What Does the Future Hold for SMEs in the Public Sector?

The Power of the Public Sector

The UK public sector is a vast market, with government departments, local authorities, health services, and education providers purchasing everything from IT systems and office supplies to complex infrastructure projects and professional services. For SMEs looking to tap into this market, the future can seem daunting. Yet, despite challenges, the future for SMEs within the public sector holds significant potential, offering opportunities for growth, innovation, and expansion.

The public sector provides SMEs with a range of opportunities, from local councils purchasing cleaning services or waste management solutions, to national government agencies requiring high-tech solutions or consultancy services. For SMEs, these contracts can offer stability, growth, and the chance to scale operations, particularly in sectors that may otherwise be challenging to break into.

In 2015, Matt Hancock, then the Minister for the Cabinet Office, set a target for the government to spend £1 in every £3 with SMEs by 2020. This ambitious goal equated to an additional £3bn annually flowing into small and medium-sized enterprises, either directly or through the supply chain. By 2023, the latest figures from the Cabinet Office revealed that just over a quarter (26%) of central government spending – approximately £19bn in 2021 and £20bn in 2022 – reached SMEs.

The failure to hit this ‘£1 in every £3’ target reflects the fact that the journey to secure a footing within the public sector continues to be fraught with challenges for SMEs. However, recent legislative changes and government initiatives could mean a brighter future for smaller public sector suppliers. Let’s examine them, and consider what they might mean for the future of public sector SME suppliers.

Changes Designed to Aid Small Businesses

The UK government is introducing several measures aimed at making public procurement more accessible to SMEs – the success of which will help define the future of small suppliers to the public sector.

The Procurement Act 2023

One of the cornerstones of SME engagement with the public sector is the upcoming Procurement Act 2023. This groundbreaking legislation aims to break down the barriers that SMEs have historically faced in competing for public contracts.

Simplifying Processes for Easier Access: Historically, SMEs have encountered numerous barriers when accessing procurement opportunities, often lacking the resources or expertise to compete effectively against well-established suppliers. The Procurement Act 2023 intends to rectify this by streamlining procurement processes, thereby making it easier for SMEs to bid for public contracts.

Enhancing Transparency: One of the critical provisions of the Procurement Act 2023 is enhanced visibility of upcoming opportunities. Public sector bodies will be mandated to publish tender details on a new central digital platform. This improved transparency allows SMEs to plan and compete more effectively, ensuring they are aware of potential contracts well in advance without having to navigate a maze of various governmental portals.

Reducing Bureaucratic Barriers: The Act also aims to eliminate unnecessary bureaucratic hurdles. For instance, it allows SMEs to provide proof of required insurance only upon winning a contract, rather than during the bidding process. This move spares SMEs from incurring pre-award costs when outcomes remain uncertain.

But the Procurement Act 2023 is not the only change affecting SMEs.

The National Procurement Policy Statement (NPPS)

The National Procurement Policy Statement was withdrawn by the new government and is currently being revised for a second publication in early 2025. It is likely to be a crucial wayfinder, emphasising a level playing field for SMEs. One facet of the revised statement is likely to be guidance for buying authorities to consider social value in their contracts, highlighting the positive impacts of engaging with small businesses.

The UK government has recognised that SMEs frequently have community-oriented missions, employing local talent and contributing to local economies. Therefore, SMEs that can articulate their social impact will increasingly find favour with public sector buyers.

Business Growth Services and Fair Payment Code

To aid SMEs further, the government plans to introduce a Business Growth Service to provide advice and support and help reduce time spent on administration.

Additionally, a new Fair Payment Code, replacing the Prompt Payment Code, is designed to improve cash flow for small businesses by addressing late payment practices within the private sector, which could then free up cashflow for small businesses to invest in their tendering and delivery capabilities, ready to compete for government contracts.

Embracing AI and Digitalisation

The adoption of Artificial Intelligence (AI) in SMEs is strongly encouraged, supported by a £7m fund. The integration of AI can significantly streamline operations, enhance efficiency, and provide SMEs with a competitive edge.

Digital platforms and tools will play a vital role in this transformation, helping SMEs automate routine tasks, analyse data more effectively, and improve customer interactions. Leveraging AI can also enable SMEs to innovate and offer tailored solutions, making them more attractive for public sector contracts.

Making Framework Agreements More SME-Friendly

The use of procurement frameworks has surged considerably, with the government procuring 72% of its large contracts through frameworks in 2021–22, up from 43% in 2018–19. Framework agreements allow public sector entities to set up contracts with suppliers swiftly, bypassing the need for a full procurement exercise each time.

While framework agreements offer efficiency, they can potentially stifle competition if not used effectively. High bid costs, lack of feedback, and low confidence in evaluation processes often deter SMEs from participating. In response, new SME-focused frameworks are being introduced. For instance, the new CCS framework covering consultancy encourages SMEs to participate as part of consortiums or as subcontractors, ensuring they have a fair chance to win public sector contracts.

Public Procurement Review Service

In alignment with the reforms, the Public Procurement Review Service will continue its role in addressing instances of malpractice, including where procurements have disproportionately excluded SMEs. By addressing these imbalances, the service aims to ensure a fairer competitive landscape for small businesses.

Opportunities for SMEs from Increased Government Spending

Beyond regulatory changes, several sectors of public spending are poised for growth, some due to investment promised in the Autumn 2024 Budget, others due to longer-term trends in public expenditure. These present significant opportunities for SMEs aiming to secure contracts within the public sector.

Construction and Infrastructure: The UK government has committed substantial funds to construction and infrastructure projects, creating opportunities for SMEs in this area. Local construction projects, energy efficiency upgrades, and infrastructure repairs will increasingly require the agility and adaptability that SMEs are known for.

Transport: Transport infrastructure is another area ripe for SME engagement. The nascent electric vehicle (EV) charging infrastructure presents an evolving market for SMEs ready to subcontract, as do major transportation upgrades. SMEs may also find ways to contribute to the supply chain for railway projects.

Healthcare and Social Care: The demand for healthcare and social care services, particularly in response to the ageing population and post-pandemic recovery, invites SMEs to contribute to projects aimed at upgrading healthcare facilities and delivering social care services for vulnerable communities.

Broadband and Connectivity: The digital transformation strategy and the pressing need for improved connectivity across the UK catalyse opportunities for SMEs involved in broadband rollout and other connectivity improvement projects.

Education: Education is another targeted sector for increased spending, particularly around school construction and fostering specialised services for students with special educational needs and disabilities (SEND). SMEs that can meet the needs of the sector may find a burgeoning market at their fingertips.

Devolution and Local Government: The devolution of powers to local government is likely to foster new opportunities for SMEs. As local authorities gain more control over procurement and service delivery, SMEs will be well-positioned to respond to community-specific needs and provide tailored solutions. The continuation of Freeports is also likely to provide opportunities for SMEs to supply services in these areas.

Trends Shaping the Future of Public Sector Procurement

Several key trends are likely to influence how SMEs will engage with the public sector in the coming years. Understanding these trends is essential for SMEs looking to stay ahead of the curve and capitalise on the opportunities available.

Digital Transformation and Innovation: The UK public sector is undergoing a digital transformation, with government bodies embracing new technologies to improve service delivery and efficiency. This digital shift creates new opportunities for SMEs, particularly in sectors such as IT, cybersecurity, data analytics, and cloud services.

Sustainability and Green Procurement: The government has set ambitious carbon neutrality goals, and public procurement is playing a significant role in achieving these targets. SMEs that offer green solutions, such as renewable energy products, sustainable construction materials, or low-carbon technologies, will find increasing demand from public sector organisations.

Increased Local and Regional Procurement: The UK government has been keen to ensure that public procurement policies support SMEs across all regions, not just those in major metropolitan areas. Local authorities, for example, are increasingly focused on buying from SMEs based within their own regions to drive local economic growth and promote community cohesion. This trend is particularly important for SMEs based outside London and the South East, as it creates more opportunities for businesses in these areas to access public sector contracts.

Challenging Headwinds

Despite these promising opportunities, SMEs will still face notable challenges. Two prominent issues include the rise in minimum wage and national insurance contributions. These increased costs may strain the financial resources of small businesses, making it imperative for SMEs to manage their budgets prudently.

In addition, the success of the planned regulatory changes is uncertain. Inertia is a powerful force, and the proposed changes will need to met with practical help if their rollout is to be successful.

What Could the Future Look Like?

We remain boldly optimistic about the role of SMEs as a key driver of innovation, dynamism, and efficiency within the public sector’s supplier base. Yet, barriers to entry still remain. To help you chart a course, we’ve created two visions for the future of SMEs within the public sector supply chain – one hopeful, the other cautious.

An Optimistic Future

In this brighter vision, SMEs thrive within a reformed public procurement landscape. Several factors drive this success:

Streamlined Procurement Processes: Thanks to the Procurement Act 2023, public sector procurement becomes more accessible. Simplified procedures, fewer pre-contract requirements, and centralised platforms mean SMEs can bid for contracts without being overwhelmed by bureaucracy.
A Level Playing Field: With the government mandating smaller contract lots and improving transparency, SMEs gain fair opportunities to compete. Initiatives like mandatory feedback for unsuccessful bidders further refine their chances in future tenders.
Support for Innovation: Programmes like BridgeAI help SMEs adopt cutting-edge technology, unlocking efficiencies and competitive advantages. Investment in AI projects is not just a theoretical promise but a tangible boost to productivity.
Fair Payment Practices: The introduction of the Fair Payment Code ensures SMEs receive payments within 30 days from all their clients, both public and private, reducing cash flow pressures and enabling them to reinvest in competing for public sector work.
More Regional Procurement: Devolution puts more power in the hands of regional leaders, who direct staff to prioritise small, local firms in their procurement activities.
Social Value Recognition: SMEs’ local roots and community contributions become a key component of procurement decisions with the move from Most Economically Advantageous Tender (MEAT) to Most Advantageous Tender (MAT), providing a strategic advantage over larger competitors.

This vision sees SMEs thriving through robust partnerships with local governments and strategic suppliers. By leveraging technological advancements and government support, small businesses become integral players in delivering public sector projects.

A Pessimistic Future

In a less favourable scenario, SMEs struggle to gain ground in the public sector. Key challenges hinder their progress:

Persisting Bureaucracy: Despite the promises of streamlined processes, smaller businesses continue to face complex and resource-intensive procurement requirements. Centralised digital platforms, though promising, fail to address fundamental issues of accessibility.
Economic Pressures: Rising wages, increased National Insurance contributions, and high energy costs squeeze SME margins. Late payments remain a significant challenge, hindering the ability of small firms to invest in developing their tendering and delivery capabilities.
Unrealised Technological Adoption: Despite government funding, the majority of SMEs remain hesitant or unable to integrate AI and other transformative technologies. This means that larger firms will be better placed to lower their cost base, eroding the price differential between SMEs and their corporate counterparts.
Dominance of Larger Players: Framework agreements continue to favour established suppliers, leaving SMEs to fight for scraps as subcontractors. Strategic suppliers pay lip service to onboarding SMEs but fail to provide meaningful opportunities.
Uncertain Political Environment: Consequences from the change of government, such as the delay to the rollout of the Procurement Act 2023, continue to play out, making planning more difficult. This more heavily affects SMEs, who may already have committed scarce resources based on now-defunct plans.

This bleak outlook paints a picture of missed opportunities and systemic barriers. SMEs struggle to compete, and public sector procurement remains the domain of large, resource-rich companies.

Key Takeaways for SMEs

Regardless of the path the future takes, SMEs can take proactive steps to position themselves for success.

To maximise their chances of success in the public sector, SMEs should consider the following strategies:

Smart Small: For SMEs eyeing public sector penetration, beginning with smaller-scale, lower-value contracts is advisable, allowing a small firm to build its reputation within the public sector.
Build Relationships: Building relationships with public sector procurement officers and understanding the procurement landscape can give SMEs a strategic advantage. This can be supplemented by pre-procurement intelligence, such as that provided by Oxygen Insights, which can highlight upcoming tenders even before they reach procurement.
Highlight Strengths: SMEs should emphasise their flexibility, quick response capabilities, and innovative solutions when bidding for public contracts.
Embrace Digitalisation: Embracing digital tools and innovations at pace can set SMEs apart. Implementing technology to streamline processes, improve efficiencies, and make SMEs more competitive.
Focus on Social Value: Demonstrating a commitment to social and environmental goals can make SMEs more attractive to public sector contracts aligning with the NPPS.
Leverage Specialisation: SMEs should focus on what they do best. Specialising in a niche area allows businesses to offer expert services or products that larger competitors may struggle to match.
Invest in Tendering: Given the complexity of the tendering process, SMEs may look to invest in tendering expertise, either by training staff, using AI tools such as mytender.io, or hiring consultants. A well-prepared bid increases the chances of winning contracts.

Which Future is More Likely?

The future for SMEs in the public sector is a tale of two possibilities.

With the right policies, proactive engagement, and technological adoption, SMEs could thrive as vital contributors to public sector innovation and growth.

Conversely, without sustained support and structural reforms, these businesses may face continued challenges.

For SMEs, staying informed, adaptable, and resourceful will be the key to navigating the road ahead.