Getting the Little Guys In:

How Government can Involve SMEs in ICT Projects

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Overview This paper, prepared by the Agile Development Network, describes an option for
extending the involvement of small to medium sized enterprises (SME’s) in ICT projects.  
It is a contribution to the wider debate on how to deliver greater success and benefits
from public sector ICT expenditure. 

The Cabinet Office Structural Reform Plan identifies the urgent need to enable greater use
of SME’s in ICT procurement.  It recognises the contribution that SME’s can bring in terms
of agility, innovation and value.
 
However, the reality is very different.  During the period 2000-2010, the majority of the
public sector expenditure on ICT went to just 19 suppliers.  The trend in public sector
ICT has been to place larger and longer term contracts, which only a limited pool of
suppliers are able to bid for.  As a result, many SME’s struggle to participate and
compete effectively for public sector ICT opportunities.
 
So, how can government extend the involvement of SME’s, whilst still ensuring
compliance with procurement law and the need to demonstrate transparency in the
contracting process?  

One of the options is the use of framework-based electronic marketplaces.  These

marketplaces enable public sector buyers to access the agility and innovation of the
SME community; and reduce the cost and timescales involved for all parties. 
 
However, before this approach is presented, it is worth considering the current
obstacles to SME participation.
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Current obstacles to Multiple obstacles exist to the participation of SME’s in Public Sector ICT, some of these
SME Participation in are described below.
Public Sector ICT
It takes too long, and costs too much, to bid

As an example, a typical tender process for application development services in the public
sector will take from 6 to 9 months, and in some cases can be considerably longer.  In
addition, the routine use of milestone based payments, whilst sensible in their own right,
mean that the winning bidder is likely to be in negative cashflow on an opportunity for a
significant period following contract award.
 
In order to sustain themselves, bidders need to be able to:

commit sufficient bid resources to support multiple tender processes, with an

average lead time from inception to receipt of income in excess of a year

maintain the specialist expertise required to understand and comply with the
standard terms of business used in the public sector

have sufficient financial strength to sustain themselves during the period from
contract award to receipt of initial payments.

For a small supplier of ICT, it is easy to see that sustaining a quality pipeline of business
in this environment will be difficult and fraught with risk.

There are Incentives The cost and time overheads described above apply equally to public sector buyers. 
on Customers to Whilst there are opportunities to streamline the processes being used, all public sector
Aggregate Demand  buyers must comply with procurement regulations, follow their own local policies, and
ensure that they engage effectively with a wide range of internal stakeholders in
delivering ICT projects. 
 
These activities do not scale in a linear fashion with the size or complexity of the project.  
The cost of procurement, as a percentage of contract value, reduces significantly as
the value of the contract increases.  It would be difficult for any public sector buyer to
manage an ICT competitive dialogue process in a compliant manner with a budget of less
than 250k.  It is no wonder that, when faced with a minimum cost base such as this,
sensible managers elect to aggregate requirements together and place larger contracts.
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Conflicts of Interest In response to the fixed costs of running OJEU-compliant procurements, many
in Current Framework departments and collaborative procurement agencies have established framework
Arrangements. agreements: pre-competed lists of suppliers where the majority of the terms and
  conditions are agreed in advance.  These have great advantages:  transaction times
and costs can be significantly reduced and much of the specialist legal and commercial
expertise is no longer required.
 
However, the way in which current framework arrangements are placed creates obstacles
to the participation of SME’s. 
 
The first obstacle is one of size: framework agreements need to accommodate potential
contracts of widely varying values.  As a result, bidders will only be able to succeed in the
framework competition if they have a high enough turnover and financial strength to
support the largest potential contract.  This locks out companies who are able to meet
some, but not all, of the opportunities being placed through the framework.
 
Most smaller companies respond to this by seeking to partner with existing, larger
framework providers, and with the prime systems integrators who support larger pub-
lic sector organisations.   In exchange for a markup, the framework provider/prime will
subcontract most or all of a package of work to an SME, thus enabling a limited level of
participation. 
 
However, this creates the second problem: the arrangement carries within it an inherent
conflict of interest.  Framework providers/primes will only seek the involvement of
a subcontractor in cases where it cannot meet the requirement with its own resources. 
 
The current moratorium on ICT contracts illustrates this issue starkly: the first response
of larger systems integrators to the cost reductions being sought is to cut out their
subcontractors in order to preserve their own staff.  A logical reaction, but one that drives
SME’s out of the equation at exactly the time that the government wishes to bring them in.
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 Procedural In addition to the obstacles listed above, there are a number of other significant
Constraints procedural and technical constraints that limit SME participation. These are listed below:

 
Security Clearance.  In order to deliver many ICT services, provider staff need to
be security cleared to varying levels of rigour.  However, the current mechanisms
for obtaining security clearance involve either a Catch-22 situation (you can only
obtain security clearance after being selected, but you won’t be selected until you
are cleared); or require the maintenance of an expensive security clearance team. 

Intellectual Property Constraints on existing software and services.  Current OGC

guidance on intellectual property is based on the view that the service provider is
generally best placed to exploit the IPR resulting from a contract.  Setting aside
the merits of this argument, in the case of software development the effect is to
create proprietary constraints on the ability of other providers to compete for future
requirements that are linked to or interface with the existing application base.

Complexity and lack of standardisation within the government ICT environment. 

Much of the cost of implementing new applications comes not from the development
itself, but the interfaces and integration required with the infrastructure and other
business systems used by the customer.  Even where a small development project
is proposed, a big project budget is required in order to deliver it, and most SME’s
do not have the breadth of capability to manage all aspects of the work.
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A new approach: Any new approach to involving SME’s in public sector ICT projects needs to meet the
Framework-based following success criteria:
Electronic
Marketplaces It must be compliant with EU procurement regulations.

It must reduce the time taken to select suppliers and place contracts
significantly, when compared to current procurement routes

It must reduce transaction/overhead costs for all parties

It must be supported by procedural changes in the way that ICT projects are
defined and delivered, to enable more flexible, rapid decision making.

It is possible to change this, and to change it quickly, through the implementation of

one or more Framework-based Electronic Marketplaces.  These would have the
following characteristics:

The scope of each framework is limited to a defined ICT category (potentially

in line with those used for existing BuyingSolutions frameworks)
Only one provider is selected per framework - the Market Manager
The role of the Market Manager is to:

establish and maintain an electronic trading environment for

SME’s to provide in-scope services, and for public sector buyers
to publish requirements
provide central administrative services including registration,
prequalification of SME’s for different sizes of opportunity,
process management, provision of security vetting services for
market participants, marketing and promotion of the marketplace
within each market, to maintain and apply Market Rules: standard
terms and conditions and contracting procedures that enable the
rapid selection and engagement of individual SMEs to support
specific requirements.

The Market Manager recovers their costs through the application of a markup
to the services procured through the framework.
Crucially, the Market Manager must be a neutral party - not involved in directly
delivering the services themselves.  This removes the inherent conflict of
interest in the operation of current framework agreements.
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The Market Rules within each framework could then be tailored in order get the best value
from each class of services.  For example, the contracting approach and terms for Agile
software development project may be very different from those for CLAS consultancy. 
 
Framework-based electronic marketplaces offer a potential mechanism for delivering this
new approach.  This approach is based on tried and tested models already in use in both
the public and private sectors.  The work currently being undertaken on the Government
App Store (G-AS) provides an opportunity to implement this kind of approach in a way
that complies with EU procurement law and widens the participation of SME’s in public
sector ICT.
 
Electronic marketplaces are not new - a number have been established within the public
sector in the course of the last decade.  They provide an electronic trading environment
in which buyers can advertise their requirements to a pre-selected group of suppliers,
with the majority of the steps in the purchase to payment process automated. 
The Zanzibar platform provides an example of the efficiencies that can be released
through this approach.   However, these have tended to focus on improving the efficiency
of existing supply arrangements, rather than as a mechanism for enabling new
providers to enter the marketplace.  A Framework based e-Market can deliver a fast,
efficient mechanism for extending the involvement of SME’s in the delivery of
government ICT.

Next Steps We’re passionate about helping to make public sector software projects a success
story, whilst delivering significant savings for the UK tax payer. We would welcome
the opportunity for a conversation about how we could help you deliver this vision.

Please contact

Kelvin Prescott
kelvin.prescott@newburyconsulting.co.uk
for more on the ideas in this paper

Andy de Vale
andy@2dcargo.com
for more on the Agile Delivery Network.