How Can SME Spending Provide Value for Money in the Defence Industry?

Inzpire has lofty aspirations, and unashamedly so.

Through revolutionising the industrial military relationship we intend to become the most respected Defence company in the world. The aim is clear and so is the pathway to achieve it. Firstly, we must build and demonstrate our quality in the UK before exporting our pedigree to the global market. As an SME, classified by the EU as a company with a headcount of less than 250 people or a turnover of less than €50m per annum, the UK government pledge for SME spending is vitally important to our long term strategy. But more than that, it is key to ensuring better value for the tax payer in military spending.

But how can we be assured that SMEs can provide better value for money than the big defence primes? Well in some areas they can’t, clearly they are not scaled to provide for a huge capital projects such as the Queen Elizabeth carriers. But in so many other areas they can provide products and services without inflated Prime Defence contractor costs. The smaller scale of these companies provide agility to ensure the military gets exactly what it needs and not a product that roughly meets the requirement and has a large Research and Development bill that needs covering. Also, they have reduced overhead costs that translates to savings for the MoD and better value for money for the taxpayer.

The UK government has pledged to spend directly and indirectly £1 in every £3 with SMEs by 2020, up from the current level of 27%. The MoD cites complexity of procurement processes as a reason for lower levels of SME spending and has agreed with the Cabinet office, in its February 2016 departmental plan, to achieve 25% by 2020 up from the current level (2014-15) of 19.4%.

But, in all these figures, the important thing is the direct or indirect figure. In 2014-15 4% or ~£822m was spent directly with SMEs. One of the key benefits to SME spending is to spread the money invested by the MoD into a broader spectrum of the defence industry. The second key benefit is to ensure value for money but this is more opaque when money moves through the Defence Primes first with their associated mark ups. With such a low percentage of direct SME spending then it is questionable as to whether this is achieved.

The question is why is the direct spending levels so low and can this be increased? Do the mechanisms for this help or hinder direct spending. If the Framework Agreement Technical Assistance version v5 (FATS 5) is a gauge of intent, then this figure will not change. The system appears to be skewed towards prime defence contractors and acts as a barrier to entry for SMEs. Indeed, when questioned on this at an industry day the FATS5 briefing team suggested that SMEs get in bed with the ‘Primes’ to sub-contract.

The appointment of Emma Jones as the Crown SME Tsar is a very welcome development. With a rich heritage as an entrepreneur she understands the needs and benefits of SMEs. She has a three point plan to improve levels of government spending with SMEs, the first of which is to make the process simpler. There is no shortage of SMEs that wish to sell to the MoD, so if the MoD wishes to succeed in making this SME spending target then procurement simplicity must be a priority and will not be met by procurement systems such as FATS 5.

Inzpire is currently part of a Frameworks Group that is directly advising Government through our membership of the Government SME panel, that meets regularly in the Cabinet Office. We are one of 20 SMEs selected to participate and are honoured to be involved. It is an excellent Government initiative.

Of note, there is clearly recognition of the problem within the MoD. As Steve Morgan the Commercial Director for the MoD observed at a procurement event in Wales in late 2016; often the Prime “is not adding any value and it is the second tier firm that is doing so” or “the Prime is actually doing things themselves that would be better done by using another firm”. So now the challenge is surely to reconfigure procurement processes to directly access this second tier of supplier. This is no mean feat, but in my view essential if the MoD is to meet its own SME spending targets.

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