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e-procurement & the SME – challenges for
Scotland
Igor Dutra, Chris Findlay, Moira McGregor, Tom McEwan Napier University,
School of Computing 10 Colinton Road, Edinburgh, EH10 5DT
igordutra@gmail.com; {05013388; 05011664; t.mcewan}@ napier.ac.uk
Note this is a prepress copy of the paper available at http://www.iadis.net/dl/Search_list_open.asp?code=3270 published as part of the
IADIS International Conference e-Commerce 2006
ABSTRACT
The growth of Internet use and the rapid uptake of e-commerce have significantly changed the business
environment. Automation of procurement processes and functions has magnified opportunities and
exacerbated the inherent risks in public sector procurement. The Scottish Executive has established a
common e-procurement approach for public procurement agencies in Scotland. This paper examines the
Scottish model and compares it with the global e-procurement experience, which, as well as revealing
benefits, has also suggested dangers in centralising requirements and aggregating orders. The impact e-
procurement policy will have on local Small and Medium Enterprises (SMEs) is analysed and
recommendations made for future policy. Case studies demonstrating benefits to Scottish SMEs are
reviewed. The paper concludes that the efficiency benefits of e-procurement make its widespread adoption
inevitable and while e-procurement presents opportunities for SMEs, policy makers should be alert to the
risks of aggregation, centralisation and skills gaps.
KEYWORDS
Scottish Executive, SME, e-procurement, e-Government.
INTRODUCTION
As the world rapidly adopts e-commerce, and governments seek to bestow the associated benefits on their
people, the implications extend beyond internal operational benefits. Scotland, a part of the United Kingdom,
is a small nation of 5 million, whose government encourages adoption of public sector e-commerce (Scottish
Executive, n.d.-b). This preliminary investigation, of the effect of public e-procurement on local SMEs, seeks
to identify consequences of e-procurement which frustrate policy objectives and are therefore worthy of
detailed research.
Basic e-procurement automates catalogue purchase processes on the Internet. More elaborate systems
encompass, collaborative requirements capture, tendering, auctions, order placement, invoicing and payment.
This paper uses the Office of Government Commerce (2005) definition for e-procurement, “the term used to
describe the use of electronic methods in every stage of the purchasing process from identification of
requirement through to payment”.
The Scottish Executive is the civil service of the devolved Scottish Parliament, which governs Scotland’s
education, health, justice, rural affairs, transport and economic development. Scottish Executive policy is to
make Scotland “the best and easiest place for suppliers to do business with the public sector". Public
procurement is consolidated under the e-Procurement Scotl@and (ePS) initiative. The Scottish Executive
encourages e-procurement in three areas: (i) e-tendering, (ii) e-auction tools and (iii) Purchase to Pay (P2P),
which automates commodity procurement (Scottish Executive, n.d.-b). This paper compares successful
Scottish Government e-procurement case studies with global experiences. Case studies allow the reader to be
emotionally involved and learn action-related analysis of real, complex situations (Christensen, Hansen, &
Christensen, 1987). Literature supporting negative impact of e-procurement was selected from heterogeneous
sources, including case studies, press reports and published papers.
EXPERIENCES ELSEWHERE
Scotland is not alone in seeking to exploit the perceived benefits of e-procurement. A recent Australian
review of public e-procurement investigated experiences in Italy, New Zealand, Australia and Scotland
(AGIMO, 2005) and identified different government and technical environments which achieved variable
success. The study concluded that the New Zealand e-procurement project, abandoned in 2003 due to lack of
uptake, did not communicate the business case adequately. Conversely, the Italian government e-procurement
project which addressed limited SME public procurement opportunities is perceived a success.
AGIMO concluded that e-procurement strategy should not be technology driven and must be implemented
with best business practices. The Australian and Scottish models were deemed successful so far, and in both
countries the introduction of e-procurement has coincided with a rationalisation of bureaucracy.
An EU report (CEC, 2004) suggested threats to SMEs could arise if introduction of e-procurement systems
was accompanied with disproportionately high participation costs (e.g. software licences or training) for
SMEs, excessive centralisation and order consolidation, and supplier subscription fees. A survey of 400
businesses and business associations (Table 1) makes clear the expectations of positive impacts of e-
procurement on SMEs.
Table 1. Extract from the interactive policy making survey (CEC, 2004)
Conversely, governments are motivated to provide best value for their tax payers. The dyadic government
objectives of supporting SMEs while minimising cost are discussed in BRTF (Better Regulation Task Force,
2004) which identifies the following barriers to government contracts for SMEs.
• Aggregation and bundling of large, related requirements can accrue economies of scale, but exclude
small companies.
• Framework agreements over 4 years favour large well established companies.
• Onerous documentation and poor transparency are greater obstacles to resource light SMEs.
• Inconsistent data on the proportion of government needs satisfied by SMEs hinder setting of
effective SME supportive public procurement goals.
While these barriers exist for all potential suppliers, larger organisations have more resources to counter
them. The key question is whether e-procurement alleviates or exacerbates SME disadvantages. Readily
accessible online procurement systems help maximise uptake by suppliers and purchasers. Conversely, high
training overheads discourage use of e-procurement systems, as evidenced by failed European initiatives, and
favour larger better resourced businesses.
The experience in Italy confirms these and other challenges but also suggests approaches to counter them.
The Italian centralised public procurement organisation, Consip (Public Information Services Agency),
established 2000, uses electronic catalogues, auctions and portals. It initially realised massive public savings
by aggregating orders nationally. However, after two years, problems and hidden costs emerged. Centralised,
aggregated contracts effectively excluded local SMEs, diminishing the supplier pool and competition.
Centralised buying incurs greater distribution costs and reduces local flexibility. The centralised approach
also exacerbated the skills gap and resistance to change. Local government staff were frustrated by the
electronic catalogue access technology and loss of purchasing control. The Italian Government decentralised
Consip and set up independent local systems providing flexibility and improved SME access.
Decentralisation also improved accountability of purchaser and supplier. Consip continued placing contracts
with small, local bidders and a decentralised flexible solution was established (Marra, 2004).
The introduction of e-procurement systems by the London Borough of Newham aggregated procurement of
low-value high-volume goods and services, simplified processes and improved buyer leverage. However,
supplier rationalisation had a damaging effect on local SMEs, who were dependant on public procurement, as
the rapid shift in buying behaviour favoured larger national and global suppliers. Newham was an early
adopter of e-procurement and was one of the first to recognise the potential problem of SME exclusion.
Newham developed two techniques to sustain a local supply base, while meeting procurement targets. First,
an online supplier analysis tool helps identify companies which will be affected by public procurement
moving to regional and national suppliers. A pilot project with 50 public agencies showed that 6% of trade
suppliers are ‘at risk’ - SMEs represent almost 90% of this supply base, employing more than 77,000 people.
These pilot statistics project nationally to 500,000 jobs threatened. Second, KickStart supports local SMEs
who setup simple e-commerce websites and connect with broadband (Newham KickStart Project, 2005).
The potential benefits of e-procurement for SMEs are well understood, yet there are clearly potential
challenges. The following research examines these benefits and challenges from a Scottish perspective.
THE SCOTTISH CASE
The ePS programme invites SMEs to adopt latest technology and best practice Purchase to Pay (P2P)
methods, including electronic order receipt and invoice payment on a level footing with global corporations
(Scottish Executive, n.d.-d). SMEs (fewer than 250 employees) consisted 99% of enterprises and provided
53% of jobs. Small enterprises (fewer than 50) consisted 98% and 40% respectively (Scottish Executive,
2005b).
Scottish Executive procurement policy is “to take steps to remove barriers to participation by SMEs (…)
which does not discriminate against larger firms and which helps to improve Value for Money (VFM) by
increasing competition” (Scottish Procurement Directorate, 2004). Hence, setting quotas would violate the
principle of VFM and procurement legislation.
The centrally hosted ePS is available to any public sector organisation, partly central government funded,
free to the supplier and participating public sector buyers subscribe. Suppliers provide an electronic
‘catalogue’ of their goods and services. Orders, invoices and payments are completed electronically using
embedded payment card to speed payment. Fifty-six public procurement agencies, including nine National
Heath Service (NHS) organisations and six local authorities, used the service before August 2005. Over
10,000 suppliers, ranging from SMEs to multinationals including Dell, Vodafone, and Lyreco, have been
eenabled onto the service. In 2004, an estimated 60% of tenders issued by Scottish Executive Procurement
Directorate used e-procurement.
The Scottish Executive website provides the following examples to illustrate some of the advantages that
have been realised so far.
1. Thomson Alarms (14 employees, turnover £650,000), provides security, communications and
network solutions for the public and private sector. Since implementation of ePS a fragmented error
strewn manual requirement capture and ordering process taking 2-4 days has been supplanted with a
quicker e-procurement process with fewer errors. By demonstrating their e-procurement
competence, Thomson quickly established themselves as an ePS supplier to NHS Lanarkshire
(Scottish Executive, n.d.-c).
2. Renfrewshire Council now use ePS to process tenders electronically. Strawberry Fields (17
employees) who supply fruit to Renfrewshire schools were recently awarded a two-year £222,000
contract. The previous tender process required complex documents and was time-consuming for
suppliers and Council staff. Although Strawberry Fields, who deliver fruit and vegetables, were
initially intimidated by e-tendering, they found ePS accessible and efficient, saving Renfrewshire
Council £1.5 million annually (Scottish Executive, 2005a).
3. The Scottish Executive used an e-auction to procure a large requirement for personal computers.
All four qualified bidders submitted highly competitive, open, online bids. These exceeded expectations,
achieving a saving of around £400,000 against the previous contract price (for lower specified machines). A
purchase order for around £1 million was placed electronically with the winning supplier the following day
(Scottish Executive, n.d.-a).
Many national and international accolades confirm the quality and success of ePS (BCS, 2005; ELCOM,
2006; National Public Procurement Practitioners Day, 2005). A recent Federation of Small Business (2004)
paper stated that SMEs will benefit from ePS by providing a single place for requirements previously
distributed around multiple publications. FSB anticipate ePS will encourage use of plain language and
simplify terms and conditions. The business pages of the Scottish national newspapers, however, present
contrasting views, exemplified in the following two paragraphs.
Scottish public bodies spend £8 billion annually on private sector goods and services which represents a
significant economic development tool available to support local SMEs. However, local SMEs are often
excluded. Some contracts stipulate businesses have a turnover in excess £100M which effectively excludes
even medium sized local companies. This policy supported the growth of the giant multinational IT
companies at the expense of SMEs and appears to derive from risk-averse public sector procurement
professionals (Jones 2006).
Glasgow city council has an initiative to increase the amount of work placed with local firms. Other Scottish
public procurement bodies should consider the adoption of non-price criteria such as economic impact of
their decisions on the Scottish or local economy. The adoption of European Public Procurement Directive
(EPPD) by Scottish Executive consolidated much case law on how public bodies could apply social or
environmental criteria in awarding contracts, but reduces potential opportunities for local SMEs which can
often transport goods using fewer carbon miles and dispose of waste more efficiently (Osler, 2006).
There is also evidence that skills gaps can limit the ability of SMEs to participate in e-procurement. The
growth in the number of Scottish SMEs during the 1970s and 1980s is not matched by training within
companies. Surveys show many SME owners are reluctant to conduct formal training, but, will participate in
‘on the job’ training where cost benefit relationship is more visible (Lange, Ottens & Taylor, 2000). IT skills
are a specific problem. E-skills UK (2005) identified that 4% of the entire Scottish population needed a
substantial increase in IT skills simply to meet the country’s changing job profiles. The missing skills are not
those of the software graduate, but rather more basic IT skills (confidence with general software applications
and computer equipment) at the Scottish Vocational Qualification SVQ level 3 (which is equivalent to
university entrance level). If SMEs are not providing the training, and the IT skills required for e-
procurement are in short supply, then SMEs are unlikely to use e-procurement effectively or efficiently, if at
all.
CONCLUSIONS AND RECOMMENDATIONS
Public sector e-procurement will continue to be introduced to realise cost savings. As e-procurement becomes
more widespread throughout business, and as retail e-commerce becomes the norm, adoption by the public
procurement agencies becomes inevitable. This is an opportunity with associated risk for Scottish SMEs.
Experiences elsewhere suggest improved visibility of public needs and reduced bureaucracy.
Conversely there are significant threats from aggregation, centralisation, long term framework agreements,
skills gaps, weak visibility of procurement policy and poor supplier feedback.
The Scottish Executive use ePS to tackle traditional procurement obstacles to SMEs, namely excessively
complex paperwork, cost of sales, and slow payment. While many of these obstacles could be addressed
independently, ePS levels the playing field for SMEs, previously disadvantaged by the bureaucratic cost of
doing public sector business. These benefits are being realised, but there are risks associated with aggregation
of public requirements and increased global opportunity to tender for local public needs. Consolidation of
requirements often coincides with centralisation and framework agreements, and acts against SMEs, who
struggle to compete on price and scale (Jones, 2006; Dundee City Council, 2006). The Newham experience
demonstrates that public procurement agencies can recognise threats and take effective action to ‘level the
field’ for SMEs. E-procurement can deepen skills gaps between SME and multinationals, if only the latter
can afford to develop staff in the use of public sector e-procurement systems. This could be further
exacerbated, if the public sector does not provide effective communication on requirements or feedback on
bid deficiencies.
Nevertheless, the anticipated benefits can be seen in the Scottish experience. Scottish Executive offers
various case studies of positive local SMEs e-procurement experiences. Strawberry Fields (Scottish
Executive, 2005a) enjoyed a streamlined bidding process and reduced cost of seeking business. Thomson
Alarms (Scottish Executive, n.d.-c) have benefited from elimination of duplication of effort and significant
error reduction reducing the cost of doing business with the NHS. The computer procurement example
(Scottish Executive, n.d.-a), however, invites more cautious evaluation of the claimed benefits (less cost and
higher specification computers). While past experience is normally an effective benchmark, in the PC market
we routinely see lower prices and higher specifications than in the previous year. To demonstrate savings due
to e-procurement, the comparison would need to take into account the annual reduction in the appropriate
index.
There is evidence of specific wins for SMEs in Scotland. Streamlining and improved transparency of public
requirements is evident. However, the global experience has been mixed. Some major risks of centralisation,
aggregation and skills gaps for SMEs and associated local employment have been identified.
These risks should be tackled urgently as commodity purchase is increasingly a global activity, irrespective
of e-procurement.
To capitalise fully on the technology offered, Scottish Executive should adopt the following strategies:
• Promote the importance of SMEs in sustaining local economic stability and growth.
• Continually monitor the total proportion of business awarded to SMEs using traditional and e-
procurement, and actively assess the impact of public e-procurement initiatives;
• Encourage maximum SME participation through: o Streamlining public e-procurement with SMEs
by requiring standard methodologies;
Directly address existing and emerging IT skills gaps within SMEs, in particular supporting
on-the-job training;
Enforce equal tender conditions for both SMEs and large corporations;
Prohibit price-only selection policy.
Public procurement accounts for a significant proportion of any national economy. Many SMEs depend
heavily on public sector business. SMEs are a significant driver for economic growth. While small
percentage public spending reductions can contribute to huge national savings, if they damage the SME
sector, the long term consequences will be catastrophic.
E-procurement offers great opportunities for cost savings. Used astutely the technology can support
government objectives to develop local capabilities in SMEs. It is not the technology which will determine
the positive or negative impact of e-procurement to local Scottish SMEs, but the management of its
implementation.
This study used limited resources in a short time; however our analysis identifies key areas for further
investigation. Topics worthy of future research include detailed case study analysis; unsuccessful e-
Procurement implementations in Scotland; globally adopted SME policies in e-procurement and a more
quantitative measurement of its benefits (e.g. cost of entry for SME vs. improvement of competitiveness).
The major beneficiaries of those studies will be: (i) the public procurement agencies from clarity of insight;
(ii) SMEs through increased opportunity; (iii) the local communities from the growth of indigenous SMEs.
ACKNOWLEDGEMENTS
We acknowledge the co-operation of Scottish Executive in preparing this report. Igor Dutra is supported by
the Programme AlBan, the European Union Programme of High Level Scholarships for Latin America,
scholarship no. E05M056679BR.
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