SBA Announces Small Companies Get Larger Piece of Federal Pie

With some fanfare and perhaps a little
relief, the U.S. Small Business
Administration (SBA) recently
announced that small companies are
getting a larger piece of the federal
contract pie. This important
demographic—a full 99.7 percent of
all U.S. employers—received $62.7 billion in prime contracts
last year—enough to create or retain almost 470,000 jobs,
according to SBA.

More important from a legal standpoint, the dollars
amounted to 25 percent of all government prime contracts.
That's noteworthy because since the Small Business Act went
into effect in 1988, Congress has mandated that at least 23
percent of federal prime contracts must go to these types of
companies, arguing that this would strengthen the overall
economy. In addition to the goals for small businesses in
general, federal contractors have incremental contract
targets for companies classified as small, disadvantaged,
women-owned and HUBZone businesses.

Celebrations of the 2003
results are certainly in order,
and no one should downplay
the positive effects this money
has and will have on small
companies. However, we
shouldn't let these rosy
statistics overshadow the
problems small companies
still face in winning federal
contracts.
Last year was the first
time in this decade that the
federal government met
the 23 percent statutory
threshold. In the previous
year, federal contracts totaled
about $235 billion, with small
companies receiving a 22.6 percent
share. The percentage in 2001 was
22.8 and 22.3 percent the year before
that. I know, each year it was almost
23 percent. Statistically speaking,
what's a 0.4 percent shortfall when
you're talking about billions of
dollars? Actually, it's quite a lot.
That numerical blip seems less
inconsequential when you consider
its dollar value: $940 million. In a
market sector where companies may
consist of only a handful or perhaps
a few dozen employees, $940 million
isn't pocket change. It can mean the
difference between keeping an
entrepreneurial and innovative
start-up company competitive or
losing out against established and
well-funded technology players.

Other factors make the nearly one
billion dollar shortfall even more
significant. For years, questions have
surrounded the accuracy of the
percentages and the size of companies
that received funds earmarked for
small enterprises. Some of the
recipients weren't small at all, and
included dominant U.S. corporations.

In 2003, the General Accounting
Office (GAO) reported that federal
contract data had overstated small
business involvement, adding that
five large contractors received $460
million in small business awards. The
GAO said some of the errors came
about because companies that once
were certified as small had outgrown
their designations but hadn't yet been
reclassified.

The SBA has been working to cull
its small business lists of obvious
misclassifications. Still, members of
Congress continue to hear complaints.
Lloyd Chapman, president of the
Microcomputer Industry Suppliers
Association, testified before Congress
last year about small business contracts
going to large companies. The problem
is particularly troubling in the
information technology industry, he
believes, because a large number of
"small businesses" are actually
divisions of Fortune 1000 firms.

Here's another problem: Finite
definitions of what constitutes a small
business have been particularly
confusing for IT companies, since the
standards can vary depending on
whether a company sells products or
services. Companies that sell both
may be characterized as "small" in
one category but not in the other,
according to official standards.

Fortunately, SBA is taking steps
to fix this problem. In January, it
decided to define value added
resellers as "small" if they employed a
maximum of 150 people. In March,
SBA proposed further changes when
it issued sweeping new guidelines for
companies across all industry types. If
adopted, these rules would classify
many IT companies as small if they
employed 150 or fewer people and
reported annual receipts that did not
exceed $30 million.

In the meantime, what can federal
agencies do to meet the spirit as well
as the letter of the law? First, they can
exceed the thresholds. Last year, the
Departments of Defense and
Homeland Security did just that by
awarding small businesses 24.8
percent and a whopping 40.7 percent,
respectively, of their prime contracts.

Federal entities also can actively
promote Office of Small and
Disadvantaged Business Utilization
(OSDBU) programs, something
already being done in many of the
larger agencies. Such programs offer
information and Web sites designed
to make small business owners
savvier about the federal contract bid
process. The Treasury Department
and the Air Force have particularly
active OSDBU efforts.

Further, agencies can educate
small companies about federal
procurement policies. NASA, for
example, has offered training courses
that target women- and minority-owned small businesses in high-tech
industries. Similarly, NASA and the
Treasury, Interior and Health and
Human Services departments host
outreach sessions that get small
business owners and IT program
managers together in face-to-face
meetings. Businesses get a chance to
showcase their expertise, while
federal managers discuss their
procurement needs.

Giving small businesses their
mandated share of federal contracts
isn't just the legal thing to do, it's
also the smart thing for federal
agencies to do. Some of the most
significant technology innovations—

both in products and services—come
from the small business sector, and
these innovations will help agencies
more quickly achieve their IT goals.
At the same time, their contracts
keep one of the most important
segments of the U.S. economy alive
and growing.