The relationship between large Government contractors and the smaller SMEs  which they sub-contract to deliver large Government contracts, has never been easy. On-going Government reforms, spearheaded by the Cabinet office Minister Francis Maude  to public sector procurement aimed at streamlining process’s and  at squeezing out greater efficiencies and cost cutting to benefit the taxpayer, are making that relationship more problematic.  Of course, SMEs are warmly  welcoming moves to ensure that they are given a greater share of public sector contracts. The aspiration (an aspiration is not quite the same as a target) being a 25%  SME share  across Government Departments, as well as moves to encourage large suppliers to pay their bills on time  and  to meet, in full, their obligations to smaller sub-contractors generally.  But the  large public sector suppliers hold the whip hand  in the market and, as we have seen  recently, in Serco’s case, are quite often prepared, (and nobody should be surprised by this ), to attempt to  pass  these  costs down the line  to smaller  sub-contractors so that they shoulder most, if not all, the burden. This kind of thing happens pretty routinely and to be fair on large contractors if their margins are under pressure   one basic way for them to protect those margins is to pass  the buck on to their subcontractors.  The Government, of course, wants that practice stopped. They don’t want these reforms to hammer SMEs especially as they are trying to encourage more SME delivery of public services.  Serco’s mistake of course  was to be so explicit in writing.  But what is less obvious and  is happening,  in a sense,  below the radar  is that  large suppliers may be using these important Government reforms as a pretext, or cover,  to take some previously sub-contracted services in –house getting rid of the sub-contactor altogether. In other words Government reforms are having one major unintended consequence, that of actually losing SMEs some big contracts.  The Cabinet Office is coming to agreements or a  ‘Memorandum of Understanding’ with each major supplier, almost 50 are thought to have already been approached to ensure that they cut costs and deliver greater efficiencies. Ministers have been somewhat shocked by the how much the large contractors can cut the costs of the big contracts while still achieving a respectable margin. The Government should be made aware  though that some SMEs are less than happy about the developing situation.


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