Tuesday, September 30, 2014

Contracting to Boy Scouts

As a Federal contractor for decades, I have worked in and among small businesses, for them and against them; I have subcontracted work to them and have been a subcontractor to them.  I have also owned two of them.  So it can be said quite honestly that my work has not prejudiced me toward or against them, and it is absolutely true that my feelings toward small businesses and the topic of this piece are not in any way prejudiced by anything that would help or hurt me.

I do, however, believe it is time to revisit our government's position toward the utilization of small and socioeconomic-category small businesses.  I write this under the broad viewpoint that any government policy should have two key elements:
(1)  It should have a defined purpose and measurable objective within a greater goal
(2)  It should have a built-in end point when its goal has been accomplished

Let us review what the Federal government does.  In each branch of the government, the leadership develops goals for the utilization of small and special-category businesses.  These goals are passed on to the procurement staff and contracting officers to enforce, which means that when an agency wants to buy a product or service, there is some consideration that must be done as to whether the purchase should be set aside for small or special-category businesses.

Of course we can't go much further without defining some terms.  Just the word "small" is a combination of subjective and objective determination.  In the Federal context, this is done using the North American Industry Classification System, set up in conjunction with our Canadian and Mexican neighbors.  Abbreviated to "NAICS" (properly pronounced when it rhymes with "takes"), the system can be thought of as a long but simple table, assigning a six-digit code to every conceivable type of business.  For example, all the codes starting with "517" refer to companies that do telecommunications, and 517410 is the code for those engaged in "satellite communications."

The table of NAICS codes has three columns -- one is the code; the second is the description of the product or service a company in that code provides; and the third is called the "size standard."  The size standard is simply the cutoff point below which a company in that business is deemed "small", and that becomes the definition -- you're small if what you are providing defines you as small.  The size standard is expressed in one of two parameters, never both -- either a maximum number of employees in the company, or a maximum revenue average for the past three years.

The logic is that a small business is one with fewer employees.  In "service" companies, revenue reflects size, because the company is selling the hours of its staff.  However, in "product" companies, a small number of employees can generate huge revenues by comparison, so actual headcount is the metric, and product-based NAICS codes tend to use employee count as their size standard.

For example, those satellite communications companies in 517410 we noted are "small" if their average revenue for the past three years is $15 million or less.  By contrast, 517110 represents "wired telecommunications carriers", those who provide wired networks.  Although their industry is similar, they are evaluated by employee count -- such companies are "small" if they have fewer than 1500 employees.

As you can tell, the decision as to what NAICS code is used for a procurement is immensely important, and every government purchase must have one, even if the purchase is not being set aside.  If a contracting officer (CO) chooses a code that has a 1000-employee size standard, there are far more eligible firms than if they choose one with a $15 million standard.

Here's Rub #1: The Federal Acquisition Regulations ("FAR", spoken in hushed tones) govern every aspect of government procurement in awesome detail.  According to the FAR, the CO must make a decision on which NAICS code applies to a procurement based solely on the most dominant component of the procurement, and specifically without regard to size standard.  In other words, by law, a CO must look only at the "second column" of the table, find the product or service that most closely matches what he's buying, and assign the corresponding NAICS code from column one to the procurement.  Only then is the size standard (column three) pulled in.  Look at it this way: by Federal law, a contracting officer may not choose to assign a NAICS code to a solicitation he issues, using the size standard of that code as a factor in the decision.

That means that if not illegal, it is at least legally fruitless for a company to lobby a CO on an impending procurement to use a specific NAICS code -- unless the substance of the argument is totally about matching the product/service to be bought with the description under a NAICS code.  You can't say "this should be a 1500-employee code".  Of course, such lobbying happens all the time, and as many times as I've been in such a situation, I have ethically declined -- uniformly -- to discuss size standards with a CO as a rationale for picking a code.

Which, of course, brings us all the way back from Kansas City to the original point -- Why do we have small business set-asides in the first place?  Remember, I wrote about programs needing a defined purpose, a measurable objective and an end-point when the objective is reached.

I wrote in an earlier post about the absurdity of the District of Columbia having residence requirements for its city employees.  One of my points was that the government of the District is not in business to provide jobs for its citizens; rather, it is in business to provide essential services to those citizens.  Every penny it spends should be to provide those services as good stewards of the taxpayer dollar, meaning that it should hire the best available talent at the best price, and where that talent sleeps is of no importance.

The same logic applies here, somewhat.  At the Federal level, there is a concern for the economy being able to incubate businesses, which is why we have a Small Business Administration (SBA), at least when they don't overstep their bounds.  I will listen to arguments that it is appropriate for the USA to set certain procurements aside to assist in that effort (while they are being good stewards), although you'll have to work hard to make the case.  I do not, however, accept that the term "certain" in that last sentence is properly used, and I am myself "certain" that the set-aside program has gotten  corrupted beyond its ability to be evaluated.

Part of this is that I don't believe that the entire set-aside program has a sufficiently defined purpose, and certainly not a measurable objective.  The latter is evident; although every agency has goals, such as 30% of contract awards to small businesses (SBs), 3% for service-disabled veteran-owned SBs, so much for woman-owned, so much for "disadvantaged", so much for companies in "historically underutilized business zones", so much for Martian-owned, ahhh, you get it.  In order for those numbers to be meaningful, someone has to analyze what "right" is.  It doesn't make any sense to say that an agency has achieved its 30% target for small business awards if the figure of 30% as a goal was plucked out of thin air!  I respectfully decline to pat the back of a CO who has achieved a percentage goal that has no basis in rationality.

Obviously, lacking rationality, the set-aside program has no end-point for when it can be dismantled, and that itself is a problem.  When the government limits competition by imposing preference, the marketplace will adapt accordingly to take advantage.  We have, for example, companies splitting to remain under size standards; forming joint ventures with small businesses to capitalize on their size; doing all manner of legal actions to succeed.  The preferential category area has expanded as well; where a category "small disadvantaged" was created to assist businesses owned by black Americans, now that category includes Asian immigrants, Indian immigrants, African immigrants who have never faced discrimination, let alone slavery, Pacific Islanders, you name it.  At what point do we decide we no longer need to do that, and allow COs to buy from the firm offering the best offering at the optimal price, rather than the skin color of the majority owner?

We need to define the real purpose for setting aside purchases, and we need that purpose in a lot more detail and with a lot more challenge to it.  We need to identify those categories of purchase that make more sense than others (having small businesses build aircraft carriers is a bit inappropriate, and it scales from there).  We need to revisit the program to ensure it actually intends to address the defined real purpose.  We need to cease categorizing providers by skin color.

There is a cartoon by the brilliant Gary Larson, which I would love to see again; I remember it being on the wall of a company I worked at 25 years ago.  It shows a Boy Scout scoutmaster excitedly reading a formal letter to his troop of little scouts in scout uniforms with shorts, who are dancing around him and whooping and hollering in joy.  The caption read something like "In a shocking surprise, the Missile Defense Agency has awarded a $25,667,313 contract to build the launch technology for the MD-443 rocket to Boy Scout Troop 43 of McCook, Nebraska."

We're there.

Copyright 2014 by Robert Sutton

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