14 Commissioners must balance the government's aspirations for using SMEs with other conflicting priorities. Most contracting decisions are made by commissioners across government, rather than by the CCS. The SME agenda is only one part of significant ongoing changes in the way the government does business with its providers. Some of these trends may make it harder for SMEs to win contracts as commissioners seek to balance different government priorities in decisions about contracts, including:
• Reductions in commissioner capacity
Our recent reports have highlighted gaps in government's commercial capability. Most government departments plan to make further cuts by 2020, which is likely to affect capacity in commercial teams. Departments' efforts to improve the way they manage contracts has focused on larger contractors. Government has not yet set out how it will manage smaller contractors. Departments may rely on larger contractors (prime contractors) to manage supply chains on their behalf so commissioners only have one contract to manage rather than many. In recent years, government has extended this model to new areas of spending, such as estates management and learning and development. This trend is likely to continue if spending cuts reduce the capacity of commissioning teams to manage a larger number of contracts (paragraphs 3.4 to 3.8).
• Greater use of government's collective buying power
In many areas of government, particularly for common goods and services (such as office supplies and training), government is increasingly merging the spending of different departments and using its collective buying power to simplify procurement and cut costs. This allows it to standardise products and services so providers compete on the basis of price rather than quality. Providers of these products and services can no longer rely on their pre-existing relationships or specialised nature of their product or service to win contracts. This can limit opportunities for SMEs that rely on their specialist services to secure business. While the CCS has shown that SMEs can win contracts even when government merges its spending, the move towards greater price competition and standardisation changes the type of SME that is likely to win these contracts. This reduces the likelihood that SMEs will bring innovation or niche expertise (paragraphs 3.9 to 3.12 and Figure 8).
• Pressure on departments to make savings
Government's austerity policy means departments will need to achieve further cost savings by 2020. With reduced budgets, departments are less able to absorb the cost of projects overrunning or exceeding budgets. When delivery is outsourced, commissioners can seek to transfer most of the financial risks of delivering the contract to the provider, by agreeing a fixed price at the start of the project. However, it means providers must be willing and able to take on financial risk. SMEs often do not have the resources or financial support (eg from a parent company) to be able to do this so commissioners may perceive them as more risky than larger providers (paragraphs 3.13 to 3.15).
15 Consequently, most SMEs working on government contracts are part of the supply chain and it is not clear that this will lead to increased competition and innovation. These SMEs make up 60% of government's annual £12 billion estimated spending with SMEs. They work for larger prime contractors and may not compete directly for government contracts. In most areas, government has limited knowledge of these supply chains, as prime providers appoint, set contract terms for, and manage the supply chain directly. These SMEs can bring other benefits and subcontractor roles can help them increase their capacity and experience, to be better able to compete for future work. However, the Cabinet Office has no way of knowing whether it is making progress towards its overall aim of increased competition and innovation. Prime providers will also take a management fee, which either reduces the income received by subcontractors or increases the cost to government of delivering services (paragraphs 1.7, 1.15 and 3.26 to 3.28).
16 Some parts of government have identified categories of spending where SMEs can have the most impact on delivery. The CCS expects all departments to try and increase their use of SMEs. We found some examples of commissioners identifying areas where they could make greater use of SMEs. For example, sectors where SMEs are already thriving (eg digital services) or where government is keen to support SMEs to grow (eg construction). Commissioners have developed plans to reduce barriers to bidding in these areas, and make contracting arrangements more SME friendly. For example, Highways England has reduced the lot size for some construction contracts to make them accessible to SMEs (paragraphs 3.16 to 3.25 and 3.29).
17 The fractured nature of government procurement systems makes it harder for the CCS to pursue a more targeted approach for government as a whole. An underlying theme of this report is that government lacks an integrated digital platform for procurement. We reported in 2014 that individual departments do not have systems that integrate information on contracts, payments, and contractor performance. In areas not covered by CCS frameworks, this makes it harder for CCS to assemble information on cross-government spending or contracts and identify areas in which SMEs are making significant contributions to the delivery of government services or have the potential to have a greater impact. Contracts Finder holds information on some of government's contracts, but it depends on public bodies uploading information to it that is currently held in over 200 different procurement portals and the CCS has limited oversight of this data. Since July 2015, the CCS has begun to carry out a small number of spot checks to confirm that public bodies are using Contracts Finder to publicise their contract opportunities.