Home Opinion Public Sector Contracts: An Evaluation of Scale and Resources

Public Sector Contracts: An Evaluation of Scale and Resources

by Brian Sims
Peter Webster

Peter Webster

For some time now, the way in which central Government contracts are allocated, awarded and serviced has represented a cause of deep concern within the security sector. Peter Webster explains why the Conservative Government’s latest move designed to appoint more small-to-medium sized enterprises (SMEs) for carrying out public sector contracts is well intentioned, but in some ways potentially ill-thought out.

The situation surrounding central Government contracts can be summed up quite simply. Small contracts go to smaller organisations, while major contracts usually end up in the hands of one single sector behemoth. Without wishing to go over old ground, the one thing that should have been learned from several well-publicised major contract failures of the recent past was that putting all of your eggs in one basket is foolhardy and may risk a disaster scenario.

It’s a lesson that appeared to have been heeded when Matthew Hancock, minister for the UK Cabinet Office, recently announced an ambitious new target to have more SMEs working on central Government contracts. The headline is that £1 in every £3 of central Government spend will reside with smaller businesses by 2020.

However, scratching the surface of this announcement means that, when it comes to larger ‘super’ contracts, very little will change.

Let’s take a look at the figures. In 2013-2014, central Government spent £11.4 billion with SMEs. That statistic is equivalent to 26% of central Government spend. By 2020, the Government wants to increase this to a third. That would mean an extra £3 billion per annum – in 2013-2014 terms – being channelled towards SMEs either directly or through the supply chain.

At the time of the announcement, Matthew Hancock stated: “This is such an amazing opportunity for the country’s diverse and innovative small businesses. I urge them to ‘get stuck in’. From computers to uniforms, there are so many opportunities for small businesses to work with us. I want to see more of them providing value for money for the taxpayer and benefiting from our spending.”

It sounds like a step in the right direction and was given support by, among others, the Federation of Small Businesses.

Earlier this year, the Government made another announcement in which it committed to requiring the entire public sector supply chain to be paid within 30 days and abolished pre-qualification questionnaires for low value public sector contracts.

What’s the problem?

So what’s the problem? The simple answer is that what constitutes an SME in one industry doesn’t necessarily translate to another.

The Government defines a company as an SME if it meets two out of three criteria: it must post a turnover of less than £25 million, employ fewer than 250 staff and/or have gross assets of less than £12.5 million. This means that 99.9% of the UK’s 4.5 million businesses are SMEs and, with an estimated turnover of £1,500 billion, they’re directly responsible for over 14 million private sector jobs while accounting for almost half of the net growth in employment.

Data from the Office of National Statistics’ Annual Business Survey shows that, on average, SMEs create around £33 of gross value added to the UK economy for every £100 of turnover while large companies generate something in the region of £26. For certain business sectors such as IT, for example, this definition makes perfect sense.

However, in light of the Government’s proposed action, within the security sector we find a significant number of businesses with well over 250 employees.

That being so, for many organisations in our world – not to mention other sectors that are similarly labour intensive – this announcement could make an already bad situation far worse.

In reality, a security company with less than 250 employees is likely to have a maximum turnover of around £6 million. Therefore, it would be unlikely to support a professional infrastructure for, say, compliance or HR. These are abilities a company will need in order to meet the rigors of public sector contracts.

Essentially, what this latest development means is that security companies employing 250 members of staff or less are unlikely to benefit from a bigger slice of the pie due to their lack of professional specialist resources.

At the other end of the scale, the sector’s biggest players will continue to gain the larger contracts due to their supposed ability to fulfil the large numbers required for certain activities. By definition, companies in the middle with between 2,000-3,000 employees and the specialist resources available will miss out on both ends of the spectrum.

Flawed logic in view

Successive Governments have maintained a policy of issuing contracts so big in scope and scale that only a small number of huge service providers can possibly consider taking them on.

To put this into perspective, and to highlight the scale of the problem, Government spending on contracts with G4S reached £394 million in 2012. The reason behind this flawed logic is that the more that’s done, the cheaper it becomes to do it. While this is fine for, say, manufacturing, the same principles cannot be applied to the service sector as it may lead to corners being cut in areas such as management and back office support.

Inviting a greater number of companies that are bigger than SMEs – but not in the same league as, for example, G4S and Serco – to handle these larger contracts would increase attention to detail, transparency, competitiveness and innovation. Just as importantly, being able to benchmark across a whole range of suppliers would keep prices in check. This is in stark contrast to the status quo, which offers no impetus to innovate and simply engenders a culture of complacency.

There’s also the problem of our credibility as an industry. Following a number of high profile failures by major support solutions companies, we’re now unfairly perceived by some as being unable to deliver the service quality required. However, a significant contributor to these problems has been the size of the contracts let by the public sector in the first place.

The Government is well aware of this issue. Late last year, Parliament’s Public Accounts Committee said that it was too reliant on a small number of private sector contractors to provide a swathe of public services. At the time, Margaret Hodge – chairman of the Public Accounts Committee – stated: “Government must guard against quasi-monopoly suppliers becoming too important to fail. It must also encourage competition through, for example, splitting up contracts to encourage SMEs to bid for work. Competition for Government business should bring with it a constant pressure to innovate and improve. For competition to be meaningful, there must be very real consequences for those contractors who fail to deliver and the realistic prospect that other companies can step in.”

Ignoring the logistical truth

Although this sentiment is entirely appropriate, it singularly fails to recognise the logistical issues that must be addressed when awarding security contracts. It would be expensive and wholly impractical to invite numerous companies with less than 250 personnel to tender for contracts where 3,000 trained and Security Industry Authority-licensed security officers are required. On the other hand, it would make perfect sense to invite applications from three organisations that could provide 1,000 trained and fully-licensed officers.

This is exactly the type of situation the latest Government initiative fails to recognise, and it’s one that could lead to problems in the future.

These ‘bigger than SME’-sized companies combine the ability to carry out large-scale assignments with the kind of attention to detail that smaller organisations often display. It renders them able to hit a ‘sweet spot’ by offering the size to handle demanding contracts while still being flexible and responsive. It also means that companies working together can drive up standards, deliver on their promises and reduce the potential for problems.

Although probably arrived at through accident rather than by design, the glaring omission in this initiative to have companies of all sizes working on Government contracts represents a missed opportunity for a significant proportion of the organisations resident within our business sector.

Until such time that a more inclusive and wide-ranging procurement policy is put in place, it could well mean that history repeats itself. Perhaps now is the time for us to redefine what constitutes an SME in the security world.

Peter Webster is CEO of Corps Security

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