As the new Procurement Act 2024 comes into effect on October 28, 2024, the landscape of public procurement is set to undergo significant changes. Among its various provisions, one stands out as particularly beneficial for small businesses: a mandate that 33% of public sector contracts, by value, must be awarded to small and medium-sized enterprises (SMEs). This shift presents a tremendous opportunity for SMEs, but it also demands a strategic rethinking of how they engage with the public sector.
At SVGC, we’ve been actively developing the concept of Small Business Collaborative Clusters to offer more agile and comprehensive services to the public sector. These clusters are designed not just as a response to the new procurement regulations but as a means to foster long-term, stable relationships between small businesses and public sector bodies. Importantly, these collaborative clusters can be treated as a single entity when assessing financial risks, simplifying the procurement process for public sector organisations.
Understanding the Value of Collaboration
Collaboration is more than just cooperation or coordination—it’s about creating interdependency and working towards common outcomes. However, collaboration isn’t suitable for everyone or every situation. The key is to identify the right partners for collaboration, as successful partnerships are based on shared goals and mutual benefit.
The framework for establishing such relationships is well outlined in ISO 44001, the international standard for collaborative business relationships. According to Clause 8 of this standard, the process begins with defining your strategic outcomes and embedding collaboration into your strategic intent. From there, you develop associated policies, ensure your team has the necessary skills, and assess your collaboration maturity.
Next, you consider potential partners by evaluating their capabilities to operate collaboratively and aligning roles and responsibilities. After selecting your partners, you establish joint governance and relationship management processes, which include developing a Relationship Management Plan (RMP). This plan is critical—it defines the intent of the relationship, objectives, governance, risk management, and exit strategies.
The Problem with Current Procurement Frameworks
One of the challenges public sector procurement bodies face is dealing with a large number of small businesses. This complexity often leads them to use frameworks that favour large companies, under the assumption that these companies can effectively engage with smaller businesses on their behalf. However, these frameworks often result in large organisations monopolising work and sidelining SMEs. Moreover, large organisations may not utilise small businesses effectively, leading to missed opportunities for innovation and efficiency.
SVGC’s Approach to Collaborative Clusters
At SVGC, we’ve formalised our relationships with various organisations through Relationship Management Plans (RMPs), which outline the objectives, benefits, governance, ways of working, ways to measure success, risks, and exit strategies of our partnerships. By establishing these long-term, trusted relationships, we create stability and resilience within our collaborative clusters.
Once a cluster is formed, it can engage with public procurement bodies as a single entity. This approach simplifies the procurement process, reducing the number of engagements the public sector needs to manage. Instead of interacting with hundreds of SMEs, a body like the Ministry of Defence (MOD) could engage with just a relatively small number of clusters, streamlining operations and reducing administrative burdens.
Overcoming the 40% Rule
A significant barrier to SME participation in public sector contracts is the “40% rule,” which limits the value of contracts to 40% of a business’s turnover to mitigate risk. For a business with a £5 million turnover, this would mean that a contract exceeding £2 million is seen as too risky.
However, in a collaborative cluster, the combined turnover of all businesses should be considered when assessing financial risk. This is because the collective capability of the cluster provides a safety net—if one company within the cluster cannot deliver a service, another likely can. By definition, collaborative relationships are long term – not transactional. Therefore, ignoring the combined turnover of a cluster is not only unfair but also counterproductive, as it fails to recognize the reduced risk that comes with collaborative agreements.
A New Way Forward
The MOD and other public sector bodies have an opportunity to fundamentally change how they engage with the small business market by recognizing and encouraging collaborative clusters. By acknowledging these clusters and their collective turnover, public sector organisations can mitigate financial risks while benefiting from the innovation and agility that SMEs bring to the table.
In conclusion, Small Business Collaborative Clusters represent a strategic and practical approach to public procurement that aligns with the goals of the new Procurement Act 2024. By fostering long-term, stable relationships between small businesses and public sector bodies, these clusters can help achieve the Act’s objectives while driving innovation and efficiency in public services.
If you’d like to speak further with one of our experts about Small Business Collaborative Clusters, get in touch we’d love to hear from you.
