GAO study shows sector is alive and well

For all the rhetoric, small businesses as a whole have held up well in the federal marketplace

As I have noted in previous columns, the reality is that, for all the rhetoric, small businesses as a whole have held up well in the federal marketplace. But it has been a challenging time for some companies, particularly those that built their market niche based on dysfunctional features of the previous federal procurement system.

At the request of Reps. Tom Davis (R-Va.) and Ste-phen Horn (R-Calif.), the General Accounting Office recently issued a report called "Trends in Federal Procurement in the 1990s." The GAO report supports the view that the sky is not falling.

"Small businesses received a higher share in fiscal year 1999 of expenditures on new contracts over $25,000 for most categories of goods and services than they did in fiscal year 1993, including automatic data processing services as well as research and development," according to the GAO report. In 1999, small businesses received 32 percent of dollars spent under General Services Administration schedules, governmentwide acquisition contracts and indefinite-delivery, indefinite-quantity contracts. This was up from 24 percent in 1994.

Critics have often argued that the fact that the sky is not currently falling is misleading because the data includes business awarded in earlier years on multiple-year contracts. They say the small business numbers are being artificially propped up by work won prior to procurement reform. So GAO has performed a service by looking for the first time at new contract dollars going to small business in each fiscal year.

The numbers are fascinating. In fiscal 1999, small businesses received a record 28 percent of new contract dollars awarded. In fiscal 1996, the previous high, the percentage was under 25 percent. The percentage has grown for 1997, 1998 and 1999.

These numbers do not include credit card transactions, which are not currently captured in federal procurement data — another straw that the "the-sky-is-falling" critics embrace. Their comments suggest that if anything lower than 100 percent of credit card purchases go to small firms, then credit cards hurt small business.

But simple arithmetic implies that as long as the percentage of total contract dollars reaches at least 23 per-cent — which is the reported percentage going to small business when not counting credit card transactions — then including credit card sales in the data wouldn't lower the overall small-business average.

Given the likelihood that small firms receive more than a 23 percent share of credit card purchases and the fact that such purchases have been increasing over the past several years, the failure to capture card sales in the official data means that, over time, reported small-business numbers have increasingly underestimated these firms' actual share.

Indeed, the small decline in the percentage of overall dollars under all contracts reported as going to small business since those numbers peaked in 1996 may be entirely explained by this growing underreporting.

What about contract consolidation or "bundling?" It is plausible to believe that consolidating contracts reduces the small-business share of the specific business being consolidated. But in many instances, consolidation provides large benefits to agency missions and to taxpayers — such as the ability to negotiate quantity discounts. It also provides access to systems integrators rather than forcing the disastrous route of the government serving as its own integrator and allows a unified point of accountability for work being done.

For these reasons, consolidation frequently reflects classic good business practice, used in purchasing organizations throughout corporate America. (As the GAO report notes, bundling "did not result from acquisition reform legislation.") Those advocating over-regulation of bundling resemble trade protectionists who argue that the government must bail out every specific industry — such as steel or textiles — even if the industry is no longer competitive.

Just as it makes sense to compensate elsewhere in the overall economy for free trade-related declines in some specific industrial sector, so too it makes sense in the government to look carefully for areas where small businesses are genuinely competitive. The government should promote participation in those sectors rather than trying to keep poor business deals artificially alive.

And just as the overall economy can do fine even if steel and textiles decline, so too can small business do fine despite growing bundling, if the government pays attention to alternative opportunities. The overall small-business statistics suggest that this indeed is occurring.

Kelman, administrator of the Office of Federal Procurement Policy from 1993 to 1997, is Weatherhead Professor of Public Management at Harvard's John F. Kennedy School of Government.

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