they have. This makes your priority, their priority.
Opening up public procurement opportunities to small firms doesn’t just provide a direct benefit in terms of the cost and quality of goods and services supplied. There is also an indirect benefit as, where small firms are able to participate in the market, they provide competition pressure which drives up standards in larger businesses.
The Federation of Small Businesses (FSB) believes that public procurement must be about more than delivering services, and that local authority procurement in particular must be used strategically to deliver social and economic gains. More specifically, we believe that it must be used to support local growth and local jobs by using local businesses to keep more of local council’s money in local economies. In this way we can all benefit from the economic multiplier effects of this investment.
To demonstrate these benefits, the FSB asked the Centre for Local Economic Strategies (CLES) to analyse the impact of local authority spending in the local economy. They found that, when the effects of local spend are broken down and analysed, every £1 spent by a participating local authority with local small businesses generated an additional 63p of benefit for their local economy, compared to just 40p generated by large local firms. They also found that small local firms generated over 58 per cent more economic benefit for local economies over two rounds of re-spending than large local firms did.
Small business procurement
So how do public sector buyers better enable themselves to benefit from what small firms have to offer as suppliers and competitors? The FSB has developed some principles for small business friendly procurement and these are as follows.
Strategy and Policy: Increasing procurement spend with MSEs requires leadership. As such small business friendly policies should be agreed at top management level within any organisation or company.
Spend Analysis: Procurers need to have mechanisms in place to record and analyse where and with which businesses their money is spent. This should include measuring the size of enterprise – medium, small and micro, and there should be robust reporting arrangements for the results. Public sector procurers should take care not to count individual business units or wholly owned subsidiaries of large businesses in their small business spending figures.
Opportunity creation: Procurers need to create more opportunities for MSEs by proactively seeking to break down contracts into smaller lots wherever practical, and by avoiding the temptation to aggregate contracts. Contract aggregation may seem superficially attractive but this can reduce competition pressure through over reliance on a limited number major suppliers. Procurers should also be wary of long contracts, as these effectively close the market and thereby reduce competition pressure.
Visibility of opportunity
Procurers need to ensure that the opportunities created for MSEs are visible to them. This can be achieved by advertising through the relevant procurement portals. To assist small firms, it is particularly important to ensure that low value contracts are well advertised. Process Simplification: Procurers should adopt appropriate best practice with regard to their use of pre-qualification questionnaires (PQQs), which may include the adoption of existing, standardised PQQs; online prequalification; and discontinuation of PQQs and other requirements where they are unnecessary. Simplified prequalification processes for smaller procurements below EU thresholds have been brought in for public sector procurers via the Public Contracts Regulations 2015.
Proportionate requirements: Procurers should also ensure their use of selection requirements is proportionate and based purely on the needs of the contract. These requirements can be minimum experience, insurance, or turnover criteria, or information requirements such as for audited accounts.
Recognition of existing accreditations: Procurers should take account of the third party accreditations that a firm already has, rather than insisting that all bidders are registered with a specific accreditation body as a blanket requirement.
Payment practices: Procurers should to put in place and monitor specific payment policies for small business suppliers, ideally following the lead of national government pledges to pay within 10 days of receipt, but no more than 30 days other than in exceptional circumstances. Procurers should also use contract clauses to ensure that prime contractors pass on the organisations fair payment terms to their subcontracted suppliers, and that the subcontracted suppliers likewise pass on terms through throughout the supply chain. This has also been brought in for public sector procurers via the Public Contracts Regulations 2015. A step warmly welcomed by small businesses.
Small business engagement: Procurers should ensure that regular training opportunities and supplier pre-engagement activities are available for MSEs in their area, to ensure that capacity is built ahead of opportunities becoming available and support market shaping.
FSB research with its members suggests that engagement and capacity building is particularly important when trying to increase spend with small firms. Of those responding to a survey on local authority procurement, more than half (55 per cent) of those that had bid were successful in winning at least one contract and nearly a third (30 per cent) had won multiple contracts. The instances of those winning multiple contracts may suggest a dichotomy between those small firms with the capability required to win public sector contracts, and those without, with the former able to access multiple contracts once the basic capacity to win one bid has been achieved.
Looking forward, there is much work still to be done to help open up the benefits of buying from small suppliers to more public sector suppliers. Implementation of the Lord Young agenda must remain an urgent priority across the sector, and we would urge all public sector buyers to view this as a welcome opportunity.
Through the FSB, small businesses are important partners in policy making at all levels from national economic strategy through to advising local authorities and Local Enterprise Partnerships on local priorities for their areas. Whatever you need, small businesses can help, and the FSB can help you to make the most of what small businesses have to offer.