Market Watch: Small-business engine continues to hum

Jerry Grossman

The Small Business Admini- stration recently announced that small businesses received $69 billion in prime contract awards in fiscal 2004, about 23.1 percent of total prime contract dollars. This new record is nearly 6 percent above the previous high.

In addition to these prime contract awards, most small companies also derive revenues as subcontractors. Including both prime and subcontract award participation, it is estimated that small businesses received more than $100 billion in contract revenue in 2004.

Little wonder, then, that as small companies that are focused on the federal market grow to midsize, there are emerging businesses to take their places. These companies bring initiative and innovation that both employees and customers find attractive. Many small companies mature and grow larger, contributing to the pyramid-like demographic shape of the government and defense contracting sector.

While there are critics who suggest that the program is falling short of its goals, the magnitude of small-business participation is impossible to deny. Almost 45 percent of all contracts were awarded to small businesses in fiscal 2004.

The Small Business Innovative Research program in the Defense Department funded more than 3,200 research and development projects last fiscal year, worth more than $1 billion.

These programs have grown at a compound annual rate of 17 percent over the past three years. The number of phase-two SBIR awards, averaging $600,000 to $700,000 each, is about half the number of phase-one awards, indicating that many concepts submitted in phase one are worthy of more investment.

To be sure, there are many instances in which the small business set-aside program leads to substandard outcomes for the government and, by extension, the taxpayers. In a system as large as federal procurement, some amount of ineffective contractor selection is certain to occur. Follow-on assignments requiring experience, subject expertise and customer awareness are sometimes pulled away from high-performance small or midsize incumbents and awarded to small or small, disadvantaged businesses for the primary purpose of meeting quotas.

Yet the overall impact of the small-business programs clearly is positive. Hundreds of successful companies ? small, medium and large ? developed skills, experience and effectiveness as a consequence of small-business preference program participation.

Helping small businesses start and grow has substantial support across the political spectrum. For these programs to continue to bear fruit, the government must make every attempt to align the reality of the programs with the fundamental objectives for which the programs were established.

In other words, the government should be careful not to pull the rug out from under successful businesses growing out of these programs by setting aside their core contracts for small companies without the requisite experience and resources. SBA must be careful not to compromise the ability of small-business graduates to get liquidity for the companies they have built by requiring recertification of small-business status after initial contract award.

The federal government is faced with huge projects, some technically challenging and unprecedented, as well as thousands of small and midsize projects of varying complexity. Accordingly, the contractor base that supports government requirements should be reflective of this broad variety of jobs.

The industry demographics are creating many individual company success stories. Risk capital is flowing to the industry as never before, and strategic buyers from other industry sectors, as well as from other countries, are lining up to get in.

Jerry Grossman is managing director at Houlihan Lokey Howard & Zukin in McLean, Va. He can be reached at jgrossman@hlhz.com.

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