Friday, January 22, 2016

What REALLY Helps Small Businesses?

I like to think that I can explain complex things in a fairly simple, easy-to-grasp way.  We're sure going to test that concept today, because this one is about as arcane as you can get.  But it is really, really important that you do read this and do understand, because it is something our next president ought to have someone look into -- and fix.

As you know, my actual profession is writing proposals for Federal contractors, mostly for the defense industry.  That is because the government (and for me, mostly, we're talking the Defense Department) regularly needs people for a period of time to work on a problem, or staff a requirement, that does not require government (translated: permanent, with all the expensive civil service benefits) employees.  They put out a request for those people, and contractors bid on the requirement.

The winning bidder (contractor) then does the work, for whatever period they won for.  If the work requirement is still extant thereafter, another request goes out.  That is called a "recompete."  Happens all the time.  So -- if you're not in the business, just think about it as if the government needs 80 people to do some kind of support, they do a bid request, engage a winning contractor, and they do the work.  Five years later, there will generally be a recompete, and either the finishing contractor (the "incumbent") or a different one will take over the work.

In a host of cases, if the incumbent doesn't win, the employees on the contract have such vital knowledge of the requirement they've been doing for five years, that the new contractor just up and hires them.  That's called "rebadging", because the employee goes home Friday night with the incumbent's badge, and comes back in Monday morning and gets a new badge for the new contractor, and starts doing the same work.

Keep that thought.

Let us slide over to a different concept, that of "small business."  As I explained in these pages over a year ago, the government in its infinite wisdom often tries to support small businesses by "setting aside" certain contracts to be bid on only by small businesses.  That is, as I note in the article, a double-edged sword, because it can cause some issues when work that should not be given to a small business (e.g., when a $5 million-per-year business gets a $40 million-per-year contract) is "set aside."  That's the Boy Scout rocket launcher example I used in the linked piece.

It is even another problem, as I describe in this piece, when the government then takes years to award the darned contract to a winning small business, by which time the company may have lost all the key staff, or moved, or has been acquired and is no longer "small."

Where the two topics collide is in the too-frequent situation where a contract performed by large businesses for many years is put in the small business set-aside category for a recompete.  You might ask why government would do that, and the answer is simple: government is stupid.  It is stupid because it incentivizes the contracting officers who award the contracts to meet certain goals for small business awards.  You get too close to the end of a year without having met your goals, and you start setting aside work that has no business being set aside.  Really -- read that Boy Scout article again if you didn't; you'll get it.  Plus it's funny, at least at the end.

At any rate, when you have, say, that 80-person contract for some specific skill set newly recompeted as a small business set-aside, here is what happens.  The small business either takes on the incumbent as a subcontractor to keep the people, or it hires all the people away.  If the incumbent is a sub, well, the law says that over half of the employees have to be employed directly by the prime.  So over half the employees have to change companies, or all of them do.

How do you win a contract?  By showing you can credibly manage the staff at a competitive price.  By "competitive price", generally that means "lower than the incumbent", which means costs have to be squeezed down.  The government is very sensitive to how those costs are accounted for, so you really can't play many accounting games -- you have to cut the cost you pay for resources, which means "people."  And with health insurance costs unavoidably soaring, that means those employees end up with lower salaries, which is not a good thing at all, especially if they decide it is better and more stable to sell used cars than negotiate treaties or write software as a contractor.

OK.  So, knowing all that, here is the question you weren't expecting.  If the government's goal is to help small business -- and I think that is pretty much the reason -- then should we not be thinking more about helping small businesses grow by doing more things?  What good does it do simply to take existing work, being done already by large business, and give it to small businesses?

The pie, metaphorically, is what needs to grow.  Taking a slice of that pie and moving it from large to small business is a zero-sum approach that makes no sense whatsoever.  Making small business bigger by making large businesses smaller is a redistributionist approach that doesn't make small business better.

In actuality, we have plenty of instances where such contracts switched to small business have failed and been terminated early, and recompeted yet again as large-business competitions.  I'm working on one of those as we speak.  The small business winner was too small to run the work, priced it too cheaply to retain the professional staff (I don't know if any are selling used cars, but they're doing something else), and could not perform.  The government was damaged by its own decision and has to build up, all over again, a good cadre of new people -- time, money, risk.  For what?

The next commander-in-chief will have to consider what really is and is not good for small business, but he or she also needs to put the needs of government and the taxpayer, as well as the citizenry, ahead of numeric goals.  And that has to be communicated to the American people.

I could write that speech.  Perhaps I just did.

Copyright 2016 by Robert Sutton
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