Defence Online

Challenges in defence procurement and reform

July 18, 2025

The UK stands at a pivotal moment in its defence and security journey, says Tom Saunderson, partner at Browne Jacobson. As global threats evolve and the pace of technological change accelerates, the Ministry of Defence (MoD) has rightly placed innovation at the heart of its strategy.

Tom Saunderson

Yet, for the UK’s most ambitious small and medium-sized enterprises (SMEs) and scaleups, the path to meaningful engagement with MoD procurement remains fraught with obstacles. These barriers not only stifle the growth of homegrown innovators but also make it exceptionally difficult for such companies to attract the private capital necessary to scale. If the UK is to maintain its technical edge in modern defence, it must urgently reform its procurement practices to nurture and reward innovation.

Procurement Complexity and Structural Inertia 

SMEs bring agility, fresh thinking, and cutting-edge technology, but those in the sector are still finding MoD procurement processes complex, slow and risk-averse. The Strategic Defence Review (SDR), published just last month, highlighted a persistent reality: MoD tends to buy well-defined programmes from established primes, rather than investing in early-stage innovation or allowing new technologies to evolve through partnership with scaleups.

For SMEs, the hurdles begin with onerous accreditation and security vetting requirements, both costly and time-consuming. Frameworks and Dynamic Purchasing Systems (DPS) are intended to open doors, but in practice, many are closed to new entrants for years at a time, or are managed by consortia of large contractors with little transparency or feedback for unsuccessful applicants. SMEs are often relegated to the supply chain, where late payment and lack of direct engagement stifle both innovation and business growth. While the MOD pays its direct suppliers promptly, research from the Federation of Small Businesses shows that SMEs further down the chain are frequently left waiting, undermining their financial stability and attractiveness to investors. Even when SMEs do secure contracts, these are often short-term, low-margin, and highly competitive, offering little of the stability or profitability needed to justify significant private investment.

The result is a procurement environment where scaleups are forced to chase a patchwork of small, in-year contracts, with no opportunity to invest in long-term growth or to demonstrate the delivery track record MoD demands for larger awards. This creates a vicious cycle: without meaningful, multi-year contracts, private capital is reluctant to invest; without investment, scaleups cannot grow to the point where they can win major MoD work.

The Venture Capital conundrum

The UK’s defence venture ecosystem is at a crossroads. While there is growing interest from private investors – spurred by geopolitical developments and government commitments to increase defence spending – there remains a fundamental disconnect between the needs of capital markets and the realities of MoD procurement.

Venture capital, by its nature, seeks scalable growth and substantial returns within a defined timeframe. Yet, defence procurement is characterised by long sales cycles, complex regulatory requirements, and a preference for incumbents. Even the most promising scaleups find themselves trapped in a “valley of death” – unable to secure the long-term, profitable contracts that would justify further investment. Many are forced to pivot to dual-use commercial markets or consultancy work simply to survive, diverting talent and innovation away from the defence sector.

Moreover, there is a widespread misreading of the true size and structure of the UK defence market. Much of the MoD’s budget is already committed to existing programmes and established suppliers, leaving a relatively small “free space” for new entrants. This reality, combined with the dominance of a handful of strategic suppliers, means that even well-capitalised scaleups struggle to achieve the growth required to satisfy investors. The risk is that the UK’s most innovative companies will seek opportunity elsewhere, taking their intellectual property, talent, and strategic value with them.

Innovation at risk: The SDR’s ambitions

The SDR recognises these challenges and sets out an ambitious vision for change. It calls for “root and branch” reform of procurement, a segmented approach to acquisition, and a commitment to spend at least 10% of the MoD’s equipment budget on novel technologies each year. The creation of the UK Defence Innovation (UKDI) organisation, with a ringfenced annual budget of £400 million, and the establishment of a Defence Investors’ Advisory Group are positive steps towards building an IP-rich, innovation-led environment.

Crucially, the SDR proposes rapid commercial exploitation pathways—contracting within three months for innovative solutions—and a new partnership with industry that rewards productivity and risk-taking. The aim is to move away from the traditional customer-vendor relationship and create the conditions for high-IP companies to scale, export, and deliver for both the warfighter and the wider economy

The way forward

While these proposals are welcome, the ultimate test will be in their implementation. For the UK to unlock the full potential of its defence innovation ecosystem, MoD must award meaningful, profitable, and long-term contracts to innovative scaleups. This is the only way to send a clear signal to private capital that the sector is open for business and that investment in UK defence technology will be rewarded.

Such contracts must go beyond short-term pilots or consultancy work. They should provide the stability and scale needed for companies to invest in growth, develop their capabilities, and ultimately challenge the dominance of incumbent suppliers. Only by creating an environment where new entrants can thrive – where creative destruction is not just tolerated but encouraged – will the UK maintain its technical edge in an increasingly unstable world. This means:

• Reducing barriers to entry: Streamlining accreditation, security vetting, and procurement processes to make it easier for SMEs to compete directly for MoD contracts.
• Ensuring fair payment practices: Extending prompt payment standards throughout the supply chain, not just to direct suppliers.
• Creating multi-year, non-competed opportunities: Ringfencing a portion of the budget for scaleups, with contracts that allow for spiral development and iterative innovation.
• Rewarding innovation and risk: Embedding productivity and SME engagement as key criteria in contract awards and ensuring that procurement frameworks do not lock out new entrants for years at a time.
• Building an IP-rich ecosystem: Leveraging the UKDI and Defence Investors’ Advisory Group to connect innovators, investors, and MoD buyers, and to crowd in private finance under new funding models.

The UK’s ability to maintain a technical edge in modern warfare depends on its capacity to nurture and scale its most innovative companies. The MoD’s procurement system must evolve—moving beyond rhetoric to deliver the meaningful, long-term contracts that signal to private capital that defence innovation is both valued and viable. If we fail to create an environment where ambitious scaleups can thrive, we risk losing our best talent, our intellectual property, and ultimately, our national security advantage. The message from the SDR is clear: “business as usual is no longer an option”. By embracing its role as a ‘first customer’ and awarding contracts that enable SMEs to scale, the MoD can unlock a virtuous cycle of investment, innovation, and industrial growth. In an ever more unstable world, our future depends on it.

Article submitted by: Tom Saunderson, partner at Browne Jacobson.

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Post written by: Vicky Maggiani

Vicky has worked in media for over 25 years and has a wealth of experience in editing and creating copy for a variety of sectors.