The PM has promised to increase procurement from small businesses, charities and social enterprises. Joshua Chambers asks these micro-suppliers how government can help them find success in public contracting.
As a general rule of government, politicians set out their ideology, and civil servants have to make it a reality – however difficult that may be.
And so it is with the Big Society idea, which is particularly challenging because it involves changing the role of central government itself. Prime minister David Cameron wrote a newspaper article recently stating that “the grip of state control will be released and power will be placed in people’s hands”. To do this, he said, “public services should be open to a range of providers competing to offer a better service”.
Cameron’s ideas involve transforming the role of the state from that of main provider to one of service purchaser. As he wrote in his article: “The state will have to justify why it should ever operate a monopoly.” Key to Cameron’s vision is the concept of provider diversity. Big contractors shouldn’t win all the contracts; instead, the government wants to increase the number of contracts won by social enterprises, charities, voluntary groups and employee-owned mutual organisations. It is also keen to increase procurement from small and medium-sized enterprises (SMEs). As the coalition agreement says: “We will promote small business procurement, in particular by introducing an aspiration that 25 per cent of government contracts should be awarded to SMEs.”
It falls to civil servants to achieve this aspiration. This may be an uphill struggle: Chris Heathcote, a senior policy adviser at the Confederation of British Industry (CBI), warns that after years of struggling to win government contracts “SMEs have lost confidence in the process and need to be tempted back.”
With this in mind, CSW has spoken directly to people in SMEs, social enterprises, charities, voluntary groups and the umbrella organisations which represent them, in order to find out what obstacles they face – and what civil servants need to do to enable them to compete and thrive.
Off-putting obstacles
One of the biggest obstacles faced by both SMEs and other small organisations is the expense of participating in a public sector tendering processes. Heathcote explains that the complexity of government procurement can deter SMEs from even bidding for contracts.
One obvious problem is that government procurements take a long time, leaving organisations paying for both their overheads and the bidding costs while they await a decision. Gordon D’Silva runs two social enterprises: Training for Life – which trains disadvantaged people – and Hoxton Apprentice restaurant, which gives young people with a history of unemployment a chance in the culinary world. D’Silva explains that throughout a government tendering process, “you need to support basic cashflow requirements, running costs, overheads… and it places an enormous amount of risk on the social enterprise. Many will not have the surplus income to support this.”
Social enterprises often struggle to stay the course through such extended competitions because, as Ceri Jones, head of policy and research at the Social Enterprise Coalition (SEC) explains, social enterprises simply “don’t build up reserves; they reinvest for social missions instead”.
The scheduling of government tendering can exacerbate the problems faced by smaller organisations. Heathcote says that procurement officers usually aren’t aware of what is happening in other departments, meaning there can be too many tendering processes happening at the same time. “Even big providers sometimes say to us that they can’t bid for everything – even though they would like to – because there are so many tenders out at once,” he says.
Bidding their time
If an SME, social enterprise or charity still wants to tender for a contract, there are often serious barriers to entry which prevent them from doing so.
David Rumble is strategic development manager of Bywaters Waste Management Ltd. This firm was until recently an SME – the definition includes all businesses employing fewer than 250 people – and he has extensive experience of contracting with the public sector. Rumble says he can sum up the problems for SMEs in one sentence: “The bar to entrance for applying to contracts is too high.”
For example, his firm wanted to tender for the construction phase of the Olympic Games, but there was a threshold of a £70m turnover for applicants. “By definition, if you’ve got £70m [turnover] you’re not an SME,” Rumble explains. “Ironically, the company that won the contract ended up subcontracting to us for the first six months – where’s the logic in that?”
Social enterprises experience similar difficulties. Frank Villeneuve-Smith is a director at the Hackney Community Transport group (HCT), and explains that his firm was wrongly ruled out of a contract because it was a social enterprise. “We were ruled out by an arbitrary decision based on our group structure,” he says. On paper, the firm lacks reserves – but only because “any reserves from our trading company are designated to the charity part”. Villeneuve-Smith adds that government needs to be more aware of the “complex legal forms that social enterprises sometimes contort themselves into” – a point which is also true of employee-owned companies.
Another barrier can apply to start-up companies, despite the innovative solutions they may bring to public sector problems. Jones says that “traditionally, one of the criteria to get through the pre-qualifying stage for procurement is that you need three years’ experience.” This ignores the track records of people running the company, she says, who may have transferable experience from running other successful organisations for many years.
Contract trouble
Even if smaller organisations are allowed to enter bidding processes, they often find that contracts demand the provision of services over a greater geographical area than most can manage.
Seb Elsworth, strategy director for the Association of Chief Executives of Voluntary Organisations (ACEVO), points to the Department for Work and Pensions’ Work Programme: only one charity, the Careers Development Group, was able to win a bid, he says, because the tendering was looking for contractors who could deliver for an entire region.
Unlike most government procurement, however, this programme is trying to ensure that the larger, prime contractors subcontract out to smaller organisations. The specifics of the scheme have met with mixed opinions (see box), but subcontracting has been welcomed as a general approach by umbrella organisations.
Another problem, says the SEC’s Jones, is that procurement officers are generally buying a narrow contract for one department, and don’t have the flexibility to recognise the ways in which a social enterprise contractor can produce results for other departments. “A contract may only be about one part of their business, while social enterprises deliver an integrated product because they operate in a different way,” he says.
Villeneuve-Smith agrees that procurement officers prefer to tender for services separately – especially in local government. For example, he says, HCT was operating a council bus service and found that it had some slack in its timetable. Given that the drivers were already being paid, they could have operated an additional supermarket trip for elderly people “for just the price of the petrol”. However, it was the responsibility of another department to provide services for the elderly, and eventually the authority lost an opportunity to provide a cheap and useful service because it couldn’t work across silos.
What needs to be done?
Small businesses and charities are quick to highlight the obstacles they face; but they are also keen to suggest how they might be overcome. Their first piece of advice is to procurement officers: engage smaller organisations before designing a tendering process. Rumble explains that many tenders “are too prescriptive, and you must deliver the service in a certain way with very tight guidelines – as opposed to inviting innovation from the private sector. The people writing the tenders are often not aware of other options out there.” This problem may be receding, however: the government has started to recognise that outcomes are more important than outputs, and is shifting its tendering accordingly.
Currently, the CBI’s Heathcote says, it is seen as inappropriate for procurement officers to have conversations with suppliers. However, he calls for “more maturity and common sense about the benefits of informal discussion. Obviously, the bidding process needs to be fair and transparent, but it can help at the scoping stage to have discussions.” This would help develop a process and a contract which encourage smaller organisations to bid, he says.
Social enterprises want their broader social impact to be recognised in contracts; something that a private member’s bill currently passing through the House of Commons aims to achieve. D’Silva says that social enterprises don’t just provide the function directly specified in a contract – such as training – but also additional benefits. They may, for example, take on long-term unemployed people or offenders – reducing broader costs for the Exchequer.
D’Silva calls for the government to provide loans for social enterprises: “We need the sort of working capital that will allow us to compete with the big private sector firms,” he says. Such investments would not only help social enterprises to grow, he argues, but also produce wider benefits through supporting their social objectives.
What do they think of efforts to date?
The coalition’s desire to increase procurement from SMEs and charities is not a ground-breaking idea. The Labour government had the same aims – and current party leader Ed Miliband made it a priority while working as a third sector minister in the Cabinet Office. In 2008, the FutureBuilders programme enabled some voluntary groups to bid for loans in order to deliver public service contracts; other capacity-building initiatives were run through umbrella groups, ACEVO’s Elsworth explains. By that time the NHS had already implemented ‘world class commissioning’, meaning that trusts have to consider the effect of their commissioning practices on the local economy.
These policies’ effects were patchy, however. The chief executive of voluntary sector group Community Matters, David Tyler, says that Labour simply “came to the agenda too late in their administration and didn’t get a chance to implement very much of it”.
In contrast, the current government has moved quickly. Heathcote explains that a lack of contract transparency meant that in the past SMEs were often unable to find tendering opportunities. So the coalition has published all government contracts on a single website: Contracts Finder. Meanwhile, the Cabinet Office’s Office for Civil Society is looking at how to remove other barriers, and has already run a nationwide consultation on procurement problems. And the government has appointed a dedicated crown representative for SMEs, Stephen Allot, who – according to the Cabinet Office – is “seeking to remove” the pre-qualification stage in tendering processes for contracts under £100,000. Social enterprises and SMEs face identical barriers, explains Jones, so these efforts will help all small organisations.
The government is also pressing ahead with its ‘Innovation Launchpad’, which allows SMEs and other small organisations to pitch ideas to the government – aiming to allow previously excluded organisations to provide fresh thinking on public service delivery.
From a voluntary sector perspective, Tyler says that small charities were pleased with last July’s commissioning green paper, “which asked many of the right questions”, and with the deregulation taskforce – of which he is a member. However, small voluntary groups are biding their time to see whether the issues raised in consultation will be tackled in legislation.
Waiting for the white paper
The next step for government is to publish the public services white paper, which has been delayed until May at the earliest. This is expected to set out a detailed roadmap for how the PM will achieve his Big Society vision for service delivery. Although the details of how it achieves this are likely to be the subject of considerable debate within the coalition following May’s elections, both parties are likely to agree that civil servants should work to remove the procurement obstacles to greater producer diversity.
This will not be straightforward. Some contracts may always be too big for SMEs to deliver; and in these cases, the government may push prime contractors subcontract out to smaller organisations. Heathcote says that government needs to collect data about how larger businesses interact with SMEs during contract negotiations, so there can be a better understanding of how the market operates.
Another difficulty may lie in a clash between the needs of the Big Society agenda and the government’s localist philosophy. Cameron argued in his article that work to devolve power is, along with public service reform, the most important element of the Big Society agenda. But if newly-empowered local authorities fail to expand commissioning from SMEs and charities, says Jones, the government will have to push them to adopt similar reforms to those being pursued at the centre.
Most important is consultation: small suppliers insist that the government must consult with them, and act on what it hears. This amends the general rule of government: politicians set out their ideology and civil servants make it a reality – but they must also ensure that ministers listen carefully first.