[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]



 
 BEYOND THE SIZE STANDARDS: SUSTAINABILITY OF SMALL BUSINESS GRADUATES

=======================================================================



                                HEARING

                               before the

                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                              HEARING HELD
                           SEPTEMBER 14, 2011

                               __________

                               [GRAPHIC] [TIFF OMITTED] TONGRESS.#13
                               

            Small Business Committee Document Number 112-033
           Available via the GPO Website: www.fdsys.gov/house




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                   HOUSE COMMITTEE ON SMALL BUSINESS

                     SAM GRAVES, Missouri, Chairman
                       ROSCOE BARTLETT, Maryland
                           STEVE CHABOT, Ohio
                            STEVE KING, Iowa
                         MIKE COFFMAN, Colorado
                     MICK MULVANEY, South Carolina
                         SCOTT TIPTON, Colorado
                         JEFF LANDRY, Louisiana
                   JAIME HERRERA BEUTLER, Washington
                          ALLEN WEST, Florida
                     RENEE ELLMERS, North Carolina
                          JOE WALSH, Illinois
                       LOU BARLETTA, Pennsylvania
                        RICHARD HANNA, New York
                       ROBERT SCHILLING, Illinois

               NYDIA VELAZQUEZ, New York, Ranking Member
                         KURT SCHRADER, Oregon
                        MARK CRITZ, Pennsylvania
                      JASON ALTMIRE, Pennsylvania
                        YVETTE CLARKE, New York
                          JUDY CHU, California
                     DAVID CICILLINE, Rhode Island
                       CEDRIC RICHMOND, Louisiana
                        JANICE HAHN, California
                         GARY PETERS, Michigan
                          BILL OWENS, New York
                      BILL KEATING, Massachusetts

                      Lori Salley, Staff Director
                    Paul Sass, Deputy Staff Director
                      Barry Pineles, Chief Counsel
                  Michael Day, Minority Staff Director


                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page
Graves, Hon. Sam.................................................     1
Velazquez Hon. Nydia.............................................     2

                               WITNESSES

Hon. Gerry Connolly, U.S. House of Representatives, Washington, 
  DC.............................................................     3
Ms. Tonya M. Speed, Executive Director, Mid-Tier Advocacy, 
  Washington, DC.................................................     7
Mr. Christopher Yukins, Professor of Government Contracts Law, 
  Co-Director of the Government Procurement Law Program, George 
  Washington University, Washington, DC..........................     9
Mr. Michael D. Frisbey, Government Suppliers and Associates, 
  Knoxville, TN..................................................    11
Margot Dorfman, CEO, U.S. Women's Chamber of Commerce, 
  Washington, DC.................................................    13

                                APPENDIX

Prepared Statements:
    Hon. Gerry Connolly, U.S. House of Representatives, 
      Washington, DC.............................................    28
    Ms. Tonya M. Speed, Executive Director, Mid-Tier Advocacy, 
      Washington, DC.............................................    31
    Mr. Christopher Yukins, Professor of Government Contracts 
      Law, Co-Director of the Government Procurement Law Program, 
      George Washington University, Washington, DC...............    47
    Mr. Michael D. Frisbey, Government Suppliers and Associates, 
      Knoxville, TN..............................................    62
    Margot Dorfman, CEO, U.S. Women's Chamber of Commerce, 
      Washington, DC.............................................    69
Questions for the Record:
    Owens, Hon. Bill.............................................    73
Answers for the Record:
    Mr. Michael D. Frisbey, Government Suppliers and Associates, 
      Knoxville, TN..............................................    74
Additional Materials for the Record:
    Statement of Mid-Tier Advocacy...............................    76


 BEYOND THE SIZE STANDARDS: SUSTAINABILITY OF SMALL BUSINESS GRADUATES

                              ----------                              --
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                     WEDNESDAY, SEPTEMBER 14, 2011

                  House of Representatives,
                       Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 1:09 p.m., in room 
2360, Rayburn House Office Building, Hon. Sam Graves (Chairman 
of the Committee) presiding.
    Present: Representatives Graves, Bartlett, Chabot, West, 
Ellmers, Hanna, Schilling, Velazquez, Critz, Altmire, Clarke, 
Chu, and Keating.
    Also Present: Representative Mike Rogers of Alabama.
    Chairman Graves. Good afternoon, everyone. We will call 
this hearing to order. And before we get started, I want to 
welcome our newest member to the Committee, Representative Bob 
Schilling from Illinois. He is a small business owner and 
should be a great asset to the Committee. Welcome, Bob, and 
glad to have you on board.
    We are here today to talk about what happens to companies 
once they outgrow the Small Business Administration's 
definition of small. According to the Small Business Act, a 
small business is one that is independently owned and operated 
and which is not dominant in its field of operation. The Small 
Business Administration further restricts the definition by 
applying size standards which cap the number of employees or 
the annual--or the amount of annual receipts a firm may have if 
it wishes to qualify as small. One reason for the definitions 
is to establish which companies will have access to small 
business government contracting programs.
    As our country spent over half a trillion dollars through 
Federal contracts last year, and given that there is a goal of 
awarding 23 percent of those dollars to small businesses, prime 
contractors, access to these programs translates into real 
opportunities for small firms and it also creates tension. What 
happens to firms when they no longer qualify as small, 
according to the SBA size standards, but which still meet the 
Small Business Act definition of small.
    I am going to be joined today--or we are--on the dais by 
Congressman Mike Rogers, who has been detained right now at a 
markup. He should be here any minute. And our first witness is 
Congressman Gerry Connolly. Both of these gentlemen have seen 
the challenges faced by firms that are independently owned, 
operated, and not dominant in their field of operations when 
they outgrow the SBA size standards. Consequently, both of my 
colleagues have proposed pilot programs to address the 
challenges facing medium-sized businesses. I look forward to 
hearing more about their proposals.
    As this Committee considers these proposals, we do so with 
two mandates in mind. First, any medium-sized pilot must 
benefit taxpayers and the government. Even the best-crafted 
pilots will incur costs and create an additional requirement 
for contracting personnel.
    The second mandate is fundamental to this Committee. We 
have to protect small businesses so that they continue to 
create jobs, introduce innovations and increasing competition. 
I strongly believe in the value of a vigorous small business 
contracting community and advocate increases in the small 
business goal from 23 percent to 25 percent. But at this time, 
the administration is awarding only as little as 20 percent of 
the prime contracts to small firms. Given that the current 
small business goals are not being met, we have to figure out 
how to ensure that a new program for larger businesses is not 
going to make it harder for smaller businesses to compete.
    With that, I am going to thank ahead of time all of our 
witnesses for being here today on the first and second panel. I 
will now yield to Ranking Member Velazquez for her opening 
statement.
    Ms. Velazquez. Thank you, Mr. Chairman. For small 
businesses, having the Federal Government as a customer often 
means the difference between failure and success. For an early-
stage firm, Federal projects can be a reliable revenue source, 
helping them stay solvent as they expand their client base. 
Equally important, unlike their larger competitors, when a 
small firm secures a Federal contract, the influx of new work 
inquires them to add employees to their payroll. If we want to 
generate new employment opportunities for Americans, breaking 
down the bias to small business competition in the Federal 
marketplace will be key.
    Unfortunately, for entrepreneurs looking to tap into the 
Federal market, significant hurdles remain. The SBA's annual 
scorecard continues to find that the Federal Government is 
falling short of its 23 percent goals for procurement action 
that should go to small firms. In fact, for many agencies, the 
level of contracting for small firms seems to have dropped 
between fiscal year 2009 and 2010, exactly the direction we 
should not be headed in.
    Agencies are also expected to meet certain goals for 
enterprises owned by women and service-disabled veterans, yet 
for prime contracts in 2010, the Federal Government came up 
short.
    While the obstacles keeping smaller firms out of the 
Federal marketplace are many, the practice of contract bundling 
is one of the most prominent. When small firms' procurement 
actions are lumped together into a single large contract, it 
may result in less work for Federal bureaucrats, but also means 
less opportunity for small firms. In fact, for every $100 in 
contracts that are bundled, entrepreneurs lose $33 in business. 
That is adding up to billions of dollars that could be creating 
additional jobs for our Nation.
    While this Committee wants to do everything possible to 
help businesses of all size foster job growth, the record makes 
it clear we must finish the task at hand, making the Federal 
marketplace fairer for small businesses. If we are to explore 
methods for creating new venues for larger firms,, it is 
critical that we keep in mind a number of key principles. Size 
standards remain a critical measurement stake not only when it 
comes to competing for government work but qualifying for other 
benefits like technical assistance in government work, for 
qualifying for technical assistance or the SBA's capital access 
program. Any steps that begin undermining this system in order 
to generate new opportunities for medium-size companies run the 
risk of creating more problems than they solve.
    It has also become clear, thanks to this Committee's work 
and numerous GAO investigations, that large businesses are 
siphoning off contracts which should go out to small business. 
The GAO has repeatedly found that the HUBZone program is rife 
with fraud and abuse. Even more disturbing, the Committee's 
investigative work has uncovered numerous cases where veteran 
entrepreneurs lose work to dishonest big companies that game 
the system. Given this shortcoming, it will seem that a more 
immediate priority may be needed to be ensuring current set-
aside programs function as intended before we start creating 
new ones.
    Mr. Chairman, in every previous recession, small business 
has been the drivers of our economy, creating new jobs and 
restoring America to prosperity. As we contemplate changes to 
the size standard system, and new initiatives for medium-size 
businesses, we can never lose sight of the vital role small 
firms play in our economy and how procurement policy can help 
them create new jobs. With that I yield back.
    Chairman Graves. Thank you very much, Ranking Member.
    And at this time, I am going to introduce our first 
witness, Congressman Gerry Connolly from Virginia. In addition 
to being sponsor of H.R. 1812, the Small Business Growth Act, 
Congressman Connolly is the ranking member on the Subcommittee 
for Technology, Information Policy and Intergovernment 
Relations and Procurement Reform on the Oversight and 
Government Reform Committee. He also serves as co-chair of the 
Smart Contracting Caucus. Welcome. And I look forward to 
hearing your testimony.

   STATEMENT OF THE HON. GERRY CONNOLLY, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF VIRGINIA

    Mr. Connolly. Thank you, Mr. Chairman. And thank you for 
having me here today. Ranking Member Velazquez and members of 
the Committee, I really appreciate being here. I have a 
prepared statement and I am not going to read it to you. I will 
submit it for the record.
    I listened carefully to the opening statements, 
particularly of Ms. Velazquez, and I looked at some of the 
testimony you are going to hear from. And let me just say that 
some of the fears expressed are understandable, but I think if 
you look at the respective bills Mr. Rogers and I have 
introduced, they are limited pilot programs and they keep the 
small business set-aside entirely intact.
    You are going to hear testimony, apparently, from the 
Women's Chamber of Commerce. Their testimony, their assertions, 
are absolutely false. My legislation does not in any way change 
the size standards of the existing program and in fact 
explicitly has a provision that this pilot program at GSA for 
mid-tier companies to see if it works cannot take away any 
business that otherwise would go to a qualified set-aside small 
business. Period. And I want to make that very clear from the 
outset.
    I also want to talk about why I introduced this bill and I 
assume Mr. Rogers has a similar experience. His bill is limited 
to DOD. My bill is limited to GSA. And I had a number of small 
businesses, minority-owned businesses in my district, come to 
me and they have been successful. So they are graduating from 
the small business status and the problem is that we sent them 
into Federal contracting limbo on the next day. So they now 
find themselves still relatively modest in size, albeit 
successful, in part because of the programs this Committee has 
helped to create and foster and needs to do more of, as Ms. 
Velazquez says.
    But now you have got a minority-owned business successful 
in that category that has to compete with the big guys. And 
what is very interesting is they don't get any help. They are 
now graduated. On day one. And frankly, many of them find 
themselves in an impossible situation because they are 
competing against multibillion-dollar entities who have all the 
resources in the world to do red team, to put together 
professional proposal writing to make sure they are scouring 
for opportunities in the Federal Register and the like.
    And what happens to these midterm companies? Often they get 
just bought up or they go out of business. And so all your hard 
work in fostering and encouraging, correctly, opportunities, 
diverse opportunities in America for smaller businesses, 
especially minority, female, and veterans-owned businesses, 
sometimes gets blown away the minute they graduate because 
there is nothing for them in terms of transition.
    And so my minority-owned Federal contractors who have been 
part of the small business set-aside came and said, ``Can't you 
try to address this? We are not asking for permanent help, but, 
gee, to become, say, a $30 million business and now we are 
expected to compete with a $20 billion business. Little wonder 
that your CSIS study shows--if you look at the bar graph they 
have in their study for this Committee, the big guys are 
crowding out everybody else. They are getting bigger. The small 
business set-aside companies are sort of holding their own in 
that bar graph. There may be a little improvement up and down a 
little bit, but holding their own.
    It is the mid-tier category that is actually shrinking. The 
Federal Government doesn't keep accurate data on mid-tier 
companies, so it is a little hard to provide a lot of empirical 
data. But anecdotally I can tell you, at least in my district--
and I represent a lot of Federal contractors--this is an 
increasing source of concern. So that was the genesis of the 
program. I took into account the concerns, legitimately raised 
by Ms. Velazquez and others. I read the Committee memo, and I 
thought it was a very thoughtful memo by staff, that there are 
still some issues that we want to work with you in terms of the 
definition of mid-size. I kind of looked at it from an IT 
perspective and kept the definition at the employee number 
size, because I am only dealing with GSA and I am largely 
dealing with IT contracts.
    But I understand, as the staff points out in their memo to 
this Committee, well, there is a lot of diversity and there are 
a lot of different definitions. And I do actually take into 
account the staff's concern about one size fits all. We can't 
do that. I understand that. You can't do it in the small 
business set-aside either.
    There is a multiplicity of Federal agencies with lots of 
different realities in Federal agencies. But my plea to this 
Committee is can't we, on a very limited basis, create a pilot 
to see if we can do some good and that preserves and enhances 
the minority-owned companies you have worked so hard to 
incubate and foster, as opposed to just setting them out in a 
Darwinian world where, day one, they are expected to compete 
with big guys who have mega-resources, which frankly they 
cannot compete. I believe if we can do that and succeed in that 
goal, it is a good deal for taxpayers; it will foster 
innovation because a lot of times, especially with the smaller 
contracts, it is the smaller innovative companies that actually 
are the creative ones who are providing new solutions. And I 
think it would be win-win in terms of fostering and enhancing 
the legitimate goals of this Committee to create small 
minority-owned--female owned--veteran and disabled veteran-
owned businesses as part of the fabric of American contracting.
    With that, Mr. Chairman, I would be glad to entertain any 
questions.
    Chairman Graves. Thanks, Congressman Connolly.
    [The statement of Mr. Connolly follows on page 28.]
    Chairman Graves. I will turn to Mike Rogers, our guest 
today. If you have anything, Mike, you want to add, or 
questions. And then I am going to turn to the ranking member.
    Mr. Rogers. Thank you very much, first, for letting me sit 
in on this hearing. And I share most of everything that he 
said, the same observations as Mr. Connolly mentioned. My 
amendment really only focuses with the DOD. And I don't 
represent a lot of DOD contractors, but we have a lot of them 
in Huntsville, a lot of missile defense. And exactly what Mr. 
Connolly said is happening. We have these very creative, very 
innovative technology companies that are nurtured under the 
current system, but once they cross that threshold of 1,000 
employees or $30 million in gross revenues, they are on their 
own, and you can't compete with Raytheon or Boeing or one of 
these major corporations at that level yet. And invariably they 
get bought out and that stifles the very creativity and the 
flexibility small companies have. And frankly, they lose a lot 
of brain drain because a lot of their tech people don't want to 
work for a big company. They like being in the smaller 
environment.
    So what I am after, as a member of the Armed Services 
Committee, is for us to nurture these companies to get up to 
around 2,500 where they can possibly be players in competition 
for large contracts, because the fact is in the DOD there are 
four or five companies and they own this place. And they need 
some competition. It is good. It makes them be better and it 
helps us, as the government, get better deals.
    So that is my motivation and I hope that this Committee can 
embrace the concept and let us just see how it works for a few 
years. And with that, I yield back. Thank you again for letting 
me visit.
    Chairman Graves. Ranking Member Velazquez.
    Ms. Velazquez. Thank you, Mr. Chairman. And thank you, Mr. 
Connolly. I do share your concern, because thanks to the 
Committee work. And for 14 years I have been producing a 
scorecard report and bringing in the administrator and all the 
big offenders, starting with the Department of Defense and 
Education, and even Small Business Administration, failing to 
achieve the contracting goals set up by Congress. But since it 
has been set up, it has never been achieved. And that means 
small business has been losing out; yet because of the 
proactive work of this Committee, they have been more 
responsive in achieving those contracting goals. And the latest 
one for 2010 was 22.6. So we haven't achieved the 23 percent. 
And it means that small businesses are losing out billions of 
dollars in contracting opportunities.
    So my question to you is businesses that are other than 
small already receive 78 percent of Federal contracts, while 
small businesses have yet to attain the 23 percent goal. So the 
duration of your pilot program is 5 years. At the end of this 
period, how will you measure whether this program has been 
successful?
    Mr. Connolly. Well, I would want to--first of all, I take 
seriously your implied concern this could be a zero-sum game, 
and I don't want it to be. I believe the two, in fact, are 
extensions of each other. I think we can and should try to 
reach the 23 percent goal and try to help graduates of that 
program stay in business as minority, veteran-owned, female-
owned businesses, as opposed to becoming----
    Ms. Velazquez. The question is: Is this the right place?
    Mr. Connolly. Is what the right place?
    Ms. Velazquez. To establish a pilot program that will take 
awards, contracts, away from small business.
    Mr. Connolly. No. I would say that it doesn't. I think you 
could have a pilot program that actually enhances--because you 
are trying to build on the successes you are creating and want 
to enhance on the small business set-aside. It is not a zero-
sum game where if we create any kind of pilot program from mid-
tier necessarily that takes away from small- and minority-owned 
businesses. I don't believe that is true. I believe experience 
will prove that it is not true.
    Ms. Velazquez. You are aware that GSA implemented a 
training program that is directed at providing technical 
assistance to those who graduate?
    Mr. Connolly. Yes, ma'am.
    Ms. Velazquez. Why can't we wait to see the type of 
results?
    Mr. Connolly. Well, again you could. It might be--all I 
can--Ms. Velazquez, just as your experience validates and 
directs where you go on issues, I have to tell you as somebody 
who has spent 20 years as a Federal contractor, including for 
big guys and including for little guys, and having to implement 
these goals and programs in the private sector until the day I 
got here, and now hearing from my constituents in a district 
that probably has more Federal contractors than anybody else, 
it is my small, minority businesses that are clamoring for some 
relief from the mid-tier category.
    That is why I think there is a void that a pilot program, 
which is modest and not too dangerous or expensive, can 
address. And then we can learn whether it works or not.
    Ms. Velazquez. In other contracting programs such as the 
service-disabled veterans, GAO has found that there has been 
some problem with self-certification. In many cases, 
investigations have shown that businesses did not meet all 
necessary eligibility requirements, even though they self-
certified otherwise.
    It appears that your program would allow for the same sort 
of self-certification. So my question, knowing that this 
problem exists with self-certification, how do you propose we 
ensure that the representations made by participants are 
accurate?
    Mr. Connolly. Ms. Velazquez, from my point of view, I would 
be guided by the wisdom of this Committee. So if this Committee 
were uncomfortable with the self-certification process and 
chose to do something else, I would certainly support that and 
welcome that. I am not going to--I am not on this Committee, 
and I would not substitute my judgment for that of this 
Committee. So obviously if that--if you have decided that that 
is a problem and has to be addressed, I would be supportive of 
that.
    Ms. Velazquez. Thank you. Thank you, Mr. Chairman.
    Chairman Graves. Any other members wish to be heard, or 
questions?
    Mr. Connolly. Just for the record, Mr. Chairman, I want you 
to know my testimony roundly praises Mr. Rogers for his 
legislation. I thank all of you for your indulgence. I really 
appreciate it.
    Chairman Graves. Thank you very much for coming and I 
appreciate it.
    Mr. Connolly. Mr. Chairman, one more thing. May I ask 
unanimous consent that a letter supportive of this effort by 
the Professional Services Council be entered into the record as 
part of my testimony?
    Chairman Graves. Without objection.
    Mr. Connolly. I appreciate it. Thank you.
    Chairman Graves. Thank you very much. We will go ahead and 
seat the second panel.
    I want to welcome our second panel and our second group of 
witnesses. And we are first going to hear from Ms. Tonya Speed. 
She is the executive director of Mid-Tier Advocacy. Mid-Tier 
Advocacy represents a community of small- and mid-sized firms, 
providing goods and services to the Federal Government. 
Welcome. And I look forward to hearing your testimony.

  STATEMENTS OF TONYA M. SPEED, EXECUTIVE DIRECTOR, MID-TIER 
   ADVOCACY, (MTA); CHRISTOPHER YUKINS, PROFESSOR GOVERNMENT 
 CONTRACTS LAW, CO-DIRECTOR OF THE GOVERNMENT PROCUREMENT LAW 
  PROGRAM, GEORGE WASHINGTON UNIVERSITY; MICHAEL D. FRISBEY, 
 GOVERNMENT SUPPLIERS AND ASSOCIATES, KNOXVILLE, TENNESSEE, ON 
 BEHALF OF THE NATIONAL SMALL BUSINESS ASSOCIATION; AND MARGOT 
           DORFMAN, U.S. WOMEN'S CHAMBER OF COMMERCE

                  STATEMENT OF TONYA M. SPEED

    Ms. Speed. Thank you, Mr. Chairman. Chairman Graves, 
Ranking Member Velazquez, and the esteemed members of this 
distinguished panel, I am honored to be here today as executive 
director of Mid-Tier Advocacy to discuss the disappearing mid-
size firm and to support the Connolly bill, the Small Business 
Growth Act, H.R. 1812.
    The MTA represents a community of small and mid-sized firms 
that provide employment for thousands of people across the 
United States and across multiple industries. MTA is an 
organization of the country's top veteran-owned service-
disabled, HUBZone-certified, minority-owned and women-owned 
businesses. Mid-size or mid-tier refers to other than small 
businesses that may have exceeded the size standard for the 
industry as determined by NAICS code. They are seasoned 
businesses as a result of having been in the Federal market for 
10 and sometimes 30 years or more. Their revenues may range 
from 10 million to 350 million and will likely employ from 100 
to 2,000 people. They no longer are considered small 
businesses, but neither are they large in the Federal 
marketplace.
    Our testimony today will attempt to focus on two points, 
the disappearing mid-size business and why Congress should 
protect its investment, also creating jobs to strengthen the 
industrial base. We believe the standards used to define small 
business by the North American Industry Classification System 
better known as NAICS, are inadequate because in most cases the 
NAICS code defines small business as a company that has less 
than a certain threshold in annual revenues over a 3-year 
average. The reality is that once any company surpasses this 
standard, it is considered other than small.
    One of the greatest challenges for successful small 
business is to survive beyond the size standards. By its own 
admission, the SBA is responsible to the public for ensuring 
that size standard levels are rational and flexible enough to 
reflect the effects of inflation and changing economic 
conditions while promoting competitive viability among small 
businesses.
    We believe that the current NAICS codes classifications 
fail that standard and fail the successful small emerging 
business. Small businesses that grow beyond the limits set by 
the NAICS codes are punished for doing what any business needs 
to do, and that is simply to grow. Once they become moderately 
successful in the Federal market, they are thrust into 
unrestricted labor market, they must compete without the 
infrastructure or the capital to compete successfully against 
significantly larger businesses.
    And I do have a chart that I would like to share. 
Representative Connolly touched upon the differences among the 
very large companies and the small business concerns that we 
are really talking about. Most small businesses provide 
services where the NAICS ceiling is either at 7 million or 25 
million, translating to roughly 100 to 150 employees, whereas 
on the chart you can see with the large integrators they have 
up to 136,000 employees, on average 130,000 employees. And 
these are in fact the people that--the businesses that we 
represent today are in direct competition with. It is not the 
very small concerns, but the much larger integrators or the 
giants in the industry.
    Our concern is that thousands of small businesses who have 
graduated or matured have disappeared from the landscape of the 
Federal marketplace. The policies that drive the standards and 
the criteria and the entry level in developing firms 
unfortunately stifle many of them who are achieving some modest 
success. We believe standards should encourage growth by 
securing balanced competition at all levels: set-up, 
developing, and our matured phase.
    Under the Connolly bill, mid-sized contract opportunities 
would come from unrestricted procurement and not come from 
small business set-asides. We believe since the government 
invests in small companies, it should protect the investment 
and continue to support them or at least monitor their progress 
after they graduate. This makes perfect policy and economic 
sense. Taxpayers want to know what sort of return they are 
getting on their small business investment.
    And finally, I will close by saying that MTA strongly 
supports the Small Business Growth Act, H.R. 1812, because it 
goes to the heart of the government can get a better return on 
its small business investment. And to quote Mr. Connolly's 
office: The success of these small businesses is what is 
helping to drive the economic recovery. And the loss of 
incentives is what is helping--is what is threatening not only 
their ability to compete but also their ability to hire.
    And finally again, we will also quote Mr. Graves as saying 
that: The cost saving strategy can actually help Washington 
address our out-of-control Federal debt and help create jobs 
for all the reasons stated above. The establishment of a mid-
size business category would ensure that government would get 
the best bang for its buck.
    Thank you very much for allowing me to provide testimony.
    Chairman Graves. Thank you, Ms. Speed.
    [The statement of Ms. Speed follows on page 32.]
    Chairman Graves. Next, we are going to hear from Professor 
Christopher Yukins. Professor Yukins teaches on government 
contract formations and performance issues, anti-corruption 
measures, bid challenges, and government contract litigation 
and comparative issues in public procurement at the George 
Washington University School of Law. Thank you for being here, 
Professor.

                STATEMENT OF CHRISTOPHER YUKINS

    Mr. Yukins. Thank you, Chairman Graves, Ranking Member 
Velazquez, members of the Committee. Thank you for the 
opportunity to speak with you today regarding a potential 
preference for medium-sized businesses for H.R. 1812, 
Congressman Connolly's pending legislation.
    As Chairman Graves alluded to, I am a professor at GW Law 
School and I teach procurement law there. And in the interest 
of full disclosure, I should say that Ms. Northcutt was 
actually counsel--is actually a former student of mine. I am 
very glad to see her here today.
    The problem the Committee is addressing today, the problem 
of mid-sized firms in the government marketplace, really has 
two different aspects. First, there is a problem of graduating 
small businesses, which grow up under the protection of various 
small business preference programs and then must compete as 
mid-sized firms without any preferences or protections.
    Second and more broadly, mid-sized firms face special 
competitive obstacles in the Federal procurement market, a 
market which sometimes favors the largest firms, in part 
because of its steep barriers to entry. There is a perception 
that mid-sized firms in general face special difficulties in 
the government procurement marketplace because those mid-sized 
firms do not have access to the preferences enjoyed by small 
businesses and because the mid-sized firms lack the economies 
of scale and sheer economic and political muscle of the largest 
prime contractors.
    There are three possible options to assist medium-sized 
businesses. First would be to create a preference category 
called medium-sized businesses. For the reasons that I will be 
discussing, this option, the option of creating a category 
called medium-sized businesses could create serious problems in 
our international trade negotiations.
    The second option would be to expand to the small-business 
size standards to include medium-size businesses. This is a 
technical issue, not a legal issue. And it is an issue I will 
not be addressing today.
    The third option is to use an innovative pilot program, 
such as H.R. 1812 outline, to leverage existing mentor protege 
programs to assist medium-sized firms.
    Turning to the first option, the question of whether or not 
mid-size firms' access to procurement contracts should be 
resolved by creating a new category called medium sized 
enterprises, H.R. 1812 does not squarely present this issue. 
The bill does not create a new medium category of firms, but 
instead creates a special pilot program for certain medium-
sized firms. But this issue is likely to arise as policy 
discussions continue.
    The answer to this question, whether or not to create a 
special category called medium-sized firms, may lie buried in 
the World Trade Organization agreement called the Government 
Procurement Agreement. The WTO members, the World Trade 
Organization members, that joined the Government Procurement 
Agreement, which is a subset of the WTO, agreed to open their 
procurement markets to vendors from other members of the GPA. 
The United States is a leading member of the GPA. And in fact, 
the United States has been pushing this initiative to open up 
procurement markets since just after World War II.
    China is negotiating accession to the GPA, and India is 
likely to follow China in joining the agreement. The Government 
Procurement Agreement, which has been an important part of U.S. 
trade policy for many decades, is arguably the cornerstone to 
opening world procurement markets for U.S. exporters over the 
coming years.
    The United States, when it joined the GPA, made a number of 
reservations, including one vitally important to our discussion 
today. The United States reserved its right to give a 
preference to U.S. small businesses, even if that meant 
discriminating against foreign vendors seeking to sell to 
Federal agencies. The reservation which is set forth in the 
United States' general notes to the Government Procurement 
Agreement states that, quote, This agreement will not apply to 
set-asides on behalf of small and minority businesses. So while 
the United States opened up its procurement markets in general 
underneath the Government Procurement Agreement, it reserved 
its right to discriminate in favor of small- and minority-owned 
businesses.
    The United States has not reserved a right to discriminate 
against foreign vendors from GPA nations with regard to medium-
sized businesses. A new unreserved U.S. preference for 
procurement from medium-sized businesses would undermine the 
United States' negotiating position with China and other 
developing nations which are seeking broader protections for 
their own emerging industries before they agree to join the 
GPA.
    Moreover, were the United States to create a preference for 
medium-sized business, that preference could trigger a 
challenge by the European Union or other GPA members under the 
WTO dispute process. In sum, it could create serious trade 
problems where we create this category of medium-sized 
businesses.
    That leaves us then with the proposed pilot program for 
mentor protege participants. And I talked about some of the 
practical issues in my prepared statement.
    I just want to briefly touch on a couple of the issues. The 
first one is whether or not the affiliation rules should apply 
to companies in the pilot program. The affiliation rules say 
that if a small business has an affiliation with another 
company, typically through joint control, that other company's 
resources should count and the small business should be 
considered essentially a larger business.
    There are two ways this issue could possibly arise under 
this bill. The first one is if a medium-sized firm were to 
reach outside to a third party and affiliate with that firm. So 
a firm less than 1,500 employees, which is a medium-sized firm, 
would reach to another firm, for instance, to seek additional 
capital from that other firm. That could become a large 
business then. That would be a serious issue that the 
legislation should address.
    Another possible form of affiliation, though, would be 
between a mentor firm and a protege firm. And that kind of 
affiliation is arguably something the legislation should 
encourage. So I would argue that the legislation should allow 
that form of affiliation between mentor and protege.
    Mr. Chairman, I see that my time is up. I reserve the rest 
of my comments to my prepared testimony. Thank you.
    Chairman Graves. Thank you very much, Professor.
    [The statement of Mr. Yukins follows on page 48.]
    Chairman Graves. Next we are going to hear from our third 
witness, Mr. Michael Frisbey, the founder of Government 
Suppliers and Associates, Inc., of Knoxville, Tennessee. Mr. 
Frisbey is testifying on behalf of the National Small Business 
Association. Thanks for being here.

                STATEMENT OF MICHAEL D. FRISBEY

    Mr. Frisbey. Thank you very much. If you hear knees 
knocking, they are mine.
    Good morning, Chairman Graves and Madam Velazquez. I want 
to thank you first for allowing me to be here and to talk 
specifically about the Small Business Growth Act. My name is 
Michael Frisbey. I am a member of the National Small Business 
Association. I am also a small-business government contractor 
and I have 40 years of experience in government contracting 
work. Again, I would like to thank you for being here.
    Let me give you a little background on my company and why 
we are so opposed or why the NSBA is so opposed to this pilot 
program. I started the company in 2002. In 2004 we received our 
first prime vendor contracts with the Department of Defense. In 
2009, those contracts, those first three contracts that we won 
were completed. In 2009, in open competition again, even 
against unrestricted businesses, we won two more prime vendor 
contracts. Those contracts today are worth $11 million.
    In addition to the Department of Defense, we are a 
registered supplier to 15 allied Ministries of Defense around 
the world where we sell U.S.A.-made product in direct 
competition against Chinese, Korean, Bangladeshian and other 
foreign countries.
    In 2008, my wife and I purchased the assets of Columbia 
Sewing and started a new company, Government Sewing and 
Apparel, LLC, which is located in Hope, Arkansas, and today 
employs approximately 80 people directly, and approximately 200 
people through our subcontractors. I want to try to take this 
project and bring it back to reality for you. I believe that 
all of us agree in that Federal procurement, if it were not for 
that, there would be no small businesses.
    We also believe that small businesses are a great balance 
and a needed necessity in Federal contracting. Yet we talk a 
lot about small-business creation. In 1997, as you mentioned, 
Ms. Velazquez, the act was passed at 23 percent, and since it 
was passed, we have not hit 23 percent yet. We do not need to 
divide 23 percent into a new category. If the category were to 
create a medium-sized program, we have no problem with it. But 
to take 23 percent that the government has not yet hit and 
divide it up and make it smaller, we see no value in.
    I am going to give you a real-world example of what we are 
up against as a small business. In August of 2010, a 
solicitation was posted by the Department of Defense for a 
program called MOLLE. MOLLE stands for Modular Light Load-
bearing Equipment program. This contract when awarded will 
represent $98 million a year, or $297 million over the 3-year 
life of the contract. MOLLE consists of 43 items, individual 
items just like the two I am holding here. Each of these has 
their own national stock number, each of them has their own 
specification number. Those 43 items are assembled into seven 
sets and used by the military: rifleman set, medium rucksack 
set, large rucksack set, pistolman set, grenadier set, medic 
set. All of them are individual components. They could be made 
by 43 individual small businesses, the entire set-aside.
    When the set-aside--when the contract was issued or when 
the solicitation was issued, it was issued as unrestricted. The 
justification was that all of the items had to be interoperable 
and that by putting them into small businesses rather than 
letting one large contractor do them, we could not assure that 
these products would work together. The interoperability that 
they are talking about is actually nothing more than the 
purchase of a piece of 1-inch nylon elastic and being sure that 
that 1-inch nylon elastic from one product slips into the 
second product. That is interoperability. That is the 
justification for not having it as a small business set-aside.
    I want to thank personally in this hearing, Congressman 
Mike Ross from the State of Arkansas, who worked diligently 
with us to try to convince the Department of Defense to set 
aside a part of that contract. After much back and forth with 
DSCP, we were successful in getting a whopping 2.4 million, or 
under 2 percent of that contract set aside for small business.
    That is what small business is up against today. That is 
why we don't hit 23 percent, because the large businesses do 
that. That is why we are so adamantly opposed to this bill, 
because we believe first and foremost, the Federal Government 
must hit the 23 percent level that it set for small business 
set-asides before it can consider any other type of category of 
business.
    And we would encourage you, as was suggested by Chairman 
Graves, to not only increase--not only support the 23 percent, 
but increase it. I would beg you, increase it to 25 or 30 
percent. Small businesses represent 50 percent of the GDP of 
this country. Small businesses represent 50 percent of the jobs 
in this country, and yet all we have is 23 percent of 
government contracts and that hasn't been met since 1997. I beg 
you, please, do not pass H.R. 1812. It will destroy small 
businesses in this country. I am a small business contractor 
and if it is passed, I can assure you I will be out of business 
within a year of it. Respectfully submitted. Thank you very 
much.
    [The statement of Mr. Frisbey follows on page 75.]
    Ms. Velazquez. It is my pleasure to introduce Ms. Margot 
Dorfman. Ms. Dorfman is the founder and CEO of the U.S. Women's 
Chamber of Commerce. The Women's Chamber of Commerce represents 
500,000 members, three-quarters of whom are small businesses 
and Federal contractors. Through her leadership, this 
organization has championed opportunities to increase women's 
business, career and leadership advancement. Additionally, Ms. 
Dorfman has done extensive background in business, including 10 
years in executive positions with General Mills and other 
Fortune 500 firms. Welcome, Ms. Dorfman.

                  STATEMENT OF MARGOT DORFMAN

    Ms. Dorfman. Thank you. Chairman Graves, Ranking Member 
Velazquez and members of the House Small Business Committee, I 
am here today on behalf of the U.S. Women's Chamber of 
Commerce, under 500,000 members, three-quarters of whom are 
American business owners and Federal contractors.
    The U.S. Women's Chamber of Commerce strongly opposes H.R. 
1812, the Small Business Growth Act and other similar 
legislation. H.R. 1812 arbitrarily and unscientifically 
abandons the well-established small-business size standards 
methodology which is managed by the Small Business 
Administration, carving out a new contracting set-aside program 
for firms that are not small.
    The SBA already has tools to assist small-business growth. 
First, SBA size standards methodology has scientific basis, 
ongoing oversight, and includes the specific objective to 
assure competition among industries. The methodology employed 
by the SBA to provide small-business size standards is 
scientifically sound, well documented, and includes a mandate 
to foster competition.
    Through the size standards process, the SBA regularly 
examines the structural characteristics of industry as a way to 
regularly--as a way to assess industry differences and the 
overall degree of competitiveness of an industry and of firms 
within the industry.
    Industry structure is examined by analyzing five primary 
factors: average firm size; degree of competition within an 
industry; startup costs and entry barriers; distribution of 
firms by size; and small business share in Federal contracts. 
SBA also considers other secondary factors as they are relevant 
to the industries and the interests of small businesses, 
including technological change, competition among industries, 
industry growth trends and impacts on SBA programs.
    At the core of the whole size standards philosophy and 
process is the intent of promoting industry competition, which 
is why the SBA includes industry competitive analysis through 
the measurement of concentration or market power to determine 
the extent to which a particular industry is dominated by a few 
large firms. This is also why the SBA recently increased and 
continues to adjust the employee and/or revenue size number of 
industry size standards, appropriately fine-tuning industry 
size standards to reflect the current competitive landscape.
    In other words, the SBA is already making sure that the 
definition of ``small'' for each industry encompasses the 
larger firms so as to assure a strong competitive climate.
    Additionally, the Federal Government is not meeting its 
statutory obligations and goals for contracting with small 
businesses. These ongoing shortfalls should be of paramount 
concern for Congress. Over the last 5 years alone, American 
small businesses have lost $22 billion in revenues as the 
Federal Government has consistently failed to achieve the 
statutory requirement to place 23 percent of prime contracts 
within small businesses. This is a horrific loss of opportunity 
for small businesses, their employees, their families, their 
communities and the American economy. And within the prime 
contracts that are placed with small businesses, the goals for 
emerging market businesses like women-owned small businesses, 
are missed year after year.
    Over the last 5 years, American women-owned small 
businesses have lost over $29 billion in revenues as the 
Federal Government has failed to achieve the goal of 5 percent 
prime contracting with women-owned firms.
    So what can be done to assure the growth of small 
businesses that fall within industry size standards? Congress 
can take action in a number of ways to support businesses that 
do qualify as small to assure maximum growth:
    First, take the caps off the contracting limits within the 
women-owned small business set-aside program.
    Increase the overall goals for contracting with American 
small businesses to a percentage that is more in alignment with 
our numbers.
    Increase small business access to capital and compel banks 
to lend.
    Continue to fight to eradicate bundles, big business sole-
source contracts and fraud.
    And stop inappropriate in-sourcing. This practice is 
destroying opportunities for thousands of American small 
businesses. And finally, remove the goaling exclusions that 
limit the ``small business eligible'' dollars and drive down 
our opportunities for growth. And I have a list of these at the 
end of my testimony.
    Thank you for the opportunity to share our views. We 
strongly encourage Congress not to step outside the well-
established small business size standards. Instead we ask you 
to focus on assuring that businesses that are small secure 
access to larger contracts so that we might continue to grow 
and prosper and drive economic growth for the American economy. 
Thank you.
    [The statement of Ms. Dorfman follows on page 70.]
    Chairman Graves. Thank you to all of our witnesses. We are 
going to start questions with Mr. West.
    Mr. West. Thank you, Mr. Chairman and Ranking Member 
Velazquez. And, Mr. Frisbey, go Big Orange. It is football 
season. We have got to beat these Gators this weekend.
    As I sit here and listen to the testimony, in my simple 
Southern way, it seems like we are talking about hell, 
purgatory and heaven. Small business owners operate, it seems, 
in a hell. And we have got to make sure that we prop them up 
and we protect them and enable them to be successful. Because 
as you say, they are an economic engine.
    But yet I would think that we have some of these small 
businesses that do want to graduate maybe out of hell and get 
to purgatory; but yet in purgatory they find themselves, you 
know, kind of left out to hang. And I don't want to see us 
create this gap where all of a sudden these businesses that 
have grown become mid-size businesses and then they fall off 
the map and then that creates a new problem. And, of course, 
heaven represents the big guys.
    So I guess, as my question is to the panel, what do we do 
to make sure that we continue to protect--we have got to get to 
those right levels, the 23 percent contracts for small 
businesses as you talked about for women-owned businesses.
    But what do we do to also make sure that we incentivize 
growth for small businesses to get out of hell, to get into 
purgatory, and they can stay there and at least we can have 
that vibrant--if we wanted to talk about a middle class--but a 
middle operating range for businesses here in America.
    So my question is: What do we do to make sure we are 
incentivizing coming out of that small business to get into the 
medium-range business, but then not taking away from those 
small businesses?
    Mr. Frisbey. Could I respond to that?
    Mr. West. Any way we want. Of course, you are a Tennessee 
Vol, so you get to go first.
    Mr. Frisbey. I think that if you look at what we talked 
about before, you have got 23 percent for small business and 
the balance for large business. To create a medium-size 
category, to me in my mind, makes perfect sense. But it needs 
to be a separate category. It does not need to come out of the 
23 percent, that small business set-aside. If we were hitting 
23 percent regularly and had done it for a number of years, you 
wouldn't hear from me because I would say that is--we are 
accomplishing our objective. But when you haven't hit the 23 
percent, to turn around and take that large business category 
and let them compete on ours, just to make the number, makes no 
sense.
    And I will put it in perspective for you. When we talked 
about 1,500 people--now, I don't know the category, but I am 
out of the textile clothing and uniform business--there are 
four large companies that dominate the uniform and textile and 
clothing business as primes to the Department of Defense, 
companies like American Apparel and Proffer, for example. At 
1,500 people, guess what? They are now small. They just wiped 
us out. We don't even exist anymore, because there is no way I 
can compete with them.
    Ms. Speed. May I also respond?
    Mr. West. [Nonverbal response.]
    Ms. Speed. In all due respect to my esteemed panelists 
here, and to Mr. Frisbey in particular, as Mr. Connolly 
described his bill, H.R. 1812, and as we interpret it, it 
doesn't take from small business concerns. First of all, what 
the bill is attempting to do is to allow a growth path or a 
transition for companies who have already exceeded their NAICS 
codes. They are no longer considered small, but they are not 
large enough to compete on the large-scale business with 
Northrop Grumman and SAIC and others.
    So what we are looking at is--I think I am hearing from 
most of the folks here today, the goal is one issue, and that 
needs to be addressed. But how we allow businesses to grow is 
yet in itself another issue. And this bill is a pilot which 
simply is designed to protect small business by allowing small 
business to continue to grow up to 1,500 based on an employee-
sized standard that currently I believe falls in 
telecommunications today. So it is not even a new standard. It 
is something that does exist. But now we are utilizing it in 
this pilot to allow more businesses to grow up to 1,500.
    They are also required under the pilot to mentor to other 
small business. Mentoring is important because it allows for 
that business to gain the necessary infrastructure. What we 
find in this range of mid-sized companies or larger ``smalls'' 
is that they have added benefit in terms of their accounting 
systems and infrastructure, and they can reach back to help 
other small businesses to be able to gain those same types of 
things, to strengthen their infrastructure.
    And I believe someone mentioned the business breakthrough 
at GSA. That is aimed at those businesses, by the way, that 
were small, and they accelerated so quickly, they blew through 
their NAICS Code size standards, but they still operate as a 
small business but not as a medium-sized business. They don't 
have the infrastructure in place.
    And so the business breakthrough program is designed to aid 
those businesses with needed technical assistance and the types 
of things that they can't get otherwise, because they no longer 
qualify as a small business. So we are really looking at a 
growth path. And I recede.
    Ms. Dorfman. I would say the core issue is the bundling 
issue, because the contracts have been set aside for small 
businesses, and then those that are not set aside for small 
businesses are typically quite large, and a medium-sized 
business could never attain that. So I believe that we keep the 
small business set-asides for small businesses and then take 
care of the anti-bundling, remove the bundling as an issue. 
Then those who do graduate into a larger business, but not the 
super-large, would have a vehicle to then grow their business.
    Mr. Frisbey. Ms. Velazquez also hit the nail on the head. I 
have got 40 years in the defense business. I have seen 
firsthand the fraud and the manipulation that goes on. When you 
have got a company that goes out of the small business 
category--there are a number of them and I am not going to name 
them here--but there are a number that will try to set up 
businesses under wives, kids, family members, other company 
names, just to try to get around the small business standards.
    I have seen factories where orange construction barrier 
tape was run through the middle of the factory, 200 operators 
on one side, 200 on the other. When you push to find out why 
that is there, they are mentoring another small business on the 
other side of the construction barrier tape. There is not the 
enforcement there to even really aggressively go after 
enforcing the small business standards and we compete against 
it all the time.
    Mr. West. Thank you, Mr. Chairman. I yield back.
    Chairman Graves. Ms. Velazquez.
    Ms. Velazquez. Thank you, Mr. Chairman. Mr. Yukins, under 
the Women's Procurement Program, the contracts eligible for 
restricted competition are limited to those valued at less than 
5 million for manufacturing and less than 3 million for all 
other contracts. The mid-tier contracting programs that have 
been suggested have no caps on the value of contracts that can 
be awarded through restricted competition methods.
    Can you think of any policy that will justify why mid-sized 
companies should be allowed to receive contracts of unlimited 
value through restricted competition, and the value of 
contracts that can be awarded to small businesses through these 
methods are constrained?
    Mr. Yukins. The problem is even bigger than that, which is 
that the way that the pilot is set up, all contracts will be 
subject to full and open competition, which will presumably 
exclude the IDEQ and the GSA schedule contracts. All contracts 
that are subject to full and open competition would 
presumptively have to be considered first for this program. So 
you could have a huge--potentially billions of dollars for 
contracting funneled through this program.
    It would be very important for the Committee to consider 
ways to constrain, because otherwise you could have a few firms 
that are inside the mentor protege program suddenly become 
enormously wealthy. It is as though you are taking a river and 
channeling that river through a very small little stream. And 
the people who happen to be sitting in that stream are suddenly 
very, very wealthy. So your question is very important because 
the way the legislation is set up right now, all the contracts 
are pushed through that little tiny stream, the mentor protege 
program.
    Ms. Velazquez. Thank you. I raised the issue with 
Congressman Connolly about the fact that large businesses have 
presented themselves as small businesses and are taking 
contracts away from small businesses. And this has happened, 
and it has been documented with an investigation conducted by 
the GAO and the SBA's IG. So this is all happening despite the 
fact that there are several monitoring devices in the program, 
such as annual audits and site visits.
    So my question to you is: What kind of fraud prevention 
tools would be necessary in this pilot program to ensure that 
the targeted mid-sized businesses are receiving the contracts 
instead of large cooperations?
    Mr. Yukins. The logical solution would be to subject the 
companies in this program to size protest, a normal SBA size 
protest process.
    Ms. Velazquez. Okay. So my question to you is: Which agency 
will handle that?
    Mr. Yukins. The size protest could be handled in the first 
instance by SBA. The problem is that SBA--the size standards 
that you would apply only apply to small businesses, so the 
size standards would have to be revised. And then when you 
apply the size standards to these mid-sized companies, the size 
standards are incredibly complex and it adds a layer of 
complexity of management difficulty for those mid-sized 
companies.
    Ms. Velazquez. Given the constraints, budget-type 
constraints of the Small Business Administration, they don't 
have the resources and manpower to monitor and make sure that 
the 23 percent contracting goal is achieved. So now we are 
going to give this other responsibility.
    Mr. Yukins. That is definitely an issue with whether or not 
they have the capacity, and also whether or not the mid-size 
firms have the capacity to deal with the very complex size 
standards.
    Ms. Velazquez. Okay. Thank you.
    Ms. Speed, in your testimony you mentioned that a mid-tier 
program will strengthen the industrial base of these 
businesses, create jobs and encourage competition.
    Has your organization done any research as to how 
significant impact of changes we can expect to see with the 
introduction of these types of programs? What hard data do you 
have? What type of research has been conducted?
    Ms. Speed. That is a wonderful question, Ms. Velazquez. I 
would say we haven't done internal research per se, but there 
is anecdotal research based on other relationships that have 
been built. Again, these companies and MTA is comprised of are 
very mature companies; they have been around 10--some almost 30 
years, and they have understood and have operated even with the 
constraints that policy has today, that it is all about 
building relationships. And along the way, what we have gleaned 
from that is in terms of mentoring other companies, that gives 
the assistance that they need, that lends itself to greater 
capacity for those smaller firms. But also with the medium-size 
firm, they are the ones who can actually go out and hire. When 
a contract is awarded, and I believe there have been several in 
the past, that are larger-sized contracts from the unbundling 
days--but now they are all bundled--there was work. And the 
bottom line is there just isn't enough work.
    Ms. Velazquez. Ms. Speed, in a recent article in Washington 
technology, you stated that mid-sized companies were a key 
element to the Federal marketplace, and these companies are apt 
to hire more people than small businesses. However, research 
has shown that small businesses have created more than two-
thirds of new jobs in the last 15 years.
    Additionally, in a study referenced by Professor Yukin's 
testimony, job losses were found to be attributable to low-
impact firms with more than 500 employees. Thus, following your 
logic, shouldn't we instead put renewed effort in small 
business contracting programs since these are the companies 
that are responsible for most of the job creation in this 
country?
    Ms. Velazquez. So one of the imperatives that we are faced 
with here in this Committee is how can we get the best bang for 
the buck, right? And the President announced his proposal and 
initiatives. We need to create jobs. So based on the data that 
we have, it seems to me that resources will be better and more 
productive if we target small companies that are the ones 
creating the jobs that we think we need at this moment to get 
the economy growing again.
    With that, thank you, Mr. Chairman.
    Chairman Graves. Mr. Rogers.
    Mr. Rogers. Thank you, Mr. Chairman. And thank you for 
calling this important hearing. In listening to the witnesses--
you know, I know there has been a lot of talk about Mr. 
Connolly's bill. But I have got the one that goes just to the 
DOD. And I talked a little earlier about, you know, my focus 
has to do with missile defense. I am on the Strategic Forces 
Subcommittee. This is a real issue in the missile defense 
industry.
    Ms. Speed, in your comments you talked about Mr. Connolly's 
bill. Do you see any problems with the DOD pilot study that I 
am proposing to nurture these mid-sized companies?
    Ms. Speed. Thank you, Mr. Rogers. Actually, no. We are in 
support of both approaches. In fact, whether it is DOD, GSA, or 
possibly even DHS, the idea is to allow these companies the 
ability to continue to be able to have the necessary 
infrastructure and resources without being restricted. I heard 
earlier of the disincentivizing of companies--I believe Mr. 
Frisbey made the point. Some companies are trying to do all 
they can to remain small. It is all about work and the 
employees that you have. So we do support you and support your 
approach as well.
    Mr. Rogers. Ms. Dorfman, you made reference to the fact 
that size standards are being reviewed regularly and adjusted 
by the SBA. Not in the missile defense industry. They have not 
changed the size standards or the volume of revenue that you 
can generate in decades.
    Ms. Dorfman. Well then, if that is the case, then they 
obviously need to focus in on that. But we do need to adhere to 
the size standards. Otherwise, small businesses will be usurped 
by the larger businesses.
    Mr. Rogers. Well, here is what I am trying to get at: We 
are not dealing with small businesses in my proposal. We are 
saying, over and above what is set aside for small businesses. 
So the concern that Mr. Frisbey had is not a concern in the 
bill that I proposed because we aren't going to penetrate down 
into that 23 percent. This is over and above that, because the 
truth is Mr. Frisbey one day probably would like to be a little 
bit bigger business and then be able to nurture that next 
level. So I guess I am trying to figure out what is your 
opposition about the proposal?
    Ms. Dorfman. Our focus is making sure that we get the 
emphasis on the small business goals. They need to be met. And 
that is our first concern.
    Mr. Rogers. And I agree with that. So what is your 
opposition to that?
    Ms. Dorfman. So then the secondary nature is when we take a 
look how to move forward, I agree we do have to help small 
businesses get to that next level; but in doing so, we feel 
that we have to make sure that there is a sound technique that 
is put in place and that the small business size standards are 
included in that process because they have been there and they 
have worked.
    Mr. Rogers. My proposal is a pilot study. That is the whole 
purpose of a pilot study is to find out where the bump in the 
road is and what works and what doesn't. So why would you 
oppose a pilot study?
    Ms. Dorfman. Again, we would like to see Congress work on 
making sure that the small business goals are being met. And I 
believe that the larger firms can access the contracts if they 
were put together in a way that was not in the bundling 
fashion, where they are so large that they can't access them.
    Mr. Rogers. So you don't have any amendment language that 
you would like to see incorporated to make you happy? You are 
just against it is what you are saying?
    Ms. Dorfman. At this point, yes.
    Mr. Rogers. That is unreasonable. As I told Chairman 
Graves, I am open to any kind of amendment that calms the 
concerns of any sector. But I am not okay with just 
obstructionism. And that is what I am hearing. Mr. Frisbey 
seems fine, as long as his concerns are met. But it sounds like 
you are saying you don't care what concerns are met, you are 
against it. And that is a reasonable position, I guess, in your 
view, but it is not reasonable to me. I am hoping this 
Committee will make any kind of changes you want to make. But 
we ought to at least look at nurturing these businesses up to 
this next level, particularly in missile defense because this 
is serious stuff.
    And right now when it comes to the big guys, Raytheon and 
Lockheed and Boeing, they don't have competition.
    Ms. Velazquez. Would the gentleman yield?
    Mr. Rogers. Absolutely.
    Ms. Velazquez. Thank you for yielding. My question is, do 
you have small businesses that grew and that are mid-sized?
    Mr. Rogers. Oh, absolutely.
    Ms. Velazquez. And that you feel that they have problems 
with the size standard?
    Mr. Rogers. Absolutely. That is the problem. They are being 
bought up once they go over 1,000 employees.
    Ms. Velazquez. So two things could happen. One is that 
those businesses that feel that the size standard needs to be 
changed or adjusted should apply to SBA to get that reviewed; 
but also SBA, as we speak, is reviewing the size standard 
issue. So there is nothing that will prevent those businesses 
in your district from requesting SBA to look at the size 
standard issue.
    Mr. Rogers. I thank the gentlelady. The fact is, that 
gentleman right there would object to that, if they wanted to 
raise that size standard so that companies that went over 1,000 
employees could now compete for this 23 percent. And the fact 
is that the companies that I--and I don't represent them, I 
wish I did, but they are in Huntsville, can't get SBA to even 
consider those adjustments. So I am just trying to figure out 
how we can solve the problem and I hope you all work with me in 
any way, and I am amenable to any kind of amendments you all 
want to make. Thank you.
    Chairman Graves. Ms. Chu.
    Ms. Chu. Thank you Mr. Chair. This question is for Ms. 
Dorfman. Of course we know that the Federal Government has a 5-
percent goal for contracts to be awarded to women-owned small 
businesses. But it has taken 10 long years after the 
legislation authorizing the program was passed to get the 
women's procurement program in place. Now women's businesses 
are able to compete. But the program still has a ways to go.
    And so considering the 5-percent goal that has yet to be 
achieved, if a mid-sized program were to be implemented, how do 
you think it would affect the ability of women-owned small 
businesses to get contracts and meet the 5-percent goal?
    Ms. Dorfman. It would actually be devastating for our 
members simply because it has been actually 17 years since the 
goal has been put into place. The Federal Government has never 
met that. You have to understand, women-owned firms represent 
one-third of all businesses in the United States. The goal of 
5-percent can't even be met. The goal really should be, if we 
are playing fair, 30-percent. So it is very important that we 
make sure that women-owned firms and small businesses overall 
have access to these contracts and the goals are achieved.
    Ms. Chu. And how many women-owned firms are mid-sized? Are 
there examples of mid-sized women-owned firms that have been 
successful in receiving Federal contracts? And where is the 
critical need for women-owned businesses right now?
    Ms. Dorfman. At this point, what we are seeing is the 
critical need is making sure that the program is up and 
running, where they are accessing the contracts as it is. We 
have a number of different levels of firms, from the small to 
up to $30 million in revenues, that I have seen. We had done a 
survey last year. And what was interesting about the survey is 
that actually the larger mid-tier firms, when you looked at job 
creation, they would hire one person, where the smaller ones 
were poised to grow and they would commit to hire three to four 
people if they had the proper funding and the proper access to 
contracts.
    So I think you can see why I am really focused on making 
sure that the small businesses, as a whole, have access to the 
contracts and we meet those goals.
    Ms. Chu. You mentioned a way of assuring growth is to take 
caps off the contracting limits within the women-owned small 
business set-aside program. Can you expand on this? Would this 
include increasing the size limit of women-owned firms allowed 
to compete for the same contract and opening the field to 
small, mid, and large? And basically is there a way to improve 
the way that this program is implemented?
    Ms. Dorfman. Right. The caps were part of the original 
legislation where a women-owned firm contracting officer would 
set a contract aside for a women-owned firm and $3 million 
would be the largest contract you could have unless it was 
manufacturing, and then it would be $5 million. The problem 
with the caps is that it does not allow women-owned firms to 
grow their businesses, and it keeps them small. So that is why 
we are asking for those caps to be removed.
    Ms. Chu. Are there other ways to improve the implementation 
of this women procurement program?
    Ms. Dorfman. Absolutely. One of the things that we have 
seen is that the leaders--and I would say, you know, Congress 
and the executive branch have the oversight to ensure that the 
agencies meet their goals. And it would be very helpful if the 
agency heads were held accountable for not meeting their goals 
of women-owned firms and small businesses. And I think that is 
paramount because it starts at the top. If there is not a 
commitment from the Secretary, it is not going to happen.
    Ms. Chu. And one question for Mr. Frisbey. In this pilot 
program created by the bill, by Mr. Connolly's bill, small 
businesses will be excluded from participation if it was found 
that the rule of two is not satisfied. That is under this rule, 
where contractors have to set aside a contract requirement that 
says that if two or more small businesses are capable of 
performing the contract, then--but so therefore they couldn't 
compete. But there are small businesses that are able to win 
contracts in full and open competition with larger companies. 
So would small businesses lose contracting opportunities under 
this rule?
    Mr. Frisbey. Yes, ma'am. The rule of two is absolutely 
critical to small business contracting. It is one of the few 
things where we have a chance to--before the formal 
solicitation goes out, to go back and challenge the contracting 
officer and basically say, hey, wait a minute; here are two 
companies or here are three companies that are capable of 
handling this program as it is structured; and because of that, 
they are both small businesses or they are both HUBZone 
businesses or they are both women-owned businesses; and 
therefore this should be set-aside for it. So that rule of two 
is a critical element in giving us a chance to fight to try to 
get a part of those contracts, even though they are under the 
23 percent. And I just want to comment, one of the reasons that 
they don't get to the 23 percent is because there is absolutely 
no penalty. Okay, so what, I don't get the 23 percent. I don't 
get coffee this week, or whatever the--there is no attention. 
There is no focus or requirement to do that. A little bit of 
pressure that you guys are able to create, but there is no 
punitive action. It doesn't go against their reviews. It 
doesn't go against their performance. It is just one of those 
things that--it is kind of like I have got to do it.
    And that is one of the key reasons why that 23 percent 
doesn't get met at all levels, because there is no enforcement. 
And that is why--and I appreciate it. That is why the Small 
Business Administration, the national Small Business 
Administration is so opposed to this bill is simply because we 
see it just continuing to chip away at the 23 percent, rather 
than growing the 23 percent to 30 or 35 percent or 25 percent, 
as Mr. Graves suggested. It just chips away at the 23 percent. 
We would like to see that percentage increase to represent more 
of what small businesses in this country really represent.
    I am not sure, did I answer your question correctly?
    Ms. Chu. Yes. I yield back.
    Mr. Graves. They are going to call votes pretty quickly. So 
I want to try to accommodate Mrs. Ellmers and Ms. Clarke.
    Mrs. Ellmers. I just have a couple of quick questions. I 
have heard repeatedly that the 23 percent limit has not been 
hit. Where are we then? I mean how far away from that 23 
percent are we?
    Mr. Frisbey. We are 22.6 in total right now. That is why I 
brought up specifically the example of MOLLE because there is a 
$98 million contract that could be all small business. But for 
the contract officers, it is easier to administer one contract 
than----
    Mrs. Ellmers. Rather than----
    Mr. Frisbey [continuing]. Than five or four or three or 
anything else. So if I can get just one company, I have done my 
job. The contract is let, so be it, and move on.
    Mrs. Ellmers. Just streamline it and try to get it through. 
And again, there is a 5 percent for women-owned contracts. How 
far away are we on that?
    Ms. Dorfman. Well, I think at the last count, the SBA said 
we were about 4 percent. What we have to understand is that the 
data that has been out there has been flat over the years, so 
we don't know what is accurate. We did a study a few years 
back, and 2 years running, SAIC was the number one women-owned 
firm accessing contracts--not that they were a women-owned 
firm, but they were shown. So the number was skewed.
    And then last year also, the inspector general for the SBA 
came out and said that the error rate was about 96 percent in 
the data for the SBA. So we don't really know what the true 
data is. That is kind of what it is. And then when you take a 
look at the 23 percent, again, it doesn't include the 
exclusions which we calculated over the last 5 years as about 
$60 billion in lost opportunities for small businesses.
    Mr. Frisbey. I would usually say they are cooking the books 
on 10 percent.
    Mrs. Ellmers. Therefore, that is one of the issues that we 
need to really be looking at then, to make sure we are getting 
accurate data based on what is out there.
    The other issue--and I know we have addressed this 
considerably. For those small business owners who have 
performed so well at that level and they have basically grown 
into that mid-level size and now, unfortunately, they are 
competing with those much larger entities and they just simply 
can't compete, Ms. Speed, what would you say? What is an answer 
there for that? What can we be doing to help that situation?
    Ms. Speed. I think we should look at both pilots that Mr. 
Rogers and Mr. Connolly both have. They both are sound 
legislative vehicles for looking at how we grow business. But I 
also want to just talk--just one more point about the pilot 
that we really didn't get a chance to address, and that is, in 
the pilot and in the concept of it, the ability to grow; for 
the small companies, they can continue to bid up. That is 
something we did not talk about.
    But in terms of the larger ones and the mid-sized ones who 
are emerging, they don't bid down. So in effect if there is a 
contract award that goes out on the street, small businesses 
can still team and align themselves in all the ways that are 
under SBA's guidance and rules which we, I think, are hearing 
today should be applied to the mid-sized as well and the 
emerging firms. Then what we should be doing is allowing 
companies to continue to grow and bid up and not have the 
larger ones coming down, which is what we are seeing from the 
very large integrators.
    Mrs. Ellmers. And Mr. Yukins, you are the only one that 
hasn't commented. What would you say to that?
    Mr. Yukins. In terms of increasing opportunities?
    Mrs. Ellmers. Yes. Just in making sure that those companies 
that have moved their way up and now they are unfortunately 
lumped into that much larger group and are really incapable of 
competing with that larger entity, do you see solutions there 
that we can be approaching?
    Mr. Yukins. Yes. The Europeans have dealt with exactly this 
same question over the last few years. For internal political 
reasons, the Europeans can't have a category called ``small 
business'' that they give preference to. So what they did is 
they did a comprehensive review of their procurement rules and 
they said, What can we do to make life easier for small- and 
medium-sized businesses, not necessarily creating rigid 
preferences, but how can we facilitate their involvement in 
this marketplace? And those efforts are ongoing in Europe right 
now. We should do the same thing here. It is what the Obama 
administration is doing with his business breakthrough program. 
But expand that. Do a comprehensive review of the rules and 
figure out how do we make life easier for small- and medium-
sized businesses.
    Mrs. Ellmers. Thank you very much. I yield back the 
remainder of my time.
    Chairman Graves. With the Committee's information, I can 
tell you that the number is closer to 20 percent on small 
business contracts. The SBA, they get a little creative with 
the math to make the percentage look higher than it is.
    Mrs. Ellmers. The more accurate number is about 20 percent?
    Chairman Graves. Yes, absolutely. Ms. Clarke.
    Ms. Clarke. Thank you, Mr. Chairman. And thank you, Ranking 
Member Velazquez. I want to thank the panelists because this 
has been a very, very good discussion. I am not quite 
convinced, however, that there is not a need for a graduated 
process. When I think about the businesses in my district, 
particularly small businesses, and as they grow and they sort 
of hit the glass ceiling, I have found that they either get 
bought out or they die. And for small businesses like the ones 
that you are advocating for, what do you see as the remedy for 
that?
    I mean, certainly, Mr. Frisbey, if your business now gets 
to the point where it can no longer avail itself of the 
procurement opportunities as stimulated under an an 8a program 
or any other program, what would you suggest would be the next 
step for yourself? I want you to consider that. And then I want 
to put it out there for the rest of the panelists because it 
has been my experience that there hasn't been another rung on 
the ladder that enables a small business to really compete out 
there against some of these companies that are, you know, 
basically preeminent in the space.
    So I would like to hear some of your solutions or some of 
your ideas around how we bridge that gap, because it is 
significant and we--I don't think we should be blind to it, 
which is sort of where I have heard us going here. It is like 
small business, let's preserve our domain. But small businesses 
grow. And you reach that point where that growth either takes 
you where you need to go or it kills you on the vine. Let me 
end my comments there.
    Mr. Frisbey. Let me try to respond to your question, then. 
And one of the gentlemen said it earlier; yes, I would 
definitely like to grow. I must be missing something somewhere 
along the line because to me, it seems quite logical to have a 
second rung on the ladder called mid-tier that is above small 
businesses. Leave the percentage--increase it to 25 percent, 
but then set aside a second tier on the ladder for another 10 
percent and call it medium businesses. Why can't we do that? If 
that is an issue with the trade issues, then deal with it 
through the trade issues and negotiate it that way. It makes 
perfect--maybe I am missing something. But yes, I think there 
should be another rung on the ladder and I think that would be 
an appropriate way to do it.
    But my opposition is, because I have seen it happen so many 
times, the manipulation by large businesses coming down and 
chomping out another big chunk of the small business set-
asides, and that is exactly what is going to happen if this 
bill goes through, because every one of the large businesses is 
going to turn around and mentor their wife or their cousin or 
their son or whatever in a small business and they are going to 
get the small business set-aside.
    Ms. Speed. If I may also address your issue and your 
statement. And it is absolutely as you describe, as these 
businesses continue to grow, graduating from NAIS code they say 
is like falling off a cliff because there is no transition 
currently. And we believe that the pilot provides a venue, an 
opportunity. And what are the parameters again of the pilot? It 
allows you to gather the data. Currently there is no data on 
mid-sized companies, how many are out there. We know they are 
shrinking. But we can't even track how many actually graduate 
and survive to begin with.
    We have some sense of that through the CSIS study which 
showed that there were at least 2,700 still existing. And that 
is a far short number of how many small businesses you have 
that you would hope are able to continue growing within that 
space. And if they are not growing, then there are also some 
disincentives, we believe, that are in place that are 
preventing that.
    And I go back again to what Mr. Frisbey contends, that a 
number of businesses are spinning off and trying to remain 
small. They are doing all these things. The idea is not just to 
keep them in a category or a subcategory all their lives. They 
should eventually become prime contractors, which is what we 
are trying to suggest today; that when you get to that glass 
ceiling, there should be an opportunity for you to break 
through, along with all of the training and technical 
assistance that you can get based on where you were. You were 
getting it the day before. Now you are too large, and you can't 
get anything and you are expected to compete against the 
integrators.
    So we believe the pilot allows, first of all, to test it. 
Let's test and see what is going on with these mid-sized 
companies so that we can come back and make great sound policy 
decisions around the actual sizes that they should become.
    That is something that your Committee, I believe, Mr. 
Graves and Ms. Velazquez, can quite clearly easily do and we 
really are looking forward to how this moves forward with your 
assistance. And we are here to lend our support. Several of our 
MTA CEO Roundtable members are here and sitting behind me. They 
have been passing me notes to help me on technical questions. 
So I really thank you.
    Ms. Clarke. Ms. Dorfman, I know my time has run out; but, 
Mr. Chairman, I would be interested in a woman's perspective, 
if you would indulge us?
    Chairman Graves. Sure.
    Ms. Clarke. Ms. Dorfman.
    Ms. Dorfman. Sure. I agree there is an issue for the small 
businesses trying to jump into the next tier. What we have been 
hearing today is, it is not a formulated process that is going 
to protect small businesses. It really is a pilot program that 
doesn't have any parameters. Out of the GSA, there is no Small 
Business Administration involvement; there are no protections 
really for small businesses.
    What we see right now is if you use what we have for the 
Small Business Administration, they have parameters set that 
will protect small business interests, and we need to make sure 
that they are used and enforced. I think a big issue right now 
for those who are trying to make that leap is the bundling 
issue. And the bundling that happens is, you really have the 
set-asides for small businesses or you have the super-sized 
contract that a mid-tier cannot actually access. So if we can 
break apart those contracts and provide different sizes of 
contracts appropriately, I think that would answer all the 
questions, including Mr. Roberts with the DOD issue.
    Ms. Clarke. Thank you very much, Mr. Chairman. I yield 
back.
    Chairman Graves. Thank you all for participating in today's 
hearing. I appreciate the fact that we had a broad spectrum of 
opinions, obviously, represented in your testimony. It is going 
to help us better understand the challenges that are facing the 
smallest of our government contractors as well as those just 
emerging from the small business contracting firms.
    I ask unanimous consent that all members have 5 legislative 
days to submit statements and supporting materials for the 
record. Without objection, so ordered.
    [The information follows on page 74.]
    Chairman Graves. This hearing is adjourned. I thank you all 
for coming out very much.
    [Whereupon, at 2:35 p.m., the Committee was adjourned.]
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