Is the Federal Government “Investing In” Keeping Small Business Small?

Mark Shappee, Managing Director, Venture Management, Inc.

I recently attended a conference sponsored by the National Chamber of Commerce and the Professional Services Council which was aimed at small and mid-tier companies and included among its topics to be addressed “Barriers in Federal Contracting.” The panelists and speakers included a broad cross section from both the contractor community and agencies of the federal government. The conference was informative not only from the insights offered by business and government panelists but also from the quality of the questions and concerns expressed by the attendees.

Unfortunately, the conference did not provide more information or encouragement for a “small business” owner seeking (a) to manage a transition to “other than small” or “non-preferential” status or (b) to fund a retirement through the sale of the business. The discussion appeared to confirm that there was not sufficient political impetus to drive either legislative or regulatory change that would support re-opening the "off-ramp.” (See the introduction to this blog.)

One of the most striking perspectives for me came from a Presidential appointee and expert in government procurement. I asked about recent procurement practices (e.g., OPTARS II) which appear to be aimed at preventing continued eligibility for award of small business contracts to those small businesses which are successful at growing their business to a level that exceeds NAICS code guidelines. I expressed concern about such businesses being “trapped” and forced to remain small as a result of both procurement practices and the re-registration requirement in the event of a business combination aimed at strengthening the company’s ability to compete as “other than small.”

The perspective which I did not expect was that the Federal Government’s procurement practices associated with preferential treatment and contracting goals represented an “investment in” these businesses. The result of these businesses growing to, or merging with, a “large” business results in, from this point of view, the “…loss of the federal government’s investment in the small business…..”, the larger business “taking advantage of…” the government’s investment in this business, and the federal government’s being “…charged a higher overhead and G&A rate….” for the same work than would have occurred if the business had remained small.

I do not know if the view expressed by the panelist is a widely held view. I also do not know if the statements implying a higher cost to the government for the same work are true. However, policies resulting in “keeping small businesses small” do not seem to me to be desirable public policy from either an economic or a social perspective.