Turning public procurement into a launchpad for AI-enabled SMEs

A consultation with promise

The UK Government’s latest consultation, Public Procurement: Growing British Industry, Jobs and Skills, has arrived with welcome ambition. Procurement has always been one of the most powerful but underused levers of government. At more than £300 billion a year, it represents a spend larger than the NHS budget. When spent wisely, procurement can stimulate markets, support innovation, grow jobs, and strengthen local economies. When spent poorly, it becomes transactional, buying services but never shaping the economy we need.

The consultation builds on the Procurement Act 2023, which came into force earlier this year, simplifying processes and promising greater transparency. It introduces proposals such as:

• Requiring contracting authorities with more than £100 million annual spend to publish three-year SME spend targets and report progress annually.
• Cracking down on late payment by excluding suppliers that consistently take more than 60 days to pay their own supply chains.
• Giving ministers powers to designate “strategic suppliers” where national security or economic resilience is at stake.
• Strengthening obligations to consider social value, sustainability, and local job creation in contracts.

On paper, these are welcome moves. They address some of the most persistent barriers SMEs face: getting visibility in procurement pipelines, being undercut by slow payment practices, and competing against the giants who dominate centralised frameworks.

But the reality is this: while the consultation recognises SMEs as a category, it fails to distinguish between the SMEs of today and the AI-enabled SMEs of tomorrow. It is this omission that risks leaving the UK behind in the very space where we could be leading.

SMEs are not all the same

When government talks about SMEs, it tends to picture them as local trades, professional services, and traditional suppliers. These are vital, and must be supported. But alongside them exists a rapidly emerging ecosystem of AI-native SMEs, startups and micro-firms developing AI solutions that could transform everything from housing repairs scheduling, to social care case management, to highways maintenance planning.

These firms are not only solving niche problems; they are laying the foundations for entirely new industries. The UK has the talent and intellectual capital to grow these companies into tomorrow’s unicorns. Yet unless procurement policy explicitly makes space for them, they will remain on the outside looking in.

The consultation misses this distinction. It risks treating the AI startup that has spun out of a university lab the same way as the cleaning company bidding for a facilities contract. Both are SMEs, yes; but their growth dynamics, their capital requirements, and their potential contribution to the UK economy are profoundly different.

Where the consultation falls short

Drawing from my own work on dynamic marketplaces for AI SMEs, something I’ve written about extensively, the gaps become clear:

1. AI SMEs are invisible in the proposals

The paper’s SME targets are generic. There is no mechanism to differentiate between high-growth potential AI SMEs and more traditional suppliers. Without this, contracting authorities may meet their targets simply by working with SMEs that pose little long-term economic upside.

2. Procurement remains static, not dynamic

AI innovation cycles are measured in months, sometimes even weeks. Government procurement cycles are measured in years. This mismatch locks AI firms out. A startup cannot wait 18 months for a framework refresh or a contract award; it will have pivoted three times in that period.

3. No intelligent supplier-demand matching

Right now, SMEs succeed in procurement if they know the right frameworks and can navigate complex portals. But government does not use its own data to match unmet demand with innovative capacity. AI could power live dashboards that surface AI SMEs with relevant solutions to authorities at the moment of need. The consultation does not propose anything close to this.

4. Skills and workforce vision is incomplete

The consultation emphasises jobs and skills, but narrowly. It does not engage with the reality of the AI talent pipeline: fewer formal degrees, more apprenticeships, bootcamps, and micro-credentials. It does not reward firms that build skills locally in these emerging ways.

5. Procurement does not use AI itself

Ironically, procurement teams are under strain: short-staffed, overwhelmed with regulation, and drowning in paperwork. AI could be deployed to screen bids, manage compliance, and support evaluation, freeing staff to focus on outcomes. The consultation does not consider this inward-facing opportunity.

What an AI-first procurement policy could look like

So, what would it mean to bake AI and dynamic marketplaces into procurement reform? A few principles stand out:

Dedicated AI-SME lanes

Procurement frameworks should include specific “innovation lots” for AI-enabled firms, with lower barriers to entry, lighter compliance burdens, and accelerated decision-making. This is not special treatment, it is recognition that the UK’s growth industries need a different type of procurement environment.

Problem-statement sourcing

Instead of over-specifying requirements, government should pose problems: “How can we reduce missed housing appointments by 30%?” or “How can we cut case management time in children’s services by half?” AI SMEs excel at creative problem-solving. Give them the space to propose new solutions, not just deliver commoditised services.

Dynamic, data-driven marketplaces

Move away from static frameworks that refresh every four years. Create rolling, dynamic marketplaces where SMEs can be onboarded continuously, and where authorities can source rapidly. Use AI itself to manage supplier matching and quality assurance.

Rewarding skills-based hiring

Update evaluation criteria to favour SMEs that invest in apprenticeships, alternative training, and local talent pipelines. AI firms, more than most, hire on skills, not degrees. Procurement can help accelerate the shift to a skills-first economy.

Embedding AI in procurement itself

Imagine procurement functions that use generative AI to analyse 1,000 bids in hours, redacting sensitive information automatically, or simulating contract outcomes. The efficiency gains could be enormous, releasing thousands of public sector staff hours. This would not replace procurement professionals, it would free them to do the strategic work they are trained for.

Connecting procurement to prevention

There is also a deeper link here. Procurement is not just about spend; it is about shaping outcomes. If we design procurement to favour AI SMEs, we enable tools that support prevention-first approaches across local government and public services.

An AI startup building predictive analytics for social care demand could prevent crises before they happen. A small firm designing smart scheduling tools could reduce missed appointments, saving millions in wasted costs. A local company creating AI-driven citizen engagement platforms could reduce demand pressures on overstretched call centres.

Procurement reform is the key to unlocking this. By buying differently, we can create the conditions for public services to operate differently, more preventative, more intelligent, more sustainable.

International proof points

The UK does not have to invent this from scratch. Other governments are already experimenting with procurement reforms that privilege innovation and give AI SMEs a real chance to grow.

• United States: The US federal government has created Challenge.gov, a platform for problem-based procurement. Agencies post challenges, from improving veterans’ healthcare access to modernising transport systems, and startups can propose solutions. This model has directly channelled millions into AI-enabled firms without requiring them to navigate years-long procurement frameworks. The Small Business Innovation Research (SBIR) programme also gives SMEs early-stage funding tied directly to procurement opportunities, creating a pathway from startup to scaled government supplier.
• European Union: The EU has pioneered Pre-Commercial Procurement (PCP), where contracting authorities buy R&D services in stages, allowing SMEs to develop innovative solutions before a full market contract is awarded. This has been especially useful for AI healthcare and smart city technologies. The EU also encourages Innovation Partnerships, a flexible contract model that lets suppliers and authorities co-develop solutions, something the UK consultation does not touch on.
• Singapore: Known for its agile digital government, Singapore has embedded GovTech’s Sandbox approach, allowing startups to trial AI solutions directly in government departments under small, fast contracts. If the solution works, it scales. If not, it fails fast, with minimal bureaucracy. This dynamic, iterative approach has made Singapore a hub for AI SMEs in public service delivery.

These examples show what’s possible when procurement reform goes beyond generic SME targets and deliberately creates space for innovation. They prove that procurement can be both compliant and catalytic.

Why this matters now

The UK has a narrow window. Other countries are already racing ahead in embedding AI into procurement and public services. If the UK does not act, our AI SMEs will look elsewhere for markets and investment.

The government’s consultation is a step forward, but it is not enough. SMEs are not a monolith. The firms that will shape the next economy, the AI-enabled SMEs, need deliberate policy, not accidental opportunity.

From rules to a launchpad

Public procurement reform should not be judged on whether it spends more with SMEs in general. It should be judged on whether it helps create the next generation of growth industries, skills, and public value.

If we want procurement to be more than compliance, we must redesign it around innovation, prevention, and AI. That means creating dynamic marketplaces, fast-tracking AI SMEs, and embedding intelligence into the system itself.

Get this right, and procurement becomes a launchpad, one that not only buys services but builds the economy of the future. Get it wrong, and we risk spending billions while watching the UK fall further behind in the industries that matter most.

Essential readings

Today’s local AI start-ups may be tomorrow’s tech unicorns

Building a Marketplace for Innovation: Empowering AI and Data Suppliers in Public Procurement