SMEs Are Feeling The Heat In Public Sector Procurement

The government’s public spending is so vast (approximately 16% of GDP) that sustainable procurement has to be a priority if the economy is to continue to improve. However the burning issue is not procurement via large enterprises, but through the driving force of the UK’s economic growth - small businesses. 99.9% of the UK’s 4.8million businesses are SMEs and by working sustainably with these smaller suppliers for public sector contracts, the government can play a huge part in stimulating the wider economy.

However, SMEs have unfortunately floundered in the supply chain because of late payments owed by public sector bodies. This is despite the government introducing the Late Payment Directive in 2000, updating it in 2011 and launching the Prompt Payment Code in 2008. Around 33% of SMEs have been paid late by a public sector body, with owed payments accumulating to £33.6 billion in 2011, topped up by a further £2billion halfway through 2012. As a consequence, 35% of small businesses have seen a reduction in profit and 16% have seen a noticeable difference in turnover; not exactly positive numbers for fuelling the economy.

Recognising the value of SMEs and wanting to curb disparity, the government has progressively created strategies to nourish them. Back in 2011 it pledged that, by 2015, 25% of central government contracts would be awarded to SMEs and backed this up with a number of procurement changes and policies to support it. This year, we’ve seen this promise reiterated; the UK lobbied to pass the EU Procurement Directive, which further reduces public sector red tape and gives greater flexibility to SMEs to work across Europe.

The procurement rule changes make this process much easier and more efficient. Access to public sector contracts is now totally transparent for SMEs to tender and bureaucratic pre-qualification requirements have been completely removed. The European Commission estimates these simplified processes could potentially save SMEs up to 60% of bidding costs, lowering the financial barrier to pitch for public sector contracts.

This is clearly a step in the right direction for SMEs; they can now secure public sector contracts much more easily but what about the next stage of being paid? The government has created initiatives like e-invoicing and prompt payments within 30 days to push payments along.  It has also set a target for public bodies to pay 80% of undisputed invoices within 5 days and it hopes to launch e-invoicing across the whole the public sector by 2016.  Again, these are great moves for sustainable procurement but just by looking at the history of SME late payments, we know that it’s not enough.

Cashflow is the biggest financial challenge SMEs face; they depend on a steady supply of capital to cover payroll, expenses and materials costs. Even though the government introduced prompt payment measures, how can it be sure that this always happens; particularly if SMEs are subcontractors of larger firms? The Federation of Small Businesses says some signatories to the code have managed to stretch settlement periods to as long as 120 days - far longer than the limit set by the EU Procurement Directive. Equally, if an invoice is disputed and payment is delayed, it is again the SME that suffers. In some cases, this leads to capital constraints that can shut suppliers down for good, even those with otherwise healthy businesses.

There are clearly problems in SME procurement which need addressing. Mandating e-invoicing is one measure the government definitely needs to continue to pursue. When businesses are happily embracing many different forms of technology to advance their business, it’s crazy that accounts payable still relies on shuffling paper; it’s barely advanced in the last 50 years.

True collaborative working and networking is the next step. We are already seeing public sector institutions in the UK adopting open platforms, which don’t just facilitate e-invoicing and slicker payment, but also much more efficient business processes. This is something that the government needs to fully harness to level the playing field for SMEs. By creating a network for payments it removes barriers to business for SMEs and lowers the trepidation over tendering for public sector contracts. This way both public sector bodies and SMEs get a deal they’re both happy with, and gives the ability to adjust and agree payments terms as they choose.

The government’s procurement changes have paved the way for sustainable procurement but it will only fully exist when we see better collaboration and networking between public sector bodies and SMEs to create a solvent cash flow. Whether this comes from further government changes in the future, remains to be seen. 

By Christian Lanng, Tradeshift CEO