5 August 2002

SMEs - a greater role in public sector procurement?

By Dr Richard Wilson, Business Policy Executive, Institute of Directors and David Beamer, Director, PoliticsDirect

It is the policy of the United States Government, as stated in the Small Business Act, that all small businesses have the maximum practicable opportunity to participate in providing goods and services to the government. To ensure that small businesses get their fair share, the Small Business Administration (SBA) negotiates annual procurement preference goals with each Federal agency and reviews each agency's results. The SBA is responsible for ensuring that the statutory government-wide goals are met in the aggregate.

In the UK, the boundaries between the private and public sectors have become blurred in recent years as private sector businesses have become increasingly involved in the delivery of public sector services. Although some of what used to be considered core government activities have been out-sourced to the private sector, a relatively small proportion of small businesses compete for public sector commercial orders. Providing small and medium sized enterprises with a fixed proportion of the market for Government contracts would encourage more businesses from this sector to participate in the tendering process for public sector contracts. This would be advantageous for both Government and, Small and Medium Sized Enterprises (SMEs).

Contracts made by Government departments and agencies with private sector companies should entail the purchase of the best quality goods and services that are available at the cheapest price. However, if only a small proportion of SMEs are involved in tendering procedures for Government contracts, then taxpayers may not be getting the best value for their money. Providing SMEs with a fixed proportion of the market for Government contracts could encourage more businesses to enter this market and compete to be Government suppliers. Greater competition between businesses for winning Government contracts is likely to result in the taxpayer getting a better financial deal.

Indeed, greater competition from SMEs in the Government procurement market should also result in the taxpayer receiving a better quality of service. Many SMEs can be more innovative than larger businesses because they do not have to adhere to rigid rules and procedures, but are instead at liberty to try out new ways of delivering goods and services. Their ability to experiment allows many SMEs to operate more flexibly and so offer a potentially more responsive level of service in comparison to that provided by larger companies.

SMEs would likewise reap a number of advantages from being granted a guaranteed proportion of the market for Government suppliers. In the first instance, it would help SMEs surmount the hurdles that they currently face in gaining entry to this market. At present, the market for Government contracts is in practice tilted in favour of larger companies in comparison to SMEs. Information about the market for Government contracts is not particularly well disseminated. However, larger companies are able to overcome this problem and learn of new business opportunities with Government because they typically have sophisticated and sizeable research and marketing departments at their disposal. By virtue of their size, SMEs often lack these resources. Additionally, larger businesses are often well placed to deal with Government because they are invariably better acquainted with its procedures and personnel than SMEs. Setting aside a certain proportion of the market for Government contracts to SMEs would act as a counterbalance to the disadvantages that these businesses experience in this particular market.

Moreover, providing SMEs with a fixed proportion of the market for central Government contracts would help to offset the regulatory burden that SMEs as a sector operate under. Small firms often lack the resources and in-house personnel managers, accountants and lawyers to cope with new, complicated, regulations. Consequently, the burden of complying with new legislation often falls disproportionately on small firms. Improving access for SMEs to the market for Government suppliers would indirectly ameliorate (for some) the costs of regulation that businesses in this area face.

Furthermore, enhancing SME access to the Government procurement market could give a powerful boost to the businesses in this sector. The market for Government suppliers represents a significant element of the economy. Improving SME access to this market would expand opportunities for trade and allow small firms to diversify their commercial relations. This in turn could help some promising start-up enterprises to survive and it could enable some more established small businesses to grow into larger companies.

Richard Wilson has contributed to this article in a personal capacity. The article does not necessarily represent the views of the Institute of Directors.

Dr Richard Wilson can be contacted at richard.Wilson@iod.com

David Beamer can be contacted at info@NOSPAMpoliticsdirect.com (please remove NOSPAM when you email).