Reforming SME procurement

The government and some local authorities have recognised the value of procuring goods and services from SMEs for many years. The evidence is compelling and shows the true value of small businesses at the grassroots level. For example, research by the Centre for Local Economic Strategies (CLES) into the impact of local authority spending on their economies found that every £1 spent with local SMEs generated an additional 63p of benefit for their economy, compared to just 40p generated by large local firms.
So, doing business with local firms really does pay and it gives our towns and cities much more value. CLES also found that small local firms generated 58 per cent more economic benefit for local economies over two rounds of re-spending than large local firms did. That said, the benefits are not just economic.
Small firms tend to be more innovative and better able to adapt to client needs, and so can offer very high levels of service. They may not have the economies of scale, but they don’t have such large overheads, and being innovative can deliver lower costs as well as higher quality. It is a common misconception that large firms are always cheaper. This is not necessarily the case; I know a number of authorities who encountered higher costs when dealing with large businesses. If we opened up the procurement process to many more small firms, you will be surprised at what they can do for you.

With the public finances still under significant pressure it is unsurprising that the Government is looking to get the most it can from the £230 billion public sector procurement pot. In May 2013 the Prime Minister’s advisor on enterprise and small business, Lord Young of Graffham, published a report, Growing Your Business, which set out proposals to make the public sector market more directly accessible to smaller businesses. There were three main areas: simplifying prequalification; better transparency, and prompt payment.

This built a number of reforms that had already been implemented in central government to make procurement more efficient across Whitehall. One year on from the consultation on these proposals, the regulatory wheels on a package of reforms are being set in motion but what will this mean for public sector procurement?
Lord Young’s reform programme will be delivered in two tranches. The first will see a consultation on the details of the new public contract regulations, with the intention of bringing measures into force in early 2015. The second will be carried forward through Clauses 33 and 34 of the Small Business and Enterprise and Employment Bill, and subsequent secondary legislation and guidance.

What reform will mean
So, what can you expect? Well, taking the regulatory package first, we expect measures to oblige procurers to place procurement opportunities on Contracts Finder and oblige procurers to place details of who has won each contract on Contracts Finder, with an indication of contract value, and whether or not the winner is an SME. The measures should also eliminate pre-qualification questionnaires (PQQs) for low value procurements below European Union (EU) threshold but recommend ‘open style’ self certification approach with emphasis on pre market engagement, as well as ban disproportionate requirements on turnover, and financial strength via statutory PQQ guidance.
A simplified standard selection process should also be introduced for high value contracts above EU thresholds, and public procurers should be obliged to use contract clauses to ensure that their fair payment terms (30 days) are passed on by suppliers through their supply chains. Finally, there will be a measure to create a legal duty to report on late payments including interest paid.

Fair payment terms
The obligation on public procurers to use contract clauses to ensure that their fair payment terms (30 days) are passed on by suppliers through their supply chains is absolutely vital. Some tier one suppliers have been gratefully accepting prompt payment from public procurers, while simultaneously expecting their own supply chains to wait 60, 90 and even 120 days. This is unfair and Government should be applauded for doing something about it. Some local authorities are already well ahead on this. Wakefield Council is one of those already using contract clauses to force their tier one suppliers to pass on fair payment terms. They generously permitted the FSB to publish their standard clause for doing this as an illustrative example. This can be found in our 2013 report Local Procurement, Making the most of small business, one year on, which can be found on the FSB’s website.
For below tender threshold contracts the self-certification proposal is an interesting one. Normally pre-qualification asks everyone to tell the procurer whether they meet the standard or not. This proposal effectively inverts the process by requiring the procurer to state what the standards are up front in the contract advertisement. Potential suppliers then look at these and take a value judgement on whether it is worth bidding or not, knowing that they would have to provide evidence that they meet the criteria should they emerge as the winner at the end of the process. This is an elegant solution that should save both procurers and businesses time and effort if properly implemented.
The second tranche of Lord Young’s procurement reform agenda requires primary legislation and is set out in Clauses 33 and 34 of the Small Business and Enterprise and Employment Bill. Although the Bill is likely to receive royal ascent before the general election, the reality of legislative time tables means that the window for getting the statutory instruments in place before the election is very narrow. If this window is missed then the future of these reforms becomes significantly less clear.
Clause 33 of the Bill gives the Government the ability to implement further measures relating to public procurement in the future. Potential measures could see this power being used to require procuring authorities to run an efficient and timely procurement process and to make available, free of charge, information or documents, or processes necessary for any potential supplier to bid for a contract opportunity, as well as accept electronic invoices.

Putting the new measures to work
It is too early to tell how these will be interpreted for implementation. It seems likely that duties to focus on procurement in an efficient and timely manner will include measures aimed at making sure that procurement time frames are proportionate to the contract size. It also seems likely that measures will oblige acceptance of e-invoices. Somewhere along the line there will also need to be an attempt to address the potential problems that could arise from different organisations using different e-invoicing software. This is a problem that needs tackling sooner rather than later.
Clause 34 of the Bill puts the Cabinet Office’s Mystery Shopper scheme, which provides a route for suppliers to raise concerns about public procurement practice, on statutory footing by giving the Minister for the Cabinet Office and the Secretary of State the power to investigate the exercise by a contracting authority of relevant functions relating to procurement. This means that they can investigate prequalification, tendering/bidding and awards as well as the management of a contract. The provisions will empower them to demand documents, and to name and shame where poor performance is found.
With all sides of the political debate broadly agreed on the merits of opening up public procurement to SMEs and micro firms, it is likely that the provisions of the Bill will be enacted by whichever party or coalition of parties forms the next government. However, what about those of you who are eager to start the process and don’t want to wait for the rules to change?
Well, the FSB’s 2013 procurement report that I mentioned earlier has plenty of best practice guidance. The main advice centres on breaking contracts into smaller lots to create opportunities for small firms, making sure that processes and requirements are proportionate to the value of the contract, and above all, supply chain engagement and capacity building.
So, let the SMEs and micro firms in your area know what you are going to need and they will come up with plenty of innovative ways of giving you what you want. If you are not sure where to begin to engage with SMEs and micro firms in this way, you need only contact your local FSB representatives. They have a range of ways in which they can help including by making introductions to previous winners of the FSB’s Local Authority Awards’ procurement category in your local area.  
Overall, the direction of travel is for more procurement reforms in the short and medium term. I want them all aimed at increasing SME and micro firm participation in delivery of public procurement contracts. Many public procurers are already making great strides in this area with in excess of 90 per cent of local authorities taking action to assist local SMEs, but there are always opportunities to improve and the FSB is always here to help.
Further information