Sourcing business from government and larger corporates is a massive opportunity for UK SMEs. These are huge, growing markets and both segments are very keen to buy more from smaller businesses.
The UK government has set itself a target of spending 33% of its procurement budget on SMEs by 2022, which if reached, will be a big jump from the 24% level in 2017/181.
Large private sector companies are making similar noises. Construction giant Skanska spends over £1.2 billion annually across 5,500 suppliers2, the majority of which are SMEs, and its corporate community investment strategy states an intention to increase local procurement and SME spend.
But these larger organisations buy goods and services using very formal and often rigid procurement processes, which can be a daunting prospect.
Expect complexity (and bureaucracy)
Tom Evans, managing director of Pro-Outsourcing, who has worked in the procurement departments of large corporates such as Airbus and JCB, and now advises SMEs on procurement practices, says SMEs need to go into a procurement with their eyes wide open and be very well prepared.
He says: “That large order from a big company may look like an attractive chunk of business, and it may very well be, but SMEs need to understand that it often comes with terms and conditions that are unfamiliar to them and stacked in favour of the buyer, with little or no room for negotiation. And as a rule of thumb, the bigger the company you deal with, the more hurdles there will be to jump over.”
Tom highlights a number of areas SMEs tend to struggle with the most:
Payment terms are often 60 or 90 days – so SMEs in the manufacturing sector will need to find the cash to fund the purchase of raw materials as well as their product manufacturing and delivery costs while waiting for payment. They may also need to demonstrate to the buyer that they have the financial strength to do this, by providing them with financial statements and details of their access to finance.
Formal quality, ethical or social responsibility certifications or policies may be required to qualify as a supplier. These can seem like an unnecessary expense and inefficient use of management time for an SME but putting them in place will usually only have to be done once and they will put the business in good stead for future procurements.
Onerous penalty clauses may be insisted upon, such as ‘liquidated damages’, which means incurring a financial penalty if deliveries are not made on time – a practice more common in sectors with just-in-time supply chains such as the automotive sector. Also, warranty and insurance requirements are often more demanding than SMEs expect.
SMEs will also need to fit in with buyers’ existing systems, such as having to install a barcoding system to be compatible with that of the buyer.
Tom points out that while some buyers do try to help SMEs with meeting these requirements and might have training programmes in place, this is not always the case.
Top 10 tips for SMEs
Simon McCann, procurement specialist and partner at law firm Blake Morgan, has a list of ‘top tips’ for entrepreneurs who are looking at bidding for larger contracts, which have been drawn from his own experience of bidding for contracts, helping others bid for contracts, and acting as a tender evaluator for larger organisations:
1) Don't waste your time bidding for everything. Focus on what you know you can do well. If it feels like you're stretching to make your experience or capabilities fit what the client is asking for, it's probably not worth the effort. Procurement teams are good at spotting the ‘hopeful’ bids and they generally go straight in the bin.
2) Build relationships. In the business-to-business sector (as opposed to the public sector, where there tends to be greater detachment), if there are two tenders of similar strength, buyers are more likely to choose someone they know they can work with.
3) Read the tender documents. Then read them again. Make a list of the key points the client is asking for. You'd be surprised how many tenders miss out key things or even answer the wrong question.
4) Ask clarification questions if you're not sure. Buyers would rather get a bid in that's complete and responds to their requirements than one that wastes their time and misses the target.
5) Look at the criteria and weightings (such as price, quality, experience etc). Spend most time and provide most detail on those with the highest weightings.
6) Identify any ‘threshold requirements’, for example: a minimum level of experience, qualification, financial standing or insurance. If you can't meet these requirements, don't waste time bidding for that contract.
7) Don't assume that because you have worked for an organisation before, they will take this into account. In many larger organisations, the procurement team are separate from the people you may have worked with, and they will only look at what you have submitted in your tender, not past track record. So make sure you put all relevant information into the tender.
8) If you're bidding jointly with another business, check whether the buyer insists on joint and several liability (where each party is 100% liable for any losses, not just their ‘share’). If so, do due diligence on your partner to establish how strong they are. It might make sense to incorporate a separate joint venture company to contain the risk.
9) If you're unsuccessful ask for feedback to find out what went wrong and what you can do to improve. In the business-to-business sector (not so much the public sector, as they tend to be more cautious) it is often more productive to offer to meet the decision-makers for a coffee or organise a phone chat – people will generally tell you more that way. Written responses tend to be formulaic and not as helpful.
10) When you do a good job, ask for references and comments there and then, while the gratitude is still fresh. You will then have a stockpile to use, rather than pestering clients to give you a quote or a reference when you're up against a short tender deadline.
Getting the ball rolling
For public sector contracts, SMEs should register with and search the various government procurement websites - Contracts Finder (covering England), Public Contracts Scotland, Sell2Wales, and eSourcingNI and eTendersNI for Northern Ireland.
Simon also highlights the opportunity presented by getting onto ‘frameworks’ or ‘dynamic purchasing systems’, which effectively pre-approve suppliers for on-going work and then allocate specific contracts by a specified method or else by a "mini-tender", which is shorter and simpler than a full tender. These procurement methods typically relate to high-volume, repetitive purchases and can provide regular opportunities for SMEs without the time and expense of having to do a full tender.
For private sector contracts, SMEs may need to invest time searching and registering on individual websites, for example this supplier page of Hitachi Rail, or subscribe to one of the various commercial tender subscription services.
Lastly, Tom stresses that SMEs should look at their own procurement processes. He says: “I have found it is common for SMEs to struggle to get larger corporate deals simply because their prices are too high – and that is often because of their own sub-optimal procurement processes. Also, reducing your cost-of-sales can have a big impact on your bottom line.”
Typical areas of overspending by SMEs, according to Tom, include courier and logistics services (where he says savings opportunities of 50-60% are common); IT and IT support; and in the manufacturing sector, ‘over-specifying’ component parts sourced from suppliers, when a lower-specification component could do the job just as well.
The opinions expressed by third parties are their own are not necessarily shared by St. James’s Place Wealth Management.