Special Report on the 8(a) program: Plotting their exit strategies

What is an 8(a) firm?

The Small Business Administration's 8(a) business development program was created to help small, disadvantaged companies compete in the U.S. economy and provide access to the federal marketplace. To participate in the nine-year program, firms must meet the following criteria.

An (8)a firm must:

*Be a small business;

*Be unconditionally owned and controlled by one or more socially and economically disadvantaged individuals who are U.S. citizens of good character;

*Demonstrate potential for success.

A small business is independently owned and operated, organized for profit and not dominant in its field. Program eligibility is based on the average number of employees for the preceding 12 months or average sales volume over three years, and varies depending on the products or services offered.

Socially disadvantaged individuals are those who have been subject to racial or ethnic prejudice or cultural bias because of their identity as members of a group. These groups include:

*Black Americans;

*Hispanic Americans;

*Native Americans;

*Asian Pacific Americans.

Economically disadvantaged individuals are socially disadvantaged and hindered by diminished capital and credit opportunities. An applicant's net worth, excluding equity in the firm and primary residence, may not exceed $250,000.

In determining potential for success, SBA evaluates:

*Managerial experience;

*Ability to access credit and capital;

*Previous performance;

*Professional licensing.

Participants graduate after nine years, sooner if they exceed the 8(a) size standards.

Rodney Hunt, president and chief executive officer of RS Information Systems Inc. His company was ranked second among the top 25 8(a) companies.

Ricky Carioti

Top 8(a) firms look for ways to avoid contract bundling blues and find success outside program

Rodney Hunt, president and chief executive officer of RS Information Systems Inc., expects only 10 percent of his company's $200 million in 2002 revenue will come from contracts set aside for 8(a) firms.

But Hunt doesn't regard this as a sign that the 8(a) business development program didn't work for the McLean, Va., firm, which will graduate in January from the Small Business Administration program.

"The 8(a) program was beneficial for us," Hunt said. "It is designed to make companies competitive, viable business enterprises for the long term, so they can compete in the open market. I would recommend it to any minority owner."

Program participants receive business development assistance and the opportunity to bid on contracts set aside for 8(a)s. The most successful participants use the program to get a foothold in the federal market, but then work vigorously over the nine-year program to wean themselves from dependence on set asides, business owners and federal officials said.

"A small, disadvantaged business can have a very good chance of developing relationships and a past-performance record it can leverage for future contracts," said Ray Bjorklund, vice president of consulting services for market research firm Federal Sources Inc. in McLean, Va. "But there always has been a little bit of a stigma -- concern that the 8(a) company is relying too heavily upon SBA or mentor companies to help it along.

"Most do very well," Bjorklund added, but if they rely on set asides too heavily, success after the 8(a) program "is a little like the piano hanging over them on the street corner."

Often, 8(a) business owners believe their federal customers will want to stick with them after graduation from the program, but Hunt knows better. "That just doesn't happen," he said.

Agencies have to meet their small business contracting goals, so they're unlikely to move 8(a) contracts to the open-competition federal marketplace, industry observers said. Governmentwide, 23 percent of contract dollars are supposed to go to small businesses. In 2001, federal agencies fell just short of that goal, sending 22.81 percent of contract dollars to small businesses, according to the House of Representatives Small Business Committee.

Like many 8(a) business owners who are successful in the long term, Hunt had a different strategy. His firm ranks No. 2 on this year's Washington Technology list of Top 25 8(a) information technology firms with $105 million in federal IT prime contracting revenue.

"We leveraged the program to establish past performance and establish infrastructure," Hunt said. By doing that, RSIS has had considerable success in federal IT work outside the 8(a) program, as have several other firms at the top of this year's list, which was compiled from research conducted for Washington Technology by FSI and Eagle Eye Publishers Inc. of Fairfax, Va.

Companies on the Top 25 list are ranked by total IT prime contracting dollars, not 8(a) dollars. Each company must have at least $1 million in 8(a) business and must not have graduated before Sept. 1. The firms provide products and services ranging from value-added reselling to management consulting to systems engineering.

According to market research firm Input Inc. of Chantilly, Va., the percentage of federal IT spending with 8(a) contractors has more than doubled over the last several years, increasing from 2.3 percent in fiscal 1998 to 4.8 percent in fiscal 2001.

"As a group, 8(a) certified firms have fared well in this market over the last several years," said Erik TerHaar, manager of federal sector database services at Input.

Input's data includes contracts won by 8(a) companies in full and open competition and contracts set aside for 8(a) vendors.

RSIS' wins outside the 8(a) program include an Air Force contract for systems management and engineering services worth up to $88 million over eight years, and an IT contract worth $65 million for managed seats and services at the Defense Advanced Research Projects Agency.

Datatrac Information Services Inc., No. 1 on Washington Technology's list, counts in its win column a $50 million contract with the Immigration and Naturalization Service for printing and optical laser data encoding of identification cards. The Richardson, Texas, company has been so successful, in fact, that it is awaiting early graduation from the 8(a) program because it has grown so large. It now has about 1,200 employees and federal IT prime contracting revenue of $135 million in 2001.

"For us, it is a wonderful thing for them to graduate, because it shows the program works," said Luz Hopewell, associate administrator in the SBA Office of Business Development.

"We ask [8(a) firms] to make certain they have a competitive business mix so they can get revenue not only under the set-aside portion of the program, but in open competition and in the private sector," Hopewell said. "If they have a good spread of projects, they don't have to depend on set asides, and most of the firms are able to do that."

About 6,000 companies participate in the 8(a) program annually, Hopewell said.

Like RSIS, Datatrac used the 8(a) program as an entrée into the federal marketplace, not as a lifesaver.

"Most of our awards came through [General Services Administration] Schedules and blanket purchase orders, but being an 8(a) allowed us to get into the agencies and market our products," said Kathi Yeager, president and chief operating officer.

Getting on the GSA Schedule and on governmentwide acquisition contracts is increasingly important for the long-term success of 8(a) companies, business owners and IT industry observers said. That's because it is getting more difficult for small businesses, including 8(a)s, to compete for full and open procurements. Increasingly, agencies are bundling several contracts together, creating large vehicles that small businesses often are ill-suited to pursue.

"A lot of contracts are very large in scope. There is no question that puts small businesses at a disadvantage. It's hard to go after a $100 million contract when it's more revenue than you have," said Vince Bucci, executive vice president of sales and marketing at Force 3 Inc., a Crofton, Md., networking solutions company. Force 3 ranked No. 3 on this year's list with $78 million in IT prime contracting revenue.

A federal task force led by the Office of Federal Procurement Policy is investigating the impact of contract bundling on small businesses. Its recommendations should be issued this fall, said OFPP Administrator Angela Styles.

Getting a GSA Schedule, with its streamlined acquisition procedures, makes it easier for procurement officials to take a chance on a small firm, industry experts said. And getting on a governmentwide acquisition contract, known as a GWAC, gives companies a 10-year window to win work.

"We see the GSA Schedules as the great equalizer for small businesses. It puts you at a level playing field with the big boys. [Contracting officers] come to you directly; you can have the prime job," often for the first time, said Hope Lane, director of the GSA Schedules consulting practice at Aronson & Co. in Rockville, Md.

GSA officials agree the schedules program is vital to the long-term success of 8(a) firms.

"We do recommend that all federal contractors that provide services covered by the schedules obtain a GSA Schedule. It is very important," said Boyd Rutherford, associate administrator of the Office of Enterprise Development at GSA.

Jim Cheng made sure his 8(a) firm pursued GWACs.

"We had to go after those large contracts," said Cheng, president and CEO of Computer & Hi-Tech Management Inc.

in Virginia Beach, Va. The company ranked No. 4 on this year's list with $62 million in IT prime contracts.

"For many years, the government wanted single-competition contracts; now government is seeing GWACs as its main vehicle. I see that as limiting opportunities for small companies," he said. "The large companies are going after the work they used to not really care about, and bundling doesn't help. They usually win the larger potion of the larger contracts, and they aren't going to give up the choicest pieces."

Despite the effects of bundling, Bucci said he thinks myriad small business opportunities exist in the federal IT marketplace.

"There are lots of smaller contracts out there that I think the agencies are looking for small businesses to be the prime on," he said, "and there continues to be a push to utilize small business."

Like many small businesses, Force 3 also pursues subcontracting opportunities. It has subcontracted to Lockheed Martin Corp. of Bethesda, Md., Electronic Data Systems Corp. of Plano, Texas, and DynCorp of Reston, Va.

"It's an excellent way for small businesses to grow," GSA's Rutherford said. "They need to look for subcontracting opportunities in preparation for the post-8(a) period."

And prime contractors are often required to designate a portion of work to subcontractors. Federal contracts for more than $500,000 in services, for example, require prime contractors to submit subcontracting plans to the agency, Rutherford said.

Unisys Corp., for instance, must direct 25 percent of its work to small businesses under a $1 billion Transportation Security Administration contract for managed IT services. The Blue Bell, Pa., company's small business partners already include RS Information Systems Inc. and eight others.

Meeting such goals on IT contracts can be difficult, said Murray Schooner, director of Unisys' Supplier Diversity Program. For example, Unisys might have to buy computers from Dell or Hewlett-Packard or IBM -- all big businesses -- to meet the contract requirements.

"Before you know it, 80 percent of your dollars are gone," Schooner said. "If the stuff we need is available from small businesses, we can find the firms. It's the window of opportunity to do business with small firms."

To find more small business partners for the TSA effort, Schooner will travel to TSA-run fairs at airports in eight cities this month.

"It's all about outreach," he said. "We attend events, sponsor events. ... We don't say no."

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