The National Audit Office has today published a report setting out the progress made so far and the challenges faced by the government in its efforts to increase its spending with small and medium-sized enterprises (SMEs) further by 2020.

The Cabinet Office has estimated that 27% of government’s procurement spending or £12.1 billion reached small and medium-sized enterprises (SMEs) in 2014-15, surpassing its target of 25%. Government now aims to increase its spending with SMEs to 33% by 2020. In order to track government’s performance, the Cabinet Office’s Crown Commercial Service (CCS) has worked with departments to improve government’s understanding about its spending with SMEs.

The NAO says that it cannot be certain, however, whether the amount government spends with SMEs has increased over the last Parliament. The reported annual increases in spending with SMEs happened in parallel with the CCS’ work to improve its data. According to the NAO, therefore, it is not possible to know how much of the reported increase is due to the changes in approach and how much is an actual increase in SME activity.

Government has tried to harness the potential benefits of involving SMEs in the public sector marketplace for many years. The departments that the NAO spoke to agreed that SMEs can offer a number of benefits to the public sector, compared with other providers, including more flexibility and innovative approaches.

Over the last five years, the Government has had a clear and sustained focus on the involvement of SMEs in government contracts. Government has introduced initiatives to reduce the barriers faced by SMEs when bidding for public sector work. SMEs have reported, however, that they still face barriers as government initiatives are, in practice, not sufficient to ensure that more work flows to SMEs.

Government will be more likely to realise the potential benefits of using SMEs if it takes a more focused approach to improving access for SMEs. It currently bases its approach on the assumption that more SMEs will win work with government if there are fewer barriers to SMEs being able to bid. However, wider trends in government contracting mean that, although SMEs can bid for work, they are often not suitable to deliver it.

Government needs to take a more concerted effort not only to remove barriers to bidding, but to ensure that what and how government procures achieves the desired benefits of using SMEs. Government must also balance its aspirations for using SMEs with other potentially conflicting priorities, such as pressures on departments to make savings.

Among the NAO’s recommendations is for the CCS to identify areas of government spending where SMEs can have the most impact and to use best practice to inform future decisions.

“If the government is serious about increasing its use of SMEs, it will need to focus on those areas where SMEs can deliver real benefits. The government’s direct procurement spending with small and medium-sized enterprises was £4.9 billion in 2014-15. As it seeks to increase this further, government will need to think carefully about the full range of risks and opportunities that contracting with SMEs presents, compared to working with larger providers.”

Amyas Morse, head of the National Audit Office

Read the full report

Government’s spending with small and medium-sized enterprises

Notes for editors

27% Proportion of the government’s reported procurement spending that reached small and medium-sized enterprises (SMEs) in 2014-15 (Cabinet Office estimate) £4.9 billion Government’s reported procurement spending directly with SMEs in 2014-15 Unknown Number of SMEs working on government contracts 25% Aspiration for government’s level of procurement spending to reach SMEs by 2015 8 of 17 Number of central government departments that reported exceeding the government’s aspiration in 2014-15 19% Proportion of the Ministry of Defence’s procurement spending that reached SMEs in 2014-15 (the Ministry of Defence is currently responsible for 44% Of government’s procurement spending) 33% Government’s target for the level of procurement spending to reach SMEs by 2020 4 The number of different methods government has used to estimate its spending with SMEs in the last 5 years 60% Proportion of government’s spending with SMEs that was via another, larger, contractor to SMEs in their supply chains (indirect spending)
  1. Each year, the government spends around £45 billion on goods and services supplied by non-public sector organisations – such as small businesses and charities. In 2010, the government announced an aspiration for 25% of this spending to go to small and medium-sized enterprises (SMEs) by 2015. In August 2015, government announced that it would extend this target to 33% by 2020. The target covers both direct contracts with SMEs and spending that reaches SMEs indirectly (where the government’s contract is with a larger provider that subcontracts SMEs as part of its supply chain).
  2.  The Department for Business, Innovation & Skills (BIS) estimates that there are currently 5.4 million SMEs operating in the UK. Most are private sector businesses, but the definition includes many voluntary, community and social enterprise (VCSE) organisations. The Cabinet Office's Crown Commercial Service (CCS) is responsible for the government's commercial policies. This includes leading on government’s SME procurement policy.
  3. Press notices and reports are available from the date of publication on the NAO website. Hard copies can be obtained by using the relevant links on our website.
  4. The National Audit Office scrutinises public spending for Parliament and is independent of government. The Comptroller and Auditor General (C&AG), Sir Amyas Morse KCB, is an Officer of the House of Commons and leads the NAO, which employs some 810 people. The C&AG certifies the accounts of all government departments and many other public sector bodies. He has statutory authority to examine and report to Parliament on whether departments and the bodies they fund have used their resources efficiently, effectively, and with economy. Our studies evaluate the value for money of public spending, nationally and locally. Our recommendations and reports on good practice help government improve public services, and our work led to audited savings of £1.15 billion in 2014.

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