A new push to rethink the small-biz contracting payoff

Where's the return on investment if agencies invest in and foster small businesses that are bought or fail once they outgrow the small-business program?

Federal programs aimed at aiding the growth of small businesses through federal contracting are not a good investment if they simply set up those firms to fail, some experts say.

The problem is that when small businesses become midsize businesses, they lose access to set-aside contracting programs and end up struggling to survive in the eat-or-be-eaten world of federal contracting. Some firms find a way to get by, but others end up selling out to bigger competitors.

That is not necessarily a good return on the federal government's investment. But help might be on the way.

Rep. Gerry Connolly (D-Va.), who has many IT contractors in his district, is pushing a pilot program to help ease newly graduated small businesses into full-and-open competitions against the biggest contractors.

In his plan, only the General Services Administration could award contracts through the set-aside program. As important, the midtier company could win a set-aside contract only if GSA officials believe a small business likely would not have received it. In addition, the midtier company must mentor a smaller company.


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Connolly’s goal is to continue helping the once-small contractors that the government has invested in and nurtured through the years after they become midtier competitors.

He said he questioned the benefit to taxpayers if small companies are sent “into a Darwinian world where they are, on Day One, expected to compete with the big guys.”

Others have reached a similar conclusion — and have come up with their own solutions.

At a hearing Sept. 14, Rep. Nydia Velázquez (D-N.Y.), ranking member of the Small Business Committee, pointed out that GSA already has the Business Breakthrough program, which prepares small companies for the next level.

The program is available to a range of companies, and officials envision it being particularly useful to companies that are too large to qualify for small-business advantages but not large enough to successfully compete with the nation’s largest corporations. It's just want Connolly wants with his proposal.

GSA also has its mentor/protégé program. There are 81 active agreements between businesses of all sorts, from large companies to a variety of small-business types. The agreements can result in lasting business relationships and prepare the smaller firms to enter the bigger market.

Any of those programs might help, but only if federal agencies are willing to support them.

However, one industry executive said that for the most part, agencies aren’t looking beyond the small-business credit.

“No matter how well a small business does in support of an agency, it seems that once that business has outgrown the specific small-business program, the agency just turns to the next small business for support,” said Randy Slager, CEO of Catapult Technology, a mentor in GSA’s program.

Without a diversified set of customer agencies, a newly minted midtier company can quickly lose its customer base — a major factor in the high rate of failure among small businesses, he said.

Bill Jaffe, senior vice president and general manager of Tape, a service-disabled veteran-owned/woman-owned small engineering firm, said the 8-year-old company will cross the threshold into the full-and-open competition marketplace by December, and he’s going to face off for work against the Lockheed Martins and Northrop Grummans of the world.

“Companies do go through the process and survive,” Jaffe said, “but many of them do not survive.”

He is one of the leaders of a new industry group called Mid-Tier Advocacy that seeks to support such companies in a tightening market. But overall, it’s the company’s responsibility, Slager said. Businesses must plan and strategize well before the growth begins.

“I don’t think that this is a factor that is government-dependent,” Slager said. “It rests with the senior management of the small business.”

Another businessman has a different idea: Why make growth the main goal in the first place?

A reader calling himself Stay-Still-Stan recently commented on an “Acquisitive Mind” blog post by advising his peers to bask in the small-business perks. Most government contracting companies, including his own, strive to grow but are rarely happy when they do, he wrote.

His advice? “To be most profitable, government contractor: Find a niche, become the best, be a ‘disadvantaged’ company for special perks, stay not-for-profit and employee-owned, and keep company size under one of the government-defined limits to minimize the paperwork you need to do,” he wrote. “Do this, and everyone in the company will retire quite wealthy and happily.”

NEXT STORY: Contractor tax repeal advances

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