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Whitehall invests less than 3% of procurement cash in SMEs

Less than 3% of government procurement spend goes to small start-up companies, according to new analysis by open data experts Spend Network funded by Nesta.

The research, part of an ongoing commitment to explore the role of government in supporting start-ups and innovation in the UK, looked at three years’ worth of procurement transactions amounting to £68bn.

Just £1.6bn – or 2.7% of the total expenditure – was granted to small start-ups.

Tom Symons, principal researcher at Nesta focusing on public and social innovation, said: “Small start-up companies tend to be more innovative and willing to pursue new technologies than market incumbents.

“In buying predominantly from larger established firms, the UK government is taking the risk that they will miss out on new approaches which might lead to better and more efficient outcomes for citizens.”

Firms in their first two years of operation take the hardest hit, being awarded less than 0.5% of the £68bn cash total.

Symons adds that there are several explanations behind this, such as that the time between a tender going live and payment being rewarded can be too long for small companies from a cash-flow perspective.

Some sectors can also be “particularly difficult” for young firms: the Ministry of Defence (MoD), for example, spends “comparatively little” on them despite its “huge procurement budget”.

“This is understandable – it requires enormous investment to be able to meet the requirements of a defence buyer. The problem is that this makes it very difficult for the MoD to innovative in the supply chain, and creates a dependency on existing firms,” Symons said.

Despite this there have been changes in recent years to government procurement processes that help start-ups bag contracts.

G-Cloud, for example, is a “simple, flexible and transparent” digital catalogue that enables government buyers to purchase cloud-based IT services. It is designed to make it easier for SMEs to bid on work and 50% cheaper for departments to buy services.

The service shifted expensive government IT contracts – of which 80% were going to just five firms – to SMEs, as almost 50% of the work through the G-Cloud was going to them.

Symons said that this kind of “systemic overhaul” is essential in encouraging young companies to become a part of the supply chain.

He added: “If we are to support innovation inside and outside of government, we need to be conscious of the barriers that can exist for new companies trying to bid for contracts.

“We need to look at alternative approaches to procurement which will help widen markets, reduce costs and unlock better outcomes.”

Writing about the analysis, Symons said that the north east has a “historically strong track record” of supporting young firms, made possible due to a “procurement partnership” between councils focusing on collaborative economic development and local businesses.

“This collaborative approach to economic development seems to help start-ups, and is a model that might be a useful reference point as the government grows the Northern Powerhouse.”

Nesta’s findings come less than a month after an announcement that the £2.6bn European Regional Development Fund (ERDF) would undergo a “major shift to more localised spending”, opening its doors to local enterprise partnerships (LEPs) and individual local firms.

Local growth and Northern Powerhouse minister, James Wharton MP, said at the time: “This funding will give the places a chance to contribute more to the national economy and unlock local potential.

“We want local partners to come forward with how they want to use this money to forward their economy. As part of our long-term economic plan, this money will provide a big boost to businesses and help create numerous jobs locally that will also benefit people living in towns and villages nearby.”

The government added at the time that the 39 LEP areas “know best what is needed to boost growth locally”, with all decisions being taken within this framework.