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Federal Market Intelligence for Small Business |
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Set-asides may be a ‘perverse incentive’ to stay small: report81% to 94% of small contractors that survived 10 years in the federal gov’t market remained small, CSIS saysOnly a small percentage of small business federal contractors grow out of their “small” designation, according to a new study by the Center for Strategic and International Studies (CSIS). In recent years, the vast majority of the small contractors that survived for 10 years in the federal market have remained small, the study found. The failure of most firms to “graduate”--to grow large enough to exceed their industry’s definition of “small”--suggests that the government’s strategy of utilizing set-asides to promote small business expansion may be backfiring, the CSIS authors say. “The low graduation rates of small businesses that survived for 10 years rings alarm bells over the efficacy of small business set-aside programs,” the CSIS report states. At the same time, the set-asides did seem to help the small firms remain in operation for 10 years, but only for vendors who entered the market in specific years, the study found. The study also looked at how many new small firms entered the federal market in recent years and whether they survived longer than not-small firms entering in the same year, among other issues. Graduation rates For small firms that entered the market from 2001 to 2006 and survived 10 years, their ability to graduate from small business status consistently decreased over the years. For small vendors that entered the market in 2001 and survived 10 years, around 16% to 19% graduated. That means 81% to 84% of that cohort remained small. For firms that entered in 2006 and survived 10 years, only around 6% to 8% graduated. That means 92% to 94% of that group remained small. The decrease in graduation rates between those who entered in 2001 and those who entered in 2006 likely is due to the effects of sequestration and budget constraints during the latter 10-year period, the study suggests. Overall, however, the study considered the graduation rates to be low in general, regardless of the year of entry. These findings “could imply that small businesses face a perverse incentive regarding their business model where since they have safety nets when they remain small, they could be avoiding normal business growth trajectories to maintain the advantages associated with small business status,” the CSIS authors wrote. Survival rates While set-asides may not help the small vendors grow, they do seem to help keep them alive, the study suggested. Surprisingly, the small firms had higher survival rates than not-small firms when comparing vendors from each group who entered the federal market in 2001, 2002, 2003 or 2004. The not-small firms generally did better if they entered in 2005 or 2006. In addition, the small vendors that entered the Defense Dept. market specifically in 2004 or 2005 had higher survival rates than the not-small firms. Number of new vendors The number of new vendors in the federal market expanded during the 2001-2005 period, consistent with the U.S. military buildup and the Iraq and Afghanistan military operations. The number of new entrants of all sizes rose from about 28,000 in 2001 (including 8,653 small businesses) to a peak of about 58,000 in 2005 (including 13,666 small businesses). The number of new vendors entering the market has dropped consistently from the 2005 peak until 2015, when it totaled about 18,000 (including 5,125 small businesses). The downward trend of recent years is most likely due to the impact of the Budget Control Act of 2011 and severed sequestration budget cuts, the study says. Recommendations The authors note that while set-asides seem to be helping small vendors stay in operation while in the federal contracting arena, they are not as effective in helping the small businesses expand. “Policymakers should reevaluate their small business set-aside programs as these programs could be creating perverse incentives for small businesses that are contracting with the federal government. Their focus should pivot towards helping small businesses survive simultaneously with growth,” the CSIS authors wrote. More information: CSIS report: https://bit.ly/2DGRcup
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