Whitepaper #3: Rethinking the SME Bidding Advantage – Helping SMEs Improve Access to Procurement Markets

Contractors bidding through the formal procurement process must be aware of specific bid requirements or risk being rejected for being non-responsive. With government and commercial procurement departments around the world introducing thresholds and policies to achieve non-discrimination in their supply chain contracting, the first steps towards achieving parity isn’t about simply encouraging participation. It’s about building capability and compliance.

Introduction

When procurement organisations purchase goods or services, they consider and award contracts only to bidders that comply with specifications and conditions of tender as outlined in the tender invitation. Tenders received must therefore be conforming, compliant, and responsive. This enables procurement organisations to compare suppliers on an equal footing across all bidders.

Procurement departments have introduced Small to Medium Enterprise (SME)^[1] thresholds as instruments to stimulate participation and competition for tendering and bidding, and while barriers to SME participation in procurement has been the focus of research for many years, less attention has been paid to the predictors of SME success, while even more lacking is data that captures noncompliance rates of tenders submitted.

Traditional approaches of facilitating SME participation

Public procurement is the largest marketplace in the world, representing 12 percent of gross domestic product (GDP) and around 29 percent of total government expenditures in OECD countries^[2]. To put this into perspective, this is 10X the combined annual revenue of consumer marketplace giants Amazon, Google, Facebook and Walmart.

The tender process is now the most used method for the procurement of goods and services around the world as it is a more formalised and strictly managed process of ensuring consistency between departments and locations. Standard formats and structure provide for more transparency and accountability, as well as a more even playing field for evaluation.

To date, research has focused on the barriers SMEs encounter when competing for contracts in a competitive bidding environment. Unfamiliarity of procurement department culture, policy ambiguity and unwieldy tendering systems and limited resources of SMEs to cope with the cumbersome process accounts for the often underrepresentation of SMEs as public sector suppliers in many countries^[3].

Creating value and a sustainable economy

Highly successful organisations proactively drive their procurement strategies with value creation initiatives to achieve the ultimate supply chain targets. Governments are increasingly leading the way to increase the participation of SMEs and minority businesses to contract with them.

This sector constitutes a large proportion of enterprises but a smaller proportion of suppliers into government. SMEs account for 99% of all businesses, and more than half of employment globally and on average, 50 to 60 percent of national GDP^[4].

These engines of our local economies also serve as agents of social cohesion, so it stands to reason that governments are striving to support business conditions to facilitate the right access to procurement markets for competitors of all sizes. But despite trying to level the playing field, barriers to entry still continue to prevent SMEs from winning public contracts in countries everywhere.     

Participation and disqualification rates

 

Although there are clear benefits of having SMEs participate in procurement markets, they are in fact underrepresented in the process compared with their overall weight in the economy.  Consensus is currently lacking on the share of public procurement contracts that should go to SMEs.In the UK, the government has set a 33% target for spending with SMEs by 2022 despite failing to meet thresholds year after year (for example IT spend is currently sitting at 18%). With greater government interest in the relationship between procurement and innovation, a target of 10% of technology spend has been recommended to be directed to start-ups, which could be transformational to public sector modernisation and to the economy. In Australia, the federal government has exceeded its 10% target, with SMEs accounting for around 18% of the value of federal government contracts. Increased Indigenous procurement requirements have also been set to 3%.

In the US, the federal government has generally succeeded in meeting its goals of awarding 23% percent of the total value of all small business eligible prime contract awards to small businesses, with 5% to small disadvantaged businesses and 3% to disabled veteran-owned small businesses. It has had difficulty meeting the goals of 5% to women-owned small businesses and 3% to HUBZone small businesses.

A recent report published by govtech venture firm Public found that confidence in selling to government was extremely low among SMEs^[5].  On the one hand, SMEs and micro-enterprises may not be interested in public contracts because their activities simply do not align with public policy agendas (eg. health, education, infrastructure). On the other hand, SMEs may lack awareness of the opportunities available to them, such as the demand for advisory or professional services, supply of commodity items, and provision of facilities management for example. New models of engagement such as joint ventures, consortia and concepts around supply chain clustering also mean that SMEs no longer have to ‘go it alone’ to try and deliver at scale to government.

Globally, poor data collection from government does not capture accurate statistics on the scale of the problem or even the number of non-compliant tenders or bids in the market. Anecdotally, media reporting suggests that participation constraints and performance of SMEs vary according to their characteristics, such as size, maturity and sector, as do the non-compliance, (or disqualification) rates of bids during the evaluation process.

The cost of non-compliance bears more than just an opportunity cost for SMEs. It sends a ripple effect right along the supply chain and deep into the economy, with delays to the evaluation process, as well as to technical assessment of contractors, to contract award, and ultimately, to project commencement. Oftentimes, multiple non-conformance results in re-tendering which further extends procurement cycles and adds resources, cost and time to the process.

Simplifying the procurement process

The reasons why SMEs struggle with procurement can be understood in terms of an unfamiliar and not always efficient marketplace, bureaucratic tendering and bidding procedures, and their inherent resource limitations. From a supplier perspective, tendering and bidding is perceived to be bureaucratic, formalised and legalistic in nature requiring lengthy form filling, full of compliance and qualification criterion disproportionate to the risk profile of the contract.

Tenders and bids can be deemed non-compliant for a number of reasons including: being submitted late or in the incorrect format; failing to meet certain conditions of the contract; failing to answer a question or returning key compulsory documents for evaluation purposes. Tendering or bidding companies can also be excluded from consideration on grounds of conflicts of interest, or breaching of laws or policies in regards to company conduct; or providing false and misleading information.

Procurement procedures by contracting authorities have been undergoing reform for several years, making tenders and bids more accessible to SMEs in line with principles of equal treatment and open access. Measures to encourage participation among SMEs have included:

• Dividing contracts into work packages so as to reduce bureaucratic red tape;
• Reducing financial qualifications and thresholds; and
• Introducing e-procurement, allowing SMEs to use digital marketplaces and portals.

While the reform process has addressed some of the hurdles faced by SMEs in accessing procurement markets, there are undoubtedly still some barriers to entry for SMEs.

SME and technology enablement

One of the greatest advancements for SMEs has been the open access to procurement opportunities through government websites and e-tender subscription portals. However, after an SME decides to participate in a tender, it faces further constraints at each stage relating to their capability in navigating the process, as well as the resources and capacity to design the proposed solution.

Excessive paperwork and poor understanding of the compliance requirements represents a key barrier to creating both a conducive environment and ensuring mandatory conditions of the tendering process can be met.  One of the obvious constraints for SMEs is the opportunity cost to prepare a tender or bid submission while running ‘business as usual’.

Collaboration tools can greatly assist to centralise knowledge and create information efficiencies. These tools can also help SMEs to keep track of the tender milestones and documentation and enable them to more costeffectively partner with independent bidding consultants to help them improve the quality of their submissions. Joint ventures and sub-contracting arrangements between big and small companies are becoming key tactics to boost capacity through the sharing of risk, resources, knowledge and combined capability in delivering submissions and projects through relational contracting models.

But while the use of technology can, and does, improve access to procurement opportunities and enables collaboration, those opportunities will only materialise however, if SMEs know how to prepare compliant bid submissions in the first place.  The time it takes to prepare tender documentation and issue it to the market can take many months, and when non-compliant tenders further delay the process, the whole market suffers from reduced competition, missed niche solutions, and new innovations.

“…while the use of technology can, and does, improve access to procurement opportunities and enables collaboration, those opportunities will only materialise however, if SMEs know how to prepare compliant bid submissions in the first place.“

 How we can improve relational capability

Procurement organisations are now actively engaging SMEs by facilitating collaborative partnerships and industry-sector alliances, including supply chain development and diversification programs as a way to link industry with procurement opportunities, programs and grants.

Skills training, market intelligence, business missions and trade shows help SMEs make themselves visible to buyers and become part of the consultation process about supply requirements at the pre-bid phase.  A proven ability of SMEs to understand buyer hot buttons and then to engage buyers and persuade them of their value proposition outside of the tender process provides them with deeper insight into their key drivers, as well as the confidence and the opportunity to pursue larger value contracts.

Developing a culture of being proactive with process versus reactive to the tender or bid is a distinctly different approach to qualifying and winning opportunities. One approach is based on hard facts and validated human intelligence gathered as part of a documented customer engagement process to make informed choices on which to pursue opportunities. The reactive approach, on the other hand, is frequently based on assumptions, limited data and limited information solely on what is provided for in the tender document.

If SMEs want to build their capability in business development they must commit to learning about the bid lifecycle and the end-to-end process so that they are not limiting their efforts to the Request for Proposal (RFP) window.

Improving procedural capability

Onerous qualification criteria, and the ability to leverage organisational resources – human, technological, financial, administrative, network and reputational – are still critical determinants of the success of SMEs not only in the tender process, but in contract management and strategic service delivery.

Procurement is bound to value for money goals and the imperatives of transparency and accountability in commercial transactions. The success of SMEs will depend on their ability to draw on their human, social, ethical and financial capital to surmount these challenges and compile a bid that responds to the buyers’ expectations.

As it is with tendering and bidding activity, procedural know-how is associated with performance outcomes. As real as these barriers are, undoubtedly knowing how to precisely navigate the process will differentiate the compliant from the non-compliant tenderers and bidders. Successful bidders are the ones who can:

• deconstruct the legalistic and bureaucratic process; understand what buyers expect from suppliers; and
• articulate this through the formal tender process.

This baseline capability serves to improve not only the quality and compliance of the tender or bid submission, but increases the likelihood of success. Together, the relational and procedural capability, enabled by technology to facilitate collaboration and reduce time-limitations, can have a substantial positive effect on an SMEs ability to mitigate disqualification rates, while improving contract win-ratios and ultimately, percentage of total revenue derived from contract awards.

Closing the loop

Beyond the tender submission, procedural capability is relevant even after the tendering process has been completed and the contract has been awarded. In the event of a successful or failed bid, firms need to know how to obtain feedback so that they can understand the relative strengths and weaknesses of their bid. This information can then be used to continually improve and devise future bid strategies.

With tendering and bidding, the key to success is the capacity to hone the process, build on successes, and learn from failures. Like relational capability, procedural know-how is predicted to directly affect SME tendering activity and performance. To begin with, it should lead firms to tender more frequently, and time and resource implementation can be reduced if firms take a more purposeful approach to the process.

References

[1] SMEs are defined differently in the legislation across countries, in particular because the dimension “small” and “medium” of a firm are relative to the size of the domestic economy. For statistical purposes, the OECD refers to SMEs as the firms employing up to 249 persons, with the following breakdown: micro (1 to 9), small (10 to 49) and medium (50-249).

[2] OECD (2017)

[3] World Bank (2018). Working Paper. “Encouraging SME Participation in Public Procurement Markets in Middle East and North Africa (MENA)”.

Completion Summary (English). http://documents.worldbank.org/curated/en/588901524468478164/Encouraging–SME–Participation–in–PublicProcurement–Markets–in–Middle–East–and–North–Africa–MENA–Activity–Completion–Summary

[4] The OECD has been at the forefront of providing evidence and good practices related to the way public procurement is used to promote broader policy objectives, such as sustainability, innovation and social responsibility, and thus provide for the most reliable statistics available.

[5] Hugill, J., Puvinathan, R (2019). How to deliver innovation through public procurement.