Don't rock the boat on small businesses

Market Watch | Financial views of a competitive environment

Recent Small Business Administration actions aimed at
substantial increases in contract awards to small businesses
are colliding with market realities and, in many
instances, are counterproductive to the government
getting its work done efficiently and cost effectively. Identifying and
engaging a sufficient number of qualified small companies to meet
the current goals have been challenges for government officials and
prime contractors alike. Particularly in the services sector, small-business
procurement practices are fundamental to business strategy
and tactics for large and small companies.

The government and contractors have
expended substantial time and energy to pursue
existing small-business targets, while
ensuring that the government's needs are met.
Thus, federal actions that further increase the
small-business targets are likely to be counterproductive,
forcing the likelihood of contracting
with businesses not yet able to perform.

Before establishing higher small-business
goals, Congress and the administration
should revisit the purposes and objectives of
the small-business program. Fostering small-business
development requires a
more comprehensive assessment of
those aspects that will make the
contracting environment productive
and healthy for buyers and sellers.

For example, the cap on revenues
used to qualify businesses as small should be
increased significantly. This action would
provide an opportunity for proven small businesses
to continue to serve their government
customers and give them time to mature,
expand their infrastructure, win competitive
awards and pursue an exit strategy. Arguably,
that environment would be better for government
buyers and services providers.

Recent discussion at a Deltek industry
roundtable highlighted some current government
initiatives that might do more harm
than good. Apparently, SBA is increasing its
focus on achievement of the 23 percent
small-business spending target, having
determined that the actual small-business
proportion of 2006 federal spending was
about 18 percent. Much of the shortfall was
created by removing contracts held by large
companies through acquisitions.

An SBA reauthorization bill, likely to
emerge in the next Congress, contains a provision
raising the small-business target component
to 30 percent. Assuming that annual
federal services procurement is about $220
billion, then to increase the small-business
share from 18 percent to 23 percent requires
an additional $11 billion in awards to small
companies. This is equivalent to adding
about 5,500 qualified small companies, quite
a burden for an acquisition workforce
already challenged. Raising the target to 30
percent would triple the challenge and create
a mismatch between the preference goals of
the government and the qualified universe of
small businesses on the supply side.

It seems clear that small-business preference
programs need some modifications.
Changes should be formulated to
ensure that three things happen: First,
small companies will continue to have
good opportunities to participate in federal
work. Second, the government will be
able to access the inventiveness, capabilities
and commitment of small companies
to get work done cost effectively. Third,
successful small businesses that grow will
have avenues to continue to serve government
while providing career opportunities
for employees and liquidity to investors.

Both the definition of small business and
the target small-business share of federal
spending must be considered with a view
toward fostering a healthy federal services
industry, one that matches well with government
needs.

Jerry Grossman (jgrossman@hlhz.com) is managing
director at Houlihan Lokey Howard and Zukin.

About the Author

Jerry Grossman is managing director at Houlihan Lokey Howard and Zukin.

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