Small and mid-tier businesses: Time for a deep breath

The Small Business Administration recently released its annual scorecard on agency small business awards. On the surface it appears to be grim—small business prime contracting in fiscal year 2011 dropped below 22 percent after several years of flirting with the 23 percent goal. While the news was not particularly good, and the report should not be ignored, it’s also important not to over-react to it. One year does not a trend make and the report needs to be seen in the context of the year it reflects.

And fiscal 2011 was an unusual year.

In 2011, agencies did not get their final appropriation until the beginning of the third quarter. The appropriations’ passage was followed immediately by the debt ceiling debate, which, while not directly tied to immediate spending, had a real effect on agencies’ planning and spending commitments. As a result, the overall market for government services was down nearly 4 percent—or four times more than the reduction in small business’s share of the market. While the two data points are not immediately comparable, since one looks at total spending and the other at market share, they are not entirely disconnected either. For example, the final spending bill compelled instant spending reductions by agencies, a significant portion of which, it is safe to assume, were low hanging fruit drawn from smaller contracts that were disproportionately performed by small business.

Finally, insourcing of work from the private sector, particularly at the Defense Department, was still moving forward. While data does not exist to measure the actual impact on small businesses, we know anecdotally that small businesses were significantly harmed by DOD’s undisciplined insourcing activity.

Despite this important context, the SBA report will nonetheless spur reactions from Capitol Hill and from the administration. Even before the release of the scorecard, the House passed the 2013 National Defense Authorization Act, which contains a provision to increase the government’s small business prime contracting goal to 25 percent and creates a new, “advanced small business” set-aside program to help firms that have grown beyond the small business size standards but now exist in that no-man’s land of government contracting known as the “mid-tier.” While both proposals have merit and are based in good intentions, both proposals ought to be dropped or significantly altered.

The proposal to raise the small business goal to 25 percent is simply premature. Prior to 2011, the government has only missed the current 23 percent goal by less than 1 percent in each of the last few years. New rules, including those providing for small business set-asides under multiple-award contracts, are just now going into effect. Further, any effort to raise the goals ought to be part of a holistic approach that carefully assesses the total small business participation in government contracting, including subcontracts. Only then can we assess whether there are functional or business areas in which small businesses are inappropriately under-represented and whether additional incentives or requirements are needed.

The advanced small business set-aside provision is similarly premature. While there can be no doubt that there is a squeeze on mid-tier firms competing for government contracts that merits serious attention, the latest data make clear that the challenges are not the same in each business sector. Moreover, the proposal that passed the House is called a pilot program but contains no restraints as to its breadth and few requirements for meaningful metrics and analyses that are essential to determining its impacts. In the meantime, there are other, less disruptive, steps the government can take to begin to address the significant issues facing mid-tier firms, such as requiring that acquisition strategies for significant services procurements include analyses of the likely industrial base impacts of the proposed strategies, like those routinely conducted for major weapons systems acquisitions.

There should be no debate about the critical role small and mid-tier firms play in the government marketplace. Nor should there be any debate about the benefits of ensuring the long term viability of high-performing firms in both of those categories. But those steps need to be built on strong, data-driven evidence—most of which only the government can generate and assess. And we’re not there yet.