Is it a larger cow or has it just been moved closer?

The truth about government claims about procurement from SMEs, and the myth of trickle-down economics

Yesterday I received an email from HMRC with a promotional message on behalf of the government (they have all businesses on their database of course, but let’s leave the use of that to promote government political claims for discussion elsewhere!). It says that the government is ‘open for business’ and supporting SMEs:

So, the Government’s ‘commitment’ for spending with SMEs is now £1 in every £3? Great news! It says that’s an opportunity worth £15bn per year —Woohoo!

Hmm, it’s a bit odd though as I’ve been hearing from a wide variety of SMEs (and having my own similar experience) that working with government has become a lot harder in the last 6-12 months, and they are doing less business with government now, despite being established public sector suppliers with solid track records.

As this is the era of ‘alternative facts’, let’s fact-check the government’s claims a little, just to be sure, before getting too excited about the promotional mailing…

Fact Check

The Cabinet Office’s press release about the target includes the minister, Matt Hancock saying: “In 2013 to 2014, central government spent an unprecedented £11.4 billion with small and medium-sized businesses”. That’s pretty clear, right? The government spent £11.4bn with SMEs in one year. Couldn’t be more clear.

A quick review of the most recent National Audit Office figures available (for the year 2014–15, published March 2016, so should show growth from the figure Mr Hancock announced the year before) shows that:

• The government currently spends £4.9bn with SMEs. Hmm, this seems a lot less (£6.5bn less!) than stated in the official Cabinet Office announcement above. Why such a huge gap? We’ll come to that later. But still, there’s a gap of over £10bn to bridge from here in order to reach the £15bn they talk about now. How will they achieve that? Tripling the amount of business done — that’s definitely a larger cow, right?
• The government claims, in this period, that 27% of ‘procurement spending’ ‘reached’ SMEs — beating its target of 25%. Great! But wait, those words in inverted commas become important later, sadly.
• The government’s new target will now be 33% of ‘procurement spending’ to ‘reach’ SMEs. So that’s an increase of 6 percentage points, but in number terms that’s a jump from £4.9bn to their claimed £15bn. Hmm, something isn’t adding up here. How much bigger is this cow?
• Aha. Here’s the rub. In the quietly damning way of the NAO, presented as a simple stat: “The number of different methods the government has used to estimate its spending with SMEs in the last five years: 4”, so we don’t know if it’s really a larger cow, or just been moved closer than the other cow. Targets and actual figures from different years can’t be compared.
• And: “Proportion of government’s spending that was via another, larger, contractor to SMEs in their supply chains (indirect spending): 60%.” And this is the key figure — they are folding into their ‘success’ metrics the spend by their large suppliers with SMEs, and counting that as a government success. They are placing hope, once more, in 'trickle-down economics', which has been widely discredited. It’s also worth mentioning that this is, and can only be, an estimated measure with no basis in data (see below).

This echoes something a specialist (Chatham House rules so I can’t disclose who) discussed at the recent GovcampUK. He said that his firm’s analysis of government spending data is that:

• Spend is increasingly going to a small number of large suppliers.
• In order to show success, the SME spend target has been re-defined (one of those 4 re-definitions in the last 5 years) so that it includes an estimate of the spend that ‘reaches’ SMEs via the government giving large pots of cash to big companies, and them hopefully spending some of it with SMEs somewhere further down the supply chain. Government departments can estimate this figure however they like, but hey, they have a big target to meet, so unsurprisingly these figures end up being pretty large.
• And the target itself has also been changed, in that the percentage is no longer of total government spend, but is of ‘procurable’ spend (still referred to by government in reports above as ‘procurement spending’). But this isn’t the total amount of spending with suppliers. Government departments can define ‘procurable’/’procurement’ spend any way they like, and estimate the spend accordingly. Some departments apparently don’t count their mobile phone contracts in that figure, for example, in order to remove spend from the total figure that then gets used to calculate the SME percentages.

Therefore, what was previously a measure of government spend with SMEs drawn from clearly definable data that could be audited, has now become an estimated measure of government and it’s large suppliers’ spend with SMEs as a percentage of an estimated figure of what probably could have been spent with SMEs.

The National Audit Office says (page 7, point 10): “we do not know how much of the reported increase is due to the changes in approach and how much is an actual increase in SME activity. For indirect spending, the Cabinet Office has surveyed a larger group of providers each year since 2011–12 so annual figures are not comparable. The CCS’ methodology for direct spending has not changed since 2011–12, but we cannot be certain that numbers are directly comparable due to the structure of the underlying data”.

The government’s targets are therefore meaningless.

The only meaningful figure is how much of the total government spend with suppliers was spent directly with SMEs.

If we look at those numbers, it seems there has been little increase in real terms since 2011/12 when the direct spend with SMEs was £4.44bn. In fact, using an inflation calculator shows (roughly) that this figure in today’s money is £4.88bn! Rather close to the £4.9bn the NAO was reporting for 2014/15.

So that’s why the government needs to change the calculation of the statistic to meet its goal — because it isn’t growing the actual number in a meaningful way. Therefore it wants to include more spend in the number through other routes, such as counting the ‘trickle down’ of money through the supply chain.

Trickle-Down Spending With SMEs

The government is now counting estimated indirect spending in its numbers. Okay so it’s misleading, but surely it’s still good news for SMEs, right?

Well. Sub-contracting for the big service providers that government awards these major contracts to is a very different experience. They’re not subject to the same regulations that government buyers are, and have some pretty poor practices. I hear from SMEs that work in this way that:

• They demand a large chunk of margin. So the work SMEs do via this route is much less profitable than working direct for government (profit allows businesses to maintain financial reserves for tough times, invest in new jobs etc — in SMEs it’s not about new private jets etc).
• They charge on at higher rates to government, so the taxpayer gets a worse deal, even though the SME is working for less money.
• They pay SMEs on a much slower timescale than government does. This makes cashflow very tight for SMEs, which threatens their existence.
• They mostly don’t let SMEs claim any credit for the work they did, binding them in NDAs. Building up a good track record of work with case studies is what enables SMEs to win future work and build a sustainable business.
• They have outdated ways of working baked in. This prevents young modern companies using the up to date ways of working that have been proven to deliver better results — such as using Agile, open source, open standards and so on.
• They introduce communications bottlenecks in their extended supply chains in order to maintain control, not allowing SME contractors to engage with each other, with the client, or the client’s users. This leads to problems down the line as misunderstandings arise.
• And more, but we’ll leave it at these key ones above.

Additionally there is no measure about the type of work that is making its way down the supply chain. The government may be giving a juicy, high-margin IT contract to a large supplier (which always works out well, right?), but then counting the SME spend of that company hiring a small business to clean the offices at low margin.

For all these reasons, most of the trend in commerce these days (and in government until recently) has been dis-intermediation — reducing or removing long supply chains of intermediaries to have two parties deal directly with each other. The UK government is now going for re-intermediation.

This is only good for the large providers, giving them a finger in a wider range of projects large and small, and reversing the threat they’ve perceived from the SME-positive agenda of the Government Digital Service (GDS).

This government believes in ‘trickle-down’ economics in the wider economy. However, as an economic principle it is largely discredited. Let’s not revisit the flaws in the dogma once more by trying to force it on the government supply chain too.

It is better for everyone if government contracts directly with SMEs. Only the statistic representing that activity is important.

The Mirage Of Individual Contractors

In the last five years there has been a huge increase in the number of ‘personal service’ limited companies that have been registered. 76% of registered companies now only ever employ one person, the founder, who then works as a contractor.

Government has made extensive use of hiring these people as contractors, ‘off payroll’ through their personal service companies, and the same is true for the large suppliers to government. This is just disguising employment at a lower level of employment rights, rather than creating entrepreneurship and nurturing small business.

These personal service companies count as SMEs in the official statistics about company formations etc, and especially in the claims about 'indirect' spend.

There is no discussion in the government statistics about filtering out these personal service companies in order to get a true picture of government purchases from actual small businesses that create employment rather than replace it.

However, this area is going to now be in flux too, as new restrictions on the use of personal service companies by government contractors come into force in April this year. TfL has been the first to respond with a policy. It’s not yet clear whether this will also move these individual contractors to simply be sub-contractors to large suppliers in one way or another.

Summary

It seems that the cow isn’t larger — it has just been moved to appear so.

Therefore Matt Hancock, Minister for the Cabinet Office, was being more than a little disingenuous in his statement of the facts in that announcement. Remember he said “In 2013 to 2014, central government spent an unprecedented £11.4 billion with small and medium-sized businesses”.

Government did not spend £11.4 billion with small and medium-sized businesses.

It spent £4.9bn, and then ‘reckons’ that £6.5bn may have ‘trickled down’.

The statement should have said: “In 2013 to 2014, we changed the way we measure government spend with SMEs, and we guess that probably around £11.4 billion of the £45bn or so we spend with large suppliers eventually trickled down to SMEs, but we have no way of knowing for sure, or how directly that resulted from government spending anyway.”

And the Public Accounts Committee seems to agree, releasing a report on government spending with SMEs in May 2016, questioning the government’s claims:

“it is not clear that SMEs are better able to compete with larger providers or whether they are actually getting any more government business than before.[…] The Committee is not persuaded that initiatives to remove barriers to SMEs have resulted in substantially greater competition for government business, citing evidence of larger providers continuing to dominate.”

The HMRC email I received refers to Emma Jones, the Small Business Crown Representative who will be giving a seminar on how all this benefits SMEs. Now, I know Emma a little, from way back, and I know that she is genuinely enthusiastic and dynamic about small business and entrepreneurship. She has the potential to be a great voice for small businesses. It should be noted though, that she has only been contracted to do the role one day a week, which previously was a full-time role — so in this area at least the government seems to have signalled that it cares only 20% as much about working with SMEs as it did before.

That aside, I think we need to be having these discussions based on clear facts rather than manipulated data. Let’s grow the cow, not just keep moving it around.

The only meaningful statistic is what percentage of total spend with all suppliers is spent directly with SMEs. That is the only measure that should be reported, and ambitious targets should be set to improve it.

That will have us dealing in facts, rather than political claims.

SMEs are a vital part of the UK economy, directly creating jobs and growth. A pound spent by government with a UK SME is a pound invested in the UK economy. A pound spent with the largest suppliers is a pound sent to pay largely overseas workforces in offshoring operations, getting the mostly overseas CEOs another holiday home or Porsche, and delivering profits for largely overseas investors.

That seems to be directly against this government’s stated agenda. They say so much about ‘Great’ Britishness and small business. Let’s see some of that talk become genuine action in a positive way for the UK economy rather than smoke and mirrors games that damage it.

This post was originally published on our Medium blog at https://blog.weareconvivio.com/is-it-a-larger-cow-or-has-it-just-been-moved-closer-65d5a7b364b0