Small-business decline hurts federal IT

The Defense Department's decision last month to temporarily suspend the 10 percent price evaluation adjustment for small and disadvantaged businesses (SDBs) because DOD exceeded its 5 percent SDB business goal in fiscal 1998 may indicate that small and minority-owned companies are getting their fair share of government work. But in reality, SDBs' ability to win government information technology contracts has been dealt a blow over the past years.

Procurement reform and the Supreme Court's 1996 Adarand Constructors Inc. v. Pena decision, which ruled that any federal program that uses race as a basis for contract decisions must serve a compelling government interest, are mostly to blame.

To their credit, the Clinton administration, with the help of Congress, is desperately trying to save the small and minority-owned businesses as a viable community of government contractors. The government's strategy to save small businesses takes two forms: provide for more prime contractor work and promote greater subcontracting work. Providing for more prime contractor work is taking several paths. First, the Small Business Administration has started new programs, such as the HUBZone Program and the VSB Program. Don't worry if you haven't a clue what these are. Virtually no one I have asked has ever heard of them.

The HUBZone (Historically Underutilized Business Zone) Program, which became effective Jan. 4, requires that procurements with a value of more than $100,000 be set aside for HUBZone companies if the procuring agency expects to receive at least two reasonably priced offers. The program is voluntary for procurements worth $2,500 to $100,000, and other restrictions apply. SBA estimates that more than 30,000 companies will apply for this program in 7,000 zones.

The VSB (Very Small Businesses) Program also went into effect Jan. 4 for companies with fewer than 16 employees and less than $1 million average in annual receipts. This pilot program applies only to 10 SBA regions, including Los Angeles; Santa Ana, Calif.; Boston; Detroit; El Paso, Texas; New Orleans; and Philadelphia. The program requires that services procurements worth $2,500 to $50,000 be set aside for VSBs if two or more bids will be received.

SBA has undertaken other initiatives. One of those involves publishing proposed rules that would minimize "contract bundling," which tends to squeeze out SDBs from consideration on a contract. Another initiative involves creating a World Wide Web site (pro-net.sba.gov) that lists companies that meet the definitions of small businesses; small, disadvantaged businesses; and woman-owned businesses for agencies and contractors to use in finding qualified companies. Be aware, however, that SBA is having a hard time getting this program going, so the listing is not complete.

Also, with DOD leading the way, new provisions have been added to the Federal Acquisition Regulation that provide two procurement mechanisms that benefit SDBs. First, agencies may include an evaluation factor or subfactor for planned small, disadvantaged business subcontracting. Second, the FAR now permits a monetary incentive for subcontracting with SDBs.

But will all of this help SDBs survive? Actually, no one even agrees whether SDBs are in trouble. But with rare exception, virtually everyone I have spoken with in the SDB community has difficulty maintaining his government contract business. With the explosion of governmentwide acquisition contracts (GWACs) and General Services Administration schedule use, SDBs can no longer rely on the Commerce Business Daily to find business because these actions no longer require synopsis in the CBD.

Last year GSA, with the Federal Supply Service and the Federal Technology Service, accounted for $8 billion of the $26 billion that agencies spent on IT. No one knows how much more spending was done under all the other GWACs, but at least half of all IT spending was done under the FSS, FTS and GWAC vehicles. Virtually none of this business was publicized in the CBD for small businesses to pursue.

Procurement reform also has hurt SDB business, as shown by the new acquisition system implemented by the Federal Aviation Administration after it was cut loose from all federal procurement regulations. According to FAA statistics, spending with SDBs plummeted 91 percent. To the FAA's credit, the agency has recognized this problem and has taken steps to fix it, but it still has a long way to go.

Some of the major procurement offices have taken steps to help SDBs survive. The Transportation Department's Information Technology Omnibus Procurement contract, for instance, has worked hard to ensure that SDBs get prime contracts. And GSA has noted that it supports SDBs, indicating that small businesses and SDBs captured 29 percent and 4 percent, respectively, of the FSS fiscal 1998 spending. FTS reported that of the $3.2 billion spent through its programs in fiscal 1998, 26 percent went to small businesses.

Despite all these efforts, statistics for all IT spending show a sharp decline in the market share of small and SDB companies. From fiscal 1996 to fiscal 1998, the prime contract spending to small and SDB companies for IT products and services dropped $1.06 billion, or 18 percent.

Obviously a few SDBs will do very well financially. But strategically, the environment may no longer foster the small companies that have, in the past, been the beginnings of great companies. Ultimately, this will have negative repercussions in the quantity and quality of the contractors that the federal government depends on for survival.

-- Dornan is senior vice president of Federal Sources Inc.