Are big SIs becoming the unwanted middle-man between government and SMEs?

Key technology innovators within the Cabinet Office and the Government Digital Service (GDS) should be commended for the progress being made in improving the relationship between the public sector and SMEs, where now some 10.5 percent of procurement spend goes directly to small and medium sized enterprises.

This is up from 6.5 percent in 2009/10 and suggests that a number of reforms that have been introduced in recent years are starting to make an impact. For example, the introduction of the G-Cloud, where the majority of suppliers signed are SMEs, has given buyers in government transparent and direct access to agile, innovative businesses that can procure products in shorter time-frames and at a fraction of the cost of traditional systems integrators (SIs).

However, the latest figures released by the Cabinet Office also reveal an interesting trend that is emerging. When looking at the past year, the amount of cash spent directly with SMEs only increased from £4.4 billion in 2011/12 to £4.5 billion in 2012/13 – an additional £137 million, up only 0.4 percent.

But, over the same period indirect spend with SMEs increased from an estimated £2.9 billion to £4 billion – an additional £1.1 billion, a more significant 2.9 percent boost. Indirect spend with SMEs can be defined as spend that has gone through key suppliers to government, but landed in the pockets of SMEs that are part of that larger supplier’s supply chain.

Although no explanation for the increase in indirect spend is given in the Cabinet Office report, it is likely that part of the reason is that big SIs are now being forced by departments, as part of procurement reforms, to include a certain amount of spend with SMEs when signing new contracts.

However, this raises the question, if this trend of indirect spend were to continue, are the government’s SME reforms working in the ways that it intended? There are two main reasons for the public sector wanting to drive more of its business to SMEs. Firstly, these smaller businesses could be the next UK technology goliaths of the future and if the government can play a part in fostering their development and growth by giving them more work, whilst benefiting from their often innovative technology, then this will mean great things for the UK economy.

Secondly, and perhaps more importantly, there have been a number of high profile scams and cock-ups within the public sector, which have largely been blamed on projects that have been poorly delivered by the traditional suppliers to government – the large SIs. These have cost the taxpayer billions of pounds. GDS and the key players in the Cabinet Office believe that by working with SMEs that can deliver projects in a more agile, cost-effective and timely manner, it will transform procurement and IT in Whitehall.

It is with this second point that may be cause for concern. If the government continues to increase its spend with SMEs via its usual ‘Oligopoly’ of suppliers, are the cock-ups and scams going to become less prevalent? Will Whitehall actually become more agile and deliver products on time, which are also easy to use and cost less? Some may question the likelihood of this outcome if big SIs are going to play the middle-man between government buyers and the eagerly sought after SMEs.

The government is careful to say that it hopes to increase its spend with SMEs to 25 percent by 2015, both directly and through the supply chain – indicating that both will play a role, but without placing too much of an emphasis on one or the other.

The Cabinet Office’s line on that matter is that it is doing its best to help SMEs win government contracts. A spokesperson for the department said: “Governmetn has been working to change the procurement landscape to make sure we’re attracting the most competitive, innovative and high quality rang of suppliers – this includes encouraging and supporting SMEs to tender and win government business.

“We know that SMEs can often deliver better value for money so we are working hard to ensure that SMEs are made aware of opportunities to compete for places on government frameworks and other contracts.”

We spoke to about half a dozen SMEs that have recently worked with government on IT projects and none of them disputed the fact that change is taking place. More than one said something along the lines of: ‘We are just happy to be getting money at all’. Joe Dignan, chief analyst at Ovum, also argues that SMEs working with bigger suppliers could be a good middle ground, where suppliers still can play a role and government gets the scale and reliability it needs.

“Does the government really want hundreds of companies to create a spaghetti ball that it needs to work with and do due diligence around? Or is it better to have a nimble set of SMES that sit on top of a scalable, secure, elastic platform?” said Dignan.

“If a department urgently needs 30 engineers ASAP, no SME can deliver that. SMEs can bring the nimble, agile innovation, but at the backend you want it to be scalable. It’s kind of a half-way house, but what it will do is allow the SMEs to grow.”

He added: “I think it gives the SMEs an opportunity to play in a much larger game than they previously would have been able to, a chance to prove themselves, and potentially export themselves too.”

Almost all the SMEs also had high praise for the G-Cloud, saying that it finally gave them the exposure and access to government departments that they had previously so desperately chased after. For example, Steve Lyon, business development manager at CRM specialists Optevia, which has won a number of contracts through the G-Cloud framework, said: “The overall time of procurement has reduced dramatically and it is also a guaranteed showcase for people to look for solutions – we are all on the same ground. The time and cost of sale has gone down dramatically.

“I think things are changing – there is a quicker entry point and a quicker impact.” However, Optevia has also partnered with larger suppliers on government projects and Lyon was quick to say that he would much rather work with government directly, adding that there is always a trade-off when working with one of the big SIs.

This was common amongst all the SMEs we spoke to – grateful for the business, but would still rather be working with Whitehall directly. However, this is not because they feel that the larger suppliers are squeezing them for all they are worth (which was our initial instinct), but because they worry that by working as part of the supply chain they are still not able to deliver the best product to the public sector, thanks to the cumbersome SIs blocking direct access.

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