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The Engine Of GrowthMinistries of Defence and military alliances like NATO want to better harness the innovation that resides within small and medium-sized enterprises in the defence industrial base. Although some progress has been made, tendering for defence contracts is still a relatively complex and non-transparent process for most smaller companies. By Peter Antill

manufacture everything that UK defence requires and are therefore reliant on what can be obtained from SMEs. These “smaller businesses are widely recognised as being the powerhouse of the UK’s defence and security community, driving through change by being innovative and developing new technologies”6, an important role in an era of continued austerity and pressures on the defence budget.

A MORE TRANSPARENT PROCESSOne area of concern, however, is the difficult market situation that SMEs often encounter and the relatively high rate of failure, as “around 65% of small businesses are still trading after the first three years of initial start-up. After five years, fewer than 45% of businesses will have survived.”7 With the UK public sector spending around £238 billion on the procurement of goods and services (including capital assets) in 2013 to 2014, which accounted for 33% of public sector spending (total managed expenditure), it is suggested that the UK government could “use this considerable spending

In 2010, the UK government was criticised for its ambivalent attitude towards this sector of the economy. The UK ADS (Aerospace, Defence, Security and Space industries) chairman at the time, Ian Godden, stated that not only would budget cuts have a major impact on the size of the defence industrial sector, but also criticised it for having a “closed door attitude to domestic industry input and an apparent trend for buying in defence and security capability from abroad.”3 The defence industrial sector “forms a substantial part of the UK economy with direct employment of 155,000, and a further 145,000 indirectly employed in the supply chain; generating annual revenues of around £22.1 billion, with defence exports worth an average £6 billion per annum over the last 10 years”.4 Within that, SMEs are seen “as the backbone of the industry and it’s well known that every single large aerospace or defence equipment contract is underpinned by the hard work of hundreds of SMEs.”5 For all their size, the prime defence contractors cannot research, develop and

Small and medium-sized enterprises (SMEs) are characterised as an “engine

for growth” in the United Kingdom and are seen as vital, not only in the wider economy, but as part of the UK defence industrial base (DIB). But what is an SME, what is their role and importance in both the wider UK economy and more specifically, in UK defence, and what steps are the UK Ministry of Defence (MoD) taking to increase the amount of business put their way? According to the European Commission (EC) 1, micro, small and medium-sized enterprises are defined in terms of their number of staff, as well as their annual turnover or balance sheet total:As such, SMEs (those businesses that have between 10 and 249 employees, with between €10 million and €50 million turnover) are seen as vital to the UK economy. Most of the UK’s 4.5 million businesses are SMEs. With an estimated combined annual turnover of £1.5 trillion, they are responsible for more than 14 million private sector jobs and account for almost half the net growth in jobs.2

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power to pursue a variety of public policy aims, such as promoting SMEs.”8 The former UK coalition government published a programme just after the 2010 election, which contained an aspiration that “25% of government contracts should be awarded to small and medium-sized businesses by publishing government tenders in full online and free of charge.”9 This then became a target set by the Cabinet Office, with a package of measures designed to open up the way government does business and making sure that SMEs can compete for public sector contracts. Since then the UK government has produced regular updates as to its progress, the first in July 201110, then March 201211, and another in August 2013, which indicated that the amount of government expenditure going to SMEs directly had increased to 10.5% for 2012 to 2013.12 The latest figures from the Cabinet Office indicate that the government has met its target, although some caution needs to be used with

the numbers given.13 According to the figures, the UK government spent “an unprecedented £11.4 billion with SMEs in 2013 to 2014 . . . a record 26.1% of government spend went to SMEs.The new data shows that central government spent 10.3% directly with SMEs, and 15.8% indirectly.”14 Broadly, the government approached the problem in two ways. The first, were direct changes to the procurement system, which included:15 ● Lean procurement – a reduction in the turnaround time between the Official Journal of the European Union (OJEU) notice and the date of the contract award by half, from 208 to 102 working days ● Pre-qualification questionnaires (PQQs) – the abolition of the use of PQQs for contracts under the £100,000 threshold (except where security is a concern) ● Contracts finder – has meant greater visibility for SMEs of lower value opportunities ● Pipelines – shows business opportunities valued at around £79 billion

with each notice containing a confidence level, giving suppliers an idea as to what the likelihood is that a contract notice will be issued at a later date ● Cross-government contracts – SMEs can play a role in large, inter-departmental contracts. Central government was mandated to source consultancy (between £100,000 and £2 million) from the ConsultancyONE framework, with early results being positive. In light of the wider target set by the Cabinet Office and the broader effort across government, the MoD produced an action plan to increase the amount of expenditure placed with SMEs, the latest version of which appeared in August 2014.16 It stated who had responsibility for the plan’s governance. Firstly, the Minister for Defence Equipment, Support and Technology17 has responsibility for the MoD’s SME policy and its delivery, while the MoD’s SME champion is the Defence Commercial Director, now renamed Director General (Commercial)18.

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Photo: Defence Growth PartnershiP

Medium-sized

Small

Micro

Company category

< 250

< 50

< 10

≤ € 50 m

≤ € 10 m

≤ € 2 m

≤ € 43 m

≤ € 10 m

≤ € 2 m

Employees Turnover or Balance sheet total

source: euroPean commission

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Following on from both the Equipment, Support and Technology for UK Defence and Security Green Paper published in 201019 and the National Security Through Technology White Paper published in 201220, along with discussions with the UK DIB and trade associations, the MoD looked at how its acquisition practices hampered SMEs from becoming involved with the MoD, either directly or indirectly. The consultation process “identified potential for improvement in three main areas: changes to MoD and wider government processes; the way the MoD manages its direct relationship with SMEs; and SMEs’ relationships with prime contractors.”21 Additional feedback indicated that SMEs found it difficult to engage with the MoD directly because of issues linked to both time and cost. Given that these companies are of a particular size, they may not have the resources to engage successfully with the MoD acquisition process, or the financial reserves to wait and see if a particular concept or requirement becomes an actual programme, or to sustain themselves during major programme changes. There was also a desire that the MoD’s processes become more transparent, easier to navigate and quicker.22

DOING BUSINESS WITH SMES So how does the MoD keep track of the business it conducts with SMEs? Since 2011, it has produced estimates as to the number and value of new contracts placed with SMEs. At the time, there were no suitable sources available to help identify whether a company was an SME or not. The MoD randomly chose a selection of the companies that it had done business with and assessed them against the EU definition of a SME.23 Meanwhile, back in 2009,

the Cabinet Office directed that the UK government’s finance systems include a particular piece of data—a DUNS number—which is a unique nine-digit reference given to companies that apply for it. As of this date, over 245 million businesses worldwide have DUNS numbers.24 Between 2011 and 2012, the MoD worked with Dun & Bradstreet (D&B) to map all the companies that had received payment from the MoD during that financial year. This work resulted in a database that included many MoD suppliers, their DUNS number and an assessment as to whether they were SMEs. It covers 98% of the companies that account for MoD expenditure. The database provided the basis for estimating how much the MoD spends with SMEs. While it is not comprehensive, it does provide some clarity on increasing UK government expenditure with SMEs. The last

major update and reassessment was conducted in July 2013.25 The most recent set of figures from the MoD are shown in the corresponding table.26 While MoD expenditure was reasonably consistent in terms of both estimated expenditure and that expenditure as a percentage of total MoD expenditure between 2011 to 2012 (5.2%) and 2012 to 2013 (5.4%), there was a noticeable decline in 2013 to 2014 (4.5%). In addition, the expenditure was placed with approximately 5,000 less SMEs. The fall in estimated expenditure was attributed to a number of factors, including:27 ● The MoD was only able to identify the SME status (based on D&B assessments) for about 93% of 2013 to 2014 expenditure. This was considerably lower than the previous two estimates and amounts to about £1.42 billion worth of expenditure ● The top 10 SMEs (in payment terms) in 2013 to 2014 received around £320 million, compared to just over £400 million for 2012 to 2013. The fall in the number of SMEs being paid was attributed to:28 ● The total number of MoD suppliers had dropped from around 27,500 in 2012 to 2013 to around 20,000 ● The MoD pays several thousand doctors each year, around half of whom

source: uK moD annual statistics series

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are assessed as SMEs by D&B. While the total paid is relatively low, the number of doctors assessed as SMEs makes up a reasonably sized fraction of the total number of SMEs. ● While the MoD was able to assess the suppliers in receipt of about 93% of expenditure, this related to only half the number of MoD suppliers by number. This is markedly lower than in the previous two years. Traditionally, SMEs have found it difficult to access government contracts, with success tending to go to those who have joined further down the supply chain as tier two, three or even four suppliers. With austerity being an issue for the foreseeable future, and continued pressure on many departmental budgets (including defence), there has been a move by central government to increase the amount of expenditure, both direct and indirect, with SMEs, as they are seen as a source of innovation, economic growth and job creation within the private sector. The measures that have been implemented so far seem to have worked, with the percentage of overall government expenditure placed directly with SMEs reaching 10.3% (directly) and 15.8% (indirectly) in 2013 to 2014. If the MoD’s own figures are even vaguely accurate (4.5% of expenditure was placed directly with SMEs) then it has quite some distance to go if it is to match the figure for the government as a whole, which represents a cross-departmental average. Interest in increasing the amount of government expenditure with SMEs is not confined to the United Kingdom.

Several other countries including Canada and the United States have also expressed an interest.29 Even NATO wants to engage more with SMEs, although being an international organisation it is an additional step removed from both prime contractors and SMEs. NATO has admitted that it has “no direct leverage on industry or market regulations”, but it does have a “role to play through the harmonisation of national and multinational capability requirements.”30 n

ABOUT THE AUTHOR Peter Antill rejoined Cranfield University in June 2009 to undertake

research in order to create a defence acquisition body of knowledge as well as several projects aimed at producing a continuous stream of publications over the longer term. This has included various books, journal articles, case studies, conference papers, monographs and chapters in edited publications as well as updating teaching material used by the Centre for Defence Acquisition. Peter graduated from Staffordshire University in 1993 with a BA (Hons) International Relations and followed that with an MSc Strategic Studies from Aberystwyth in 1995 and a PGCE (Post-Compulsory Education) from Oxford Brookes in 2005.

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FOOTNOTES

1. European Commission. (2003) ‘Commission Recommendation of 6 May 2003 Concerning the Definition of Micro, Small and Medium-Sized Enterprises’ in

Official Journal of the European Union, 20 May 2003, pp. 36-41, located at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2003:124:0036:0041:EN

:PDF, as of 23 June 2015.

2. European Commission. (2015) What is an SME? webpage, updated 10 June 2015, located at http://ec.europa.eu/growth/smes/business-friendly-environment/

sme-definition/index_en.htm, as of23 June 2015. Cabinet Office. (2013) Making Government Business More Accessible to SMEs: Two Years On, August 2013, p.

3, located at https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/231994/SME_Two_Year_On_Report.pdf as of 22 June 2015.

3. Simpson, R. (2011) ‘Recognising the Power of the SME Sector in the Defence Industry”, DCI Contracts Website, dated 6 October 2011; Wilson, A. (2010) ‘UK

Defence Industry will be ‘Halved’ by Spending Cuts’ in The Telegraph, dated 3 July 2010, located at http://www.telegraph.co.uk/finance/newsbysector/industry/

defence/7870071/UK-defence-industry-will-be-halved-by-spending-cuts.html, as of 25 June 2015.

4. Defence Growth Partnership (DGP). (2013) Securing Prosperity: A Strategic Vision for the UK Defence Sector, September 2013, p. 4, located at https://www.gov.

uk/government/uploads/system/uploads/attachment_data/file/237314/bis-13-1154-defence-growth-partnership.pdf, as of 25 June 2015.

5. Op Cit. Simpson (2011).

6. Paniguian, R. (2009) ‘SME Opportunities in Global Defence and Security” in RUSI Defence Systems, October 2009, pp. 74 – 76, p. 74.

7. Op Cit. Gray, Saunders and Goregaokar (2012), p. 6.

8. Booth, L. (2015) Public Procurement, House of Commons Library, Report Reference SN/EP/6029, p. 3, available at http://researchbriefings.parliament.uk/

ResearchBriefing/Summary/SN06029, as of 23 June 2015.

9. HM Government. (2010) The Coalition: Our Programme for Government, May 2010, 401238/0510, located at https://www.gov.uk/government/uploads/system/

uploads/attachment_data/file/83820/coalition_programme_for_government.pdf, as of 22 June 2015.

10. Cabinet Office. (2011a) Making Government Business More Accessible to SMEs, July 2011, located at https://www.gov.uk/government/uploads/system/

uploads/attachment_data/file/61148/SME-Progres-_20Report-Summary.pdf, as of 22 June 2015.

11. Cabinet Office. (2012) Making Government Business More Accessible to SMEs: One Year On, March 2012, located at https://www.gov.uk/government/uploads/

system/uploads/attachment_data/file/61384/SME-Progress-Report-Management-Summary-One-Year-On.pdf, as of 22 June 2015.

12. Op Cit. Cabinet Office (2013).

13. Glick, B. (2015) ‘Do the UK Government’s SME Spending Figures Make Sense?’ webpage, dated 27 February 2015, located at http://www.computerweekly.

com/blogs/editors-blog/2015/02/do-the-uk-governments-sme-spen.html, as of 26 June 2015.

14. Cabinet Office. (2015) ‘Government Spends £11.4 billion with SMEs’ webpage, dated 25 February 2015, located at https://www.gov.uk/government/news/

government-spends-114-billion-with-smes, as of 25 June 2015.

15. Ibid.

16. Ministry of Defence (MoD). (2014) Ministry of Defence SME Action Plan – Aug 2014 – Issue 3, dated August 2014, located at https://www.gov.uk/government/

uploads/system/uploads/attachment_data/file/361985/20140826_SME_Action_Plan.pdf, as of 18 June 2015.

17. Minister (Defence Equipment Support & Technology) – currently Phillip Dunne MP.

18. Currently Susanna Mason.

19. Ministry of Defence (MoD). (2010) Equipment, Support and Technology for UK Defence and Security: A Consultation Paper, Cm7989, December 2010,

located at https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/35916/cm7989_Eqpt_supp_tech_ukdef.pdf, as of 19 June 2015.

20. Ministry of Defence (MoD). (2012) National Security Through Technology: Technology, Equipment, and Support for UK Defence and Security, February 2012,

Cm8278, located at https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/27390/cm8278.pdf, as of 18 June 2015.

21. Op Cit. MoD (2014).

22. Ibid.

23. European Commission. (2015) ‘What is an SME?’ webpage, last updated 12 May 2015, located at http://ec.europa.eu/growth/smes/business-friendly-

environment/sme-definition/index_en.htm as of 5 June 2015.

24. Dun & Bradstreet. (2015) D&B D-U-N-S® Number webpage, located at http://www.dnb.co.uk/dandb-duns-number, as of 4 June 2015.

25. Ministry of Defence (MoD). (2014a) Background Quality Report: Defence Economics SME Statistics, 22 May 2014, located at https://www.gov.uk/government/

uploads/system/uploads/attachment_data/file/314414/20140522_KS_BQR_2014_SME_Statistics.pdf, as of 4 June 2015.

26. Ministry of Defence (MoD). (2014b) Annual Statistics Series 1, Financial Bulletin 1.01a – MOD Contracting with Small and Medium-sized Enterprises: Direct

Expenditure, 28 May 2014, Defence Economics (Defence Expenditure Analysis), p. 5, located at https://www.gov.uk/government/uploads/system/uploads/

attachment_data/file/315047/20140528-SME_Statistical_Bulletin_FINAL-O.pdf, as of 4 June 2015.

27. Ibid. pp. 5-6.

28. Ibid. p. 6.

29. Prime Minister’s Office. (2015) ‘PM Announces Support to Open New Markets for Small and Medium-Sized Businesses’ webpage, dated 18 March 2015,

located at http://www.pm.gc.ca/eng/news/2015/03/18/pm-announces-support-open-new-markets-small-and-medium-sized-businesses, as of 26 June 2015;

Hatton, L. (2012) It’s the SMEs, Stupid: Lessons from America, September 2012, Civitas, located at http://www.civitas.org.uk/economy/Hatton_USUKSMEs.pdf,

as of 26 June 2015.

30. NATO. (2013) Framework for NATO-Industry Engagement, paragraph 2, located at https://diweb.hq.nato.int/indrel/Shared%20Documents/FNIE_Brochure.

pdf, as of 26 June 2015.