Do young businesses struggle with Government procurement?

First published 19th August 2015

Innovation has been a cornerstone of the Government’s rhetoric on economic growth from IT in central departments to the concept of a Northern powerhouse. Young companies are the greatest innovators, more likely than established firms to base their offerings on the latest developments in technology than older, more established firms. Despite this, our latest research, published today in the Guardian, shows that only 2.7% of government procurement spend goes to startups. Spend Network, funded by Nesta, found evidence that not only does government procurement not prioritise innovation, it actually favours less innovative companies. You can see our results here.

Using the open data published on public spending from council and departmental websites, we built up a picture of all the companies local and central government have spent money with over respective thresholds of £500 and £25,000. We then compared this with the founding dates of these business using data from Companies House. Classifying a startup as any business under five years old with a turnover of less than £2 million a year, we were able to see if government contracts were going to startups. In fact, between 2012 and 2014, spend with young businesses declined in both central and local government. It is particularly worrying that technical and IT services, the areas in which innovation is most important, make up very little of the government’s spend on young companies compared to spending on administrative, financial or legal services.

Almost 50% of new jobs are being created by startups, so by supporting them through procurement, the Government would be revitalising the jobs market. However, startups promoting new products and ideas suffer when responding to the requirements in tender documentation. While an innovative solution may yield impressive results, it is much less likely to meet the restrictive specifications by which the tender is evaluated. This does not have to be the case. Barcelona and Philadelphia have run problem-based procurements and business accelerators. Instead of responding to a prepared list of criteria, businesses are invited to propose solutions to pre-defined problems. Fresh ideas are welcomed, opening up government procurement to innovative startups.

Our research identifies a way to combat this latent bias against startups in government procurement. The North East emerges as the leader in spending with innovative businesses. This is no accident. Local authorities in the region have worked in a partnership to support local businesses and economic collaboration for nearly 40 years.

While our research shows the Government is not supporting young firms in its current procurement practice, following best practice could open up lucrative government contracts to startups and allow the public sector to be a champion of UK innovation.

Originally published at spendnetwork.github.io.