When the UK’s lockdown began in late March, there was palpable concern for the community of SMEs that provide technology solutions to the public sector. Although the number of small and medium-sized businesses supplying to government has grown significantly in recent years, buoyed by newer routes to market such as the Digital Marketplace, it is still a relatively fledgling market.
These companies have endured tough trading conditions in the past couple of years due to the austerity agenda, the uncertainties of Brexit, and the resurgence of traditional systems integrators as digital transformation players. Then, just as the horizon was beginning to look brighter at the start of 2020, the coronavirus crisis caused the brakes to be applied again on discretionary tech spending, delivering a potentially fatal blow to some of these lean suppliers.
However, in researching a new report on the effect of COVID-19 on the govtech supply chain, I have found there is still much optimism for the future amongst SMEs. In particular, some of those technology providers that have already gained a toe-hold in the sector, have actually seen a mini-boom in business.
Public procurement professionals tend to be fairly risk-averse, so where an incumbent supplier is delivering to spec, they are now being rewarded. Cabinet Office advice, issued through public procurement notices (PPNs), is allowing existing contracts to be extended, or new ones let via accelerated processes in these extraordinary times. The Treasury is also playing its part in recognising the value that SMEs bring to new public service initiatives, especially in the digital space. Several measures have therefore been introduced, in conjunction with the Department for Business, Energy and Industrial Strategy (BEIS) and the British Business Bank, to ensure that these enterprises do not run out of cash, through providing access to grants and loans for continued funding.
While many govtech-focused SMEs are lean, they can burn through cash quickly without solid revenue streams, so state help has been very much welcomed. Another factor that may favour the smaller company over the larger tech giants is that their contracts are often delivered through contracted staff, meaning overheads can be cut quickly if needed.
Undoubtedly though, with the abrupt halt, or at best delay, to many projects resultant from the lockdown, there will be casualties and that, of course, is regrettable. SME suppliers with all their eggs in the public sector basket appear likely to be most vulnerable. The Chancellor, Rishi Sunak, has stated that any bounce-back in the economy could be a long slow process. The general feeling in the industry, is that the effects will be felt longer in the public sector than the private sector. The cost of providing Treasury-backed financial support to individuals, businesses and government agencies, which amounted to almost £125bn by early last month according to the National Audit Office (NAO) will have to be repaid.
Popular wisdom suggests that this year’s Comprehensive Spending Review (CSR), itself delayed by the pandemic, will see swingeing cuts once more in central government operational budgets, particularly those not providing frontline services to citizens. This administration has, to date, shown less appetite for Business-as-Usual (BAU) digital transformation, the lifeblood of many govtech SMEs, than its recent predecessors, so the mid-to long-term future looks a little bleaker.
It is therefore highly likely that digital reform programmes that were in the pipeline may have to be postponed or even curtailed. Strategic thinkers among SMEs are already planning for that scenario though. Those that have built up some equity, not expanded permanent staff beyond their means, and have also invested in winning private sector business, can look to the likes of financial services clients rather than government ones; they can pivot their focus on where tech spending returns first.
Those that have been in this industry for many years know that selling to the public sector has never been easy. What is today’s success (never overnight, but earned over many months of lobbying, persuading and trialling) can be tomorrow’s failure, so new-age suppliers must be skilled not only in innovation but also cautious business planning. From the evidence I witnessed through a number of interviews, I believe we are blessed in the UK govtech community with companies led by such people. I’m therefore confident that, with the right nurturing, the worthy SMEs can ride this storm and provide a platform for an innovative UK technology sector to rise again.
The full report, “How will the COVID-19 crisis affect GovTech SMEs” is available for GlobalData Public Sector subscribers to download here.
Rob Anderson is principal analyst in GlobalData’s public sector division