Digital Marketplace SME sales data shows clouds in the silver lining

Chris Farthing of Advice Cloud digs beneath the headline numbers to find both good news and cause for concern for government’s SME suppliers

Credit: Dennis Hill/Flickr/CC BY 2.0

Independent forecasts for the growth of the UK economy in 2018 average 1.4%. Contrast this with the public sector market for cloud products and services, which has been growing at about 50% a year for the last three years and may even better that rate over the next 12 months.

The Government Digital Service and the Crown Commercial Service jointly publish the sales data for the Digital Marketplace. Plotting the cumulative sales (see graph below right) of the G-Cloud and Digital Outcomes and Specialists (DOS) frameworks looks like the vapour trail of something from Cape Canaveral; ‘the men from the ministry’ who manage this marketplace have clearly spent the last five years feeding it with rocket fuel.

So, this is a good-news story – of that there can be no doubt. 

SMEs are often responsible for their own problems… many of them fail to grasp that they need to improve their basic documentation set to allow them to be selected on a procurement

But every silver lining has a cloud, and we can pick over some of the detail to unearth a few questions that cloud-watchers will be keeping an eye on over the short-term future.

Services spending
A quick note about combining G-Cloud and DOS: the latter is the newer framework, and has only been going since June 2016. A lot of the services transacted on that platform would have been seen on G-Cloud in earlier iterations. So, to look at market growth over time, it makes sense to combine the data.

Over the 12 months to June 2018, £1.5bn was spent on the two frameworks, up from £1bn in the previous 12 months. Of this total, 11% was on ‘Hosting’ (formerly IaaS and PaaS), and 14% was on ‘Software’ (SaaS). 

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So, the vast majority – 75% – of this market comprises professional services of one type or another. Some £1.1bn of services were consumed through these platforms in the year to June 2018 – up from £800m in the previous year.

We can only guess what the average daily rate is on the platforms.

In an attempt to translate this spend figure into something more accessible, let’s see what it represents as a workforce if the average were £500 per day day on a full-time equivalent basis. In these rough terms, to June 2018 the market consumed the equivalent of about 11,000 IT specialists – a rise of about 3,000 on the previous year.

At a techUK briefing in November 2017, CCS revealed its expectation that, by June 2019, the annual consumption of professional services via the frameworks would reach between £1.7bn and £2bn. If this does materialise, based on the same rough daily rates, on these frameworks alone an additional 8,000 skilled IT professionals are going to be engaged. Add to that direct recruitment and the employment under various consultancy programmes and direct tendering, and it certainly looks like a boom time for IT contractors. 

The market may not be flexible enough to deliver these valuable human resources without inflating contracting rates – more good news for contractors and a budget headache for the accountants. 

I speculate that a bigger headache to smooth delivery could be a weakness in the public sector’s ability to retain and pay their digital specialists. When specialists’ skills and experience of delivering projects inside government are going to be highly attractive to the large consulting firms, they are likely to be offering rewards that the public purse is going to be hard pressed to match. The disruption is going to add to the difficult job of delivering outcomes on time and to budget.

The marketplace for digital talent is of course wider than just the public sector. We assume Brexit is going to require some big adjustments to many government systems – but it’s not only government who are going to need to do some re-programming to get systems functioning in whatever emerges as the new order. 

Demand for digital skills outside the public sector will, I expect, put additional pressure on the market’s ability to provide the people with appropriate skills. Immigration policy and the return of Europeans to their homelands could cause an additional tightening of supply, though I doubt we are in Y2k territory. We shall have to wait and see how this plays out.     

What about SMEs?
Across all the lots – hosting, software and services) – direct spending on these two frameworks that goes to the SME sector increased from £481m to £608m in the 12 months to June 2018. This equates to a rise of 26%. The professional services component increased 29%. 

Looking at this in isolation, the situation looks good for SMEs – a market growing at 26% should offer plenty of opportunity to stimulate innovation and reward the entrepreneurs for the risks they take.

But there is some uncomfortable news in the detail. 

Direct spend with SMEs on hosting to fell 13% in the year to June 2018, while spending with large hosting suppliers increased 108%. Clearly there is a switch in this vertical. 

Is the citizen getting a better deal in the long term? That’s something for the SME policy mandarins to think about. 

One of the founding principles of G-Cloud was to access the ingenuity, agility, and flexibility of the SME and combat the oligopolistic power that ended up with the taxpayer paying more in the end. Are we seeing predatory pricing as a competitive response from the large enterprises, or is this a long-term good deal?

Total spending via G-Cloud and Digital Outcomes and Specialists frameworks during the 12 months to June 2018

Number of iterations of G-Cloud to date; the tenth version of the framework launched in July

Year-on-year growth in professional services spending with SMEs in the year to June 2018. During this time services spending with large enterprises increased 55%

March 2016
Launch of the first Digital Outcomes and Specialists framework; the third iteration is due to go live imminently

Professional services spending with SMEs in the year to June 2018, compared with £667m spent with large enterprises

On the SaaS side, SME spending went up a healthy 53% in the year to June 2018, although SaaS sales to large enterprises rose 77% during the same period. The underlying share of SaaS spending that ended up going to global brands will be higher than these figures seem to suggest, as resellers which are SMEs will be included in the SME total.

Returning to the professional services category, the 29% increase in spending in the year to SMEs is somewhat dwarfed by a 55% increase in spend to large enterprises, who now account for £667m of these professional services – compared with the £467m spent in the SME sector. Given the views expressed on possible tightness in the labour market above, it may be that the SME sector is insufficiently flexible to meet the increased demand. 

A quick look at the G-Cloud 10 rate cards of the two highest-selling suppliers in the ‘Large’ category and comparing these with the two highest-selling suppliers in the SME category shows that for mid-level talent (Level 4, ‘enable’ in ‘business change’ on the SFIA matrix) the large suppliers’ average rate is 88% more expensive than the SME supplier. While we can’t read too much into this pretty unscientific comparison – which fails to take into account things like outcomes, efficiency and what actually gets billed for the job done – it certainly doesn’t dispel the notion that oligopoly is expensive for the taxpayer.

There is some uncomfortable news in the detail: direct spend with SMEs on hosting to fell 13% in the year to June 2018, while spending with large hosting suppliers increased 108%

G-Cloud and DOS are good news. A domestic market growing at around 50% a year is a dynamo in the economy and it is feeding energy into our tech sector, which is vital for our future prosperity. The share of business moving to large enterprises is a concern, although it may reflect the reality that the large enterprises are more capable of meeting this spike in demand. 

I must also acknowledge that SMEs are often responsible for their own problems.

As I look at the G-Cloud offerings of the 70% or so SMEs that do not appear in the sales data, many of them fail to grasp that they need to improve their basic documentation set to allow them to be selected on a procurement. This is a tragedy – in most cases it can be rectified, but the entrepreneurs are blithely unaware of critical deficiencies and so will remain zombies on the catalogue until someone asks the question: “why not us?” 


Sam Trendall

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