Welcome to the HUBZone

New SBA Rules Revitalize 8(a) Program

By Mike Wiebner

the Small Business Administration's 8(a) program is expected to get a boost later this month when the SBA puts into effect revised regulations designed to strengthen the small, disadvantaged business program in the face of mounting challenges.

The new regulations come in the wake of a governmentwide review by the U.S. Department of Justice to weed out practices of "reverse discrimination." Under the SBA's new 8(a) rules, it will be easier for white women-owned firms to enter the program and tougher for contracts to be bundled, a particularly difficult roadblock for smaller, less-capitalized firms. A mentor-protégé program also will kick in, as will greater partnership opportunities between 8(a) firms and 8(a) graduates.

The SBA's 8(a) program attracted particular scrutiny from the Justice Department, as the debate about the future of affirmative action and government contract set-asides raged throughout Washington.

To understand why the information technology industry is concerned about the program's fate, just consider the cash at stake: Federal agencies purchased nearly $200 billion worth of IT goods and services in 1997 alone.

Government and industry officials say two things are clear about the new 8(a) rules: The 8(a) ranks will grow, particularly among white women, and so will the competition for 8(a) set-aside dollars. Getting ahead will increasingly require partnering with large systems integrators and fellow 8(a) companies. SBA regulations also will help ensure that companies expand their business to the commercial marketplace. Despite some challenges, the 8(a) program appears alive and well, the officials say.

Up to Speed

The SBA rewrote its 8(a) regulations to deflect potential legal challenges following the Supreme Court's 1995 decision in Adarand Constructors Inc. vs. Pena, which curbed affirmative action programs, says Bill Fisher, acting associate administrator for the SBA's Office of Minority Enterprise Development. MED administers the 8(a) business development program.

Dave Steward, president of St. Louis-based World Wide Technologies Inc.

The Supreme Court decision prompted the Justice Department to undertake a top-to-bottom review of the Federal Acquisition Streamlining Act of 1994, the Department of Defense's set-aside program and the SBA's 8(a) program to ferret out any practices smacking of "reverse discrimination."

Since its inception in 1969, the 8(a) program's mission has been to ease access to the economic mainstream for individuals subject to racial or ethnic prejudice and diminished capital and credit opportunities. For a maximum of nine years, 8(a) certified firms receive special access to federal contracting, as well as management and technical assistance from the SBA. More than $65 billion in federal contracting has been channeled to 8(a) firms in the program's nearly 30 years in existence.

The SBA included the Justice Department's recommendations in its revised regulatory package put out for public comment from Aug. 14 to Oct. 14, 1997. By law the SBA then had to review the more than 100 comments it received from industry and others. Since a portion of the reform package would affect other agencies, the White House Office of Management and Budget also was brought into the process.

The SBA is now putting the finishing touches on the new regulations. Fisher expects they will go into effect by the end of March. "There will be some minor tweaking as a result of the comments, but generally the changes are the ones you've seen," says Fisher.

Details of the Changes

The evidentiary bar for 8(a) applicants to prove social disadvantage has been lowered from "clear and convincing" to a "preponderance" of evidence. White women and the disabled are expected to benefit greatly from the rule change, say industry observers. To show economic disadvantage, an applicant's personal net worth must not exceed $250,000, exclusive of equity in a primary residence or investment in the business.

Gary Pan, president of Panacea Consulting

The desire to remain competitive, not just compliant, also drove the SBA's changes. The federal contracting environment has been dramatically altered by government reinvention, streamlined contract procedures and increasing agency reliance on large, consolidated contracts. The SBA has responded by making 8(a) contracting tools more user friendly, while also providing incentives for partnerships by 8(a) firms with both larger systems integrators and graduated 8(a) companies.

Three ideas long on the SBA back burner also were included in the new regulations. "We put all the regulations in plain language and tried to eliminate unnecessary paperwork to make it easier for firms to contract directly with federal agencies," explains Fisher. "We wanted to make sure the 8(a) contract vehicles were just as palatable as any other, so they would pop up in the contracting officer's mind as something that's easy to do."

The new rules also grant the SBA the ability to delegate many of its administrative functions to other federal agencies, thereby streamlining the 8(a) contracting process and making it easier for participating firms to secure 8(a) contracts, say SBA officials.

Another new regulation would limit new 8(a) entrants to a maximum of $100 million in set-aside contracts during their nine-year stints. "After that they can still go after competitive 8(a) requirements, even once they meet that ceiling," explains Fisher. "This enables firms to exceed the limit if they provide meaningful subcontracting relationships with emerging 8(a)s."

The new rules make it easier for 8(a) firms to form joint ventures in pursuit of bundled contracts. "As long as they are small individually, they can go after larger contracts," points out Fisher. "Of course, a great deal of work will also have to happen with private-sector partners."

Smaller, newer 8(a) firms will be able to reap the benefits of graduate 8(a) firms' credit, insurance and bonding capacity, as well as their technical and business expertise. In return, the graduate 8(a) firms get the chance to win new contracts, explains Rep. Albert Wynn, D-Md., a key player in last year's congressional debate over the 8(a) program.

Payton Smith, an analyst with IDC Government

The 8(a) mentor-protégé program also will allow mentors to hold "a greater equity interest in developing 8(a) firms, providing a win-win for the 8(a) and the mentor partner," says Fisher. Mentor companies can be either former 8(a) companies or non-8(a) firms.

Although word-of-mouth on this proposal has been generally positive, one 8(a) executive offers a caveat. "Large companies have more bureaucracy to go through ... and paperwork," says Michael Yeh, president and chief executive officer of Caelum Research Corp., a Rockville, Md.-based scientific research and analysis firm. "A lot of time we talk to the technical people or senior management, but when they pass it on, the paper trail gets lost somewhere."

Small firms themselves should consider "consolidation, mergers and joint ventures to deal with the realities of modern procurement," advises Wynn. "Federal contracting officers find it much easier to do one contract instead of 10, the multiyear instead of the annual. If two or more smaller companies get together, they can survive."

8(a) Options

Agencies will increasingly rely on General Services Administration schedules for making purchases, according to Mike Groneck, an analyst with Input, a market research firm in Vienna, Va. "We predict that downsizing in the government, both from a budgetary and personnel standpoint, will continue," he says. "But the overall IT budget will expand as they rely more on technology instead of throwing bodies at their problems."

The GSA's popularity has nonetheless created some uncertainty with 8(a) firms, as the GSA includes no requirements for 8(a) set-asides. "There's no specific contract set up for any one transaction," explains Payton Smith, an analyst with IDC Government, Falls Church, Va. "It becomes pretty difficult to enforce that a certain percentage of business should go through a certain group of companies."

"However, it's almost always very clear in contracts how much should be funneled through 8(a)s or [indefinite-delivery, indefinite-quantity contracts]," points out Smith. "It doesn't matter what sort of services is required. This should still provide opportunity for 8(a) companies."

Michael Yeh, president and chief executive officer of Caelum Research Corp.

According to SBA officials, contracts with an anticipated value of less than $3 million ($5 million in the manufacturing sector) may be awarded on a noncompetitive basis if the contract promotes the 8(a) firm's business plan of growth and development. Contracts greater than those amounts are awarded after competition among eligible 8(a) participants, according to the SBA.

However, getting a piece of that 8(a) action is no sure thing. More often than not, only larger systems integrators are able to put together bids and are securing the lead position for these proposals. They set the subcontract relationships to provide everything the contract is asking for.

Teaming is a critical part of the majority of requests for proposals and bids out there. "It's imperative that these small companies get their services and products known to the Lockheed Martins, the EDSes and the IBMs of the world - and also to the government," says Groneck.

Aggressive marketing helps 8(a) companies secure subcontracting arrangements with large systems integrators. "They're not necessarily cutting [8(a)s] out of the loop," says Smith. "It really puts 8(a)s in a better position to focus on their primary business and not be distracted by contract administration."

As always, technical excellence also is critical to long-term success. "That's how you develop the reputation for quality," says Gary Pan, president of Panacea Consulting, an Arlington, Va.-based information technology solutions provider and 8(a) company.

"If you don't have that reputation, the big boys will never talk to you," he says. "You need a story to talk about and it has to be a good story." Panacea Consulting has a compelling story, having grown in revenues from $58,000 in 1993 to $5.9 million in 1997.

Larger integrators are really in a pick-and-choose environment, he says. "I believe larger firms understand the value of having smaller companies on their team," says Pan. "Many times we have different skill sets and areas of expertise, as well as more flexibility. Many times we also have a closer rapport with the clients."

Rep. Albert Wynn, D-Md.

Caelum Research is another 8(a) firm that has aggressively pursued positions on governmentwide acquisition contracts and targeted partnership opportunities with larger systems integrators. Like many 8(a) firms, Caelum is always on the lookout for large contracts in which the prime integrator must set aside a certain portion for a small business or an 8(a) company, Yeh says.

"Anytime we have to present to a large company, we have to give them a win-win scenario," says Yeh. "Do the homework, understand there are specific opportunities and then you'll get their attention."

Case in point: The firm scored a spot on Bethesda, Md.-based Lockheed Martin Corp.'s proposal to NASA for the multibillion-dollar Consolidated Space Operations Contract. Caelum paid its dues to get its 10-year, $100 million subcontract as part of the proposal. After passing first-round interviews, Caelum sent personnel to Houston for stage two.

"We worked very hard and did enough homework to understand [Lockheed Martin's] requirements," says Yeh. "And that was just to get us in the door. We were the only one working side-by-side with them throughout the entire period. As a result, they included us as a subcontractor."

"There is a Catch-22" to this strategy, continues Yeh. "If you're a start-up or have only a 20-person company, it's very difficult to sustain your costs for six to nine months without any income." Caelum Research was a mature enough company to wait for the business; the company had 1997 revenue of $15 million.

Bundling Scenario

In 1997, Rep. Wynn introduced anti-bundling legislation that was later included in the Small Business Reauthorization Act signed by President Bill Clinton. The act requires federal agencies to justify the benefits of bundling traditionally smaller contracts; it also provides an appeals process for 8(a) companies "squeezed out" of the process.

"Bundling was actually costing the government money because they were losing the benefits of competition," says Wynn.

Because these contracts require more equipment, personnel, insurance and bonding, larger systems integrators are often the only ones able to handle such deals, with smaller firms forced to opt out of the bidding or subcontract with larger partners, but at much lower profit margins, says Wynn.

The Maryland lawmaker plans to wait and see how the new regulations play in the real world. Whatever happens to bundling, 8(a) firms and other small businesses will not be left out in the cold. Another Wynn initiative passed last year will shift the percentage of federal IT spending reserved for small business from 20 percent to 23 percent, effective this year.

That will mean an additional $6 billion a year to small business in the $200 billion annual federal IT marketplace. "It's necessary to increase the size of the [small business] pie as you increase the number of companies coming to dinner," says Wynn.

Even then, competition for that space has increased for 8(a) companies. The number of noncompetitive contracts has shrunk as they are increasingly consolidated, or bundled, into larger contracts.

Long-term relationships might suffer as a result, says Pan. Certainly, 8(a) firms must scratch tooth-and-nail as these contracts grow rarer, and more desirable among their 8(a) cohorts.

Such competition has made it difficult for 8(a) companies to maintain viable corporate infrastructures, according to Pan. "We make sure our infrastructure is filled out and robust," he explains. "I've seen other companies have to sacrifice recruiting and benefits - the things that tend to attract qualified candidates. When you lose that ability to have the overhead structure, your ability to compete and perform in the marketplace suffers."

An expanded pool of 8(a) companies will likely continue the downward spiral of margins. As these companies vie for new federal business, their bids will almost certainly fall. By focusing only on the cost portion of bids, agencies could be putting themselves at risk, says Pan.

"The end result is the competition is actually worse than open invitations," says Yeh. "With so many 8(a) companies - and so hungry - you don't have as much opportunity for 8(a) set-asides. If you're lucky enough to win an 8(a) contract, it will be extremely difficult to manage, because of the low cost you'll need to win."

Another prominent 8(a) executive is more confident that 8(a) firms and government contracting officials will find ways to make the relationships mutually beneficial.

Welcome to the HUBZone

Newly created HUBZones will soon provide federal contract opportunities to small businesses located in 6,000 geographic locations - generally rural or urban environments - if those businesses hire at least 35 percent of their employees from that area.

The HUBZone legislation, introduced by Sen. Christopher Bond, R-Mo., who chairs the Senate Small Business Committee, was signed into law by President Clinton as part of the Small Business Administration's 1997 reauthorization package.

Starting in January 1998, the SBA has six months to write the regulations necessary to implement the HUBZones program. SBA staff is now working on the project and the program should kick into gear by the end of 1998, says SBA spokesman D.J. Caulfield. Additional SBA staff, outside of the 8(a) program, will administer the program.

The original legislation was structured so that HUBZones could have taken contracting opportunities that formerly were set aside for 8(a) companies. However, congressional negotiators resolved that potential conflict. In the final legislation there is no mention of the 8(a) program, says Caulfield.

"We feel 8(a) participating firms can actually benefit [from HUBZones] as finally adopted and signed by the president," he says. "In many cases, 8(a) companies are located in rural or urban areas. They can simply go and obtain contracts under the requirements of the 8(a) program or opt for the HUBZones program."

Rep. Albert Wynn, D-Md., helped ensure this compromise measure was reached. To ensure 8(a) firms weren't edged out of government IT spending, he and other congressional negotiators raised the amount of federal IT procurement reserved for small business from 20 to 23 percent.

HUBZone's cut was set at 1 percent of overall federal IT spending in 1999. This figure will increase by 0.5 percent a year until 2003 when it reaches 3 percent, where it will remain thereafter.

-Mike Wiebner

"I think businesses are intelligent enough to go into situations with their eyes open," says Dave Steward, president of St. Louis-based World Wide Technologies Inc., the second largest 8(a) integrator and the 45th largest federal integrator. "There's a mutual understanding between agencies and 8(a)s that a company has to be profitable to succeed - and be a viable provider over the long term."

Going Commercial

The new regulations also should help 8(a) firms transition to commercial work, as mandated by the Small Business Opportunity Reform Act of 1988.

The SBA rules now provide uniform guidance for SBA field officers and 8(a) firms for monitoring and achieving this transition. A recent SBA survey of 8(a) graduates indicates that nearly 57 percent of the firms remain in business three years after graduation, although this only covers firms participating in the survey.

Under the new rules, 8(a) companies in the fifth year of participation in the program must generate 15 percent of their revenue from non-8(a) work. By the ninth and final year of participation, non-8(a) work must produce 75 percent of a firm's revenue. The SBA can exclude from future 8(a) awards any firm that falls short of these targets.

According to Steward, it's a relatively straightforward progression for 8(a) firms from the government to the commercial market.

"They must build their level of credibility, trust and integrity in the marketplace," he explains. "Get a few smaller opportunities under their belt and leverage them to bring new business."

"It's not a nine-year program for companies to live off their 8(a) status," says Steward. "It's a program to transition from the opportunity to put federal contracting vehicles in place, build their [own] infrastructure and, at the same time, augment their business into the commercial market. That's exactly what World Wide Technologies has done. This makes us a much more solid company over the long term."

Those people affiliated with the SBA and the 8(a) program have survived a tumultuous few years, not to mention the slings and arrows of congressional opponents, court challenges and the seesawing of public support.

Like nearly everyone else in the federal IT universe, SBA officials have been forced to evolve their business - helping socially and economically disadvantaged businesses succeed - to meet the reinvented, streamlined and increasingly competitive federal contracting environment.

Will the new SBA regulations do the job? Only time, and perhaps Dionne Warwick's psychic friends, can say for certain. But, if nothing else, it looks like 8(a)s will have a few more years to answer that question.

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