[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]


  NO MAN'S LAND: MIDDLE-MARKET CHALLENGES FOR SMALL BUSINESS GRADUATES

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

                                 HEARING

                               BEFORE THE

               SUBCOMMITTEE ON CONTRACTING AND WORKFORCE

                                 OF THE

                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED FIFTEENTH CONGRESS

                             SECOND SESSION

                               __________

                              HEARING HELD
                             APRIL 26, 2018

                               __________
                               
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            Small Business Committee Document Number 115-069
             Available via the GPO Website: www.govinfo.gov             
           
             
                               __________
                               

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                   HOUSE COMMITTEE ON SMALL BUSINESS

                      STEVE CHABOT, Ohio, Chairman
                            STEVE KING, Iowa
                      BLAINE LUETKEMEYER, Missouri
                          DAVE BRAT, Virginia
             AUMUA AMATA COLEMAN RADEWAGEN, American Samoa
                        STEVE KNIGHT, California
                        TRENT KELLY, Mississippi
                             ROD BLUM, Iowa
                         JAMES COMER, Kentucky
                 JENNIFFER GONZALEZ-COLON, Puerto Rico
                    BRIAN FITZPATRICK, Pennsylvania
                         ROGER MARSHALL, Kansas
                      RALPH NORMAN, South Carolina
                           JOHN CURTIS, Utah
               NYDIA VELAZQUEZ, New York, Ranking Member
                       DWIGHT EVANS, Pennsylvania
                       STEPHANIE MURPHY, Florida
                        AL LAWSON, JR., Florida
                         YVETTE CLARK, New York
                          JUDY CHU, California
                       ALMA ADAMS, North Carolina
                      ADRIANO ESPAILLAT, New York
                        BRAD SCHNEIDER, Illinois
                                 VACANT

               Kevin Fitzpatrick, Majority Staff Director
      Jan Oliver, Majority Deputy Staff Director and Chief Counsel
                     Adam Minehardt, Staff Director
                            
                            
                            C O N T E N T S

                           OPENING STATEMENTS

                                                                   Page
Hon. Steve Knight................................................     1
Hon. Stephanie Murphy............................................     2

                               WITNESSES

Mr. Stephen P. Ramaley, Associate, Miles & Stockbridge, McLean, 
  VA.............................................................     4
Ms. Lisa Firestone, President & Chief Executive Officer, Managed 
  Care Advisors, Inc., Bethesda, MD..............................     6
Mr. Mehul Sanghani, Chief Executive Officer, Octo Consulting 
  Group, Reston, VA..............................................     8
Ms. Eminence N. Griffin, Counsel and Director of Federal 
  Procurement, Information Technology Alliance for Public Sector 
  (ITAPS), Information Technology Industry Council, Washington, 
  DC.............................................................    10

                                APPENDIX

Prepared Statements:
    Mr. Stephen P. Ramaley, Associate, Miles & Stockbridge, 
      McLean, VA.................................................    24
    Ms. Lisa Firestone, President & Chief Executive Officer, 
      Managed Care Advisors, Inc., Bethesda, MD..................    31
    Mr. Mehul Sanghani, Chief Executive Officer, Octo Consulting 
      Group, Reston, VA..........................................    36
    Ms. Eminence N. Griffin, Counsel and Director of Federal 
      Procurement, Information Technology Alliance for Public 
      Sector (ITAPS), Information Technology Industry Council, 
      Washington, DC.............................................    46
Questions for the Record:
    None.
Answers for the Record:
    None.
Additional Material for the Record:
    MTA - Mid-Tier Advocacy, Inc.................................    54

 
  NO MAN'S LAND: MIDDLE-MARKET CHALLENGES FOR SMALL BUSINESS GRADUATES

                              ----------                              


                        THURSDAY, APRIL 26, 2018

                  House of Representatives,
               Committee on Small Business,
         Subcommittee on Contracting and Workforce,
                                                    Washington, DC.
    The Subcommittee met, pursuant to call, at 10:22 a.m., in 
Room 2360, Rayburn House Office Building, Hon. Steve Knight 
[chairman of the Subcommittee] presiding.
    Present: Representatives Knight, Comer, Norman, Evans, 
Murphy, and Lawson.
    Chairman KNIGHT. This hearing is called to order.
    Again, I thank our witnesses. I look forward to your 
testimony.
    We are here today to continue examining the challenges 
facing advanced small or midsize businesses. To start, it is 
important to recognize the critical, yet undervalued, role 
midsize firms play in the national economy. Midsize firms are 
significant job creators and foster much needed competition for 
industry leaders. The benefits they bring to the economy are 
similarly applicable to Federal procurement systems.
    Unfortunately, midsize contractors, particularly emergent 
or newly graduated firms face a dilemma. They are on longer 
eligible to compete for small business government contracts, 
yet must compete against companies across the entire middle-
market spectrum, which can consist of companies many times 
their size, up to and including the titans of industry.
    Firms facing this daunting prospect end up considering the 
following choices: First, to compete in the open market against 
competitors in a different weight class. Secondly, to sell 
their companies to large firms, resulting in net job losses to 
the economy. Or third, to reiterate their business models to 
focus on subcontracting which inhibits growth. Or deliberately 
limit their progress so they remain small, and therefore, 
eligible for small business set-aside contracts.
    None of these options promote economic growth, spur job 
creation, or foster competition.
    Part of the problem that we have is little information 
about what happens after these companies are no longer 
considered small. Because there is no requirement to track the 
path of these formerly small firms, Congress cannot fully 
access how effective the Small Business Administration's 
contracting programs have been in preparing small business to 
engage in the open marketplace.
    In addition, Federal procurement strategies are evolving in 
ways that make competition increasingly difficult for small and 
emergent midsize firms. However, we begin this conversation 
with a clear understanding that our primary responsibility is 
to small businesses. We must take the greatest care to uphold 
and protect small businesses' ability to compete and succeed.
    I hope through the testimony of our witnesses that we 
discover ways to ensure the sustainability of small firms as 
they continue to mature without unduly harming existing small 
businesses.
    I now yield to the Ranking Member, Ms. Murphy, for her 
opening statement.
    Ms. MURPHY. Chairman Knight, thank you. Thank you for 
holding today's important hearing.
    You know, Congress has created numerous Federal lending 
programs, set asides, and tax preferences designed to help 
small businesses succeed. However, the advantages conferred by 
these programs have led to an ongoing debate about the proper 
definition of a small business and what small business size 
standards should be used to determine eligibility for these 
initiatives.
    Size classification is especially important for firms that 
seek SBA loans, technical assistance, and Federal contracts. 
And defining a small business has proven to be a challenging 
endeavor. While one definition may work for a business in one 
context, it may be unsuitable in another. For instance, what 
works for a manufacturing company in California might not be 
appropriate for a tech startup in Florida.
    On numerous occasions, the SBA has proposed a comprehensive 
revision of its size standards. However, it remains critical 
for policymakers to engage directly with stakeholders about any 
potential revisions and their impact on middle market 
businesses. That is, firms that have grown out of their small 
size status but are not considered large, billion dollar 
enterprises.
    This hearing gives us an opportunity to better understand 
how well small business size standards are working in practice, 
and the challenges that advanced small and midsize businesses 
are currently facing, especially as it relates to Federal 
procurement. For example, midsize businesses are too large to 
qualify for small business set-aside contracts; yet, they must 
compete on the full and open marketplace against billion dollar 
firms.
    Reports suggest that midsize firms have limited options. 
Those that forego in competing in full and open markets often 
settle for subcontracting opportunities or decide to sell their 
company at a devalued rate. Access to Federal contracting 
opportunities is critical for small and midsize firms and 
essential to job creation and economic growth.
    While increasing competition for Federal contracts is a 
bipartisan goal on this Committee, we must consider whether 
revisions to the small business definition will prove to be 
insufficiently inclusive or overly inclusive of midsize firms 
to the detriment of small businesses.
    On the one hand, advanced small and midsize firms that are 
excluded from the small business definition are often barred 
from participating in some small business contracting programs. 
On the other hand, if a size standard were to become overly 
inclusive, businesses that would otherwise be considered large 
would be able to compete in these programs, depriving small 
businesses of contracting opportunities.
    So today, we will hear from multiple industries that have 
been affected by the standards in place as of October 2017. I 
want to be clear that the purpose of today's hearing is not to 
advocate for one size standard over another, but rather to 
better understand the industry perspectives and ways in which 
we can encourage as much competition in the Federal marketplace 
as possible.
    I thank all the witnesses for their attendance and look 
forward to hearing your insight on this issue.
    Thank you, and I yield back.
    Chairman KNIGHT. Okay. Thank you very much.
    If Committee members have an opening statement prepared, I 
ask that they be submitted for the record.
    Now, I would like to take a moment to explain the timing. 
You have 5 minutes for your opening statement. When it goes 
yellow, that means you have got a minute, and when it gets red, 
start to round it up. Again, my apologies for being late.
    I would like to now formally introduce our witnesses.
    Our first witness is Mr. Stephen Ramaley. He is an 
experienced government contracts lawyer and a subject matter 
expert on Federal procurement matters. Mr. Ramaley has 
prosecuted and defended bid protests before the U.S. Court of 
Federal Claims, Executive Branch agencies, and the Government 
Accountability Office. We welcome you and look forward to your 
testimony.
    Our second witness is Ms. Lisa Firestone. Ms. Firestone is 
president owner of Managed Care Advisors, Inc., a woman-owned 
small business based in Bethesda, Maryland. Managed Care 
Advisors, or MCA, provides an array of healthcare consulting 
services to various public and private customers. Both the 
customer and Ms. Firestone have won a number of distinguished 
accolades in the past several years. Ms. Firestone is also the 
chair of the Board of Directors of Women Impacting Public 
Policy and will be testifying in that capacity today. Thank you 
very much for being here.
    Our third witness is Mr. Mehul Sanghani. I got it. Mr. 
Sanghani is the chief executive officer and founder of Octo 
Consulting Group based in Reston, Virginia. Octo Consulting 
delivers complex IT strategies and business transformation 
engagements for global 100 corporations and Federal Government 
agencies. Over the last decade, Mr. Sanghani has grown the firm 
from an 8(a) certified small business into a successful midsize 
IT consulting firm. We welcome you and look forward to your 
testimony.
    Now, I would like to yield to the Ranking Member to 
introduce Ms. Griffin.
    Ms. MURPHY. Thank you.
    It is my pleasure to introduce Ms. Eminence Northcutt 
Griffin. Ms. Griffin serves as the director of Federal 
Procurement and Counsel for the Information Technology Alliance 
for the Public Sector (ITAPS), a division of the Information 
Technology Industry Council where she works to develop policy 
and advance the interests of the IT sector as it relates to 
Federal procurement. Prior to joining ITAPS, Eminence spent 
more than 6 years as the procurement counsel on the House Small 
Business Committee, so welcome home. A proud Red Raider, 
Eminence, earned a Bachelor of Arts in History and Political 
Science from Texas Tech University and a JD from St. Mary's 
University School of Law. Welcome, Ms. Griffin, and thank you 
for testifying today.
    Chairman KNIGHT. Thank you very much.
    And now, Mr. Ramaley, you are recognized for 5 minutes.

      STATEMENTS OF STEPHEN P. RAMALEY, ASSOCIATE MILES & 
   STOCKBRIDGE; LISA FIRESTONE, PRESIDENT & CHIEF EXECUTIVE 
  OFFICER, MANAGED CARE ADVISORS INC.; MEHUL SANGHANI, CHIEF 
EXECUTIVE OFFICER; OCTO CONSULTING GROUP; EMINENCE N. GRIFFIN, 
    COUNSEL AND DIRECTOR OF FEDERAL PROCUREMENT INFORMATION 
  TECHNOLOGY ALLIANCE FOR PUBLIC SECTOR (ITAPS); INFORMATION 
                  TECHNOLOGY INDUSTRY COUNCIL

                STATEMENT OF STEPHEN P. RAMALEY

    Mr. RAMALEY. Good morning, Chair Knight, and Ranking Member 
Murphy. I want to thank you for the opportunity to testify on 
this important topic.
    My name, as Chair Knight indicated, is Steve Ramaley. I am 
an associate attorney in the Government Contracts Law practice 
group at Miles and Stockbridge, P.C. However, today I am not 
testifying on behalf of the firm or any of our clients; I am 
here on behalf of the 800-member Montgomery County, Maryland, 
Chamber of Commerce, and as an active member of its GovConNet 
Council. The council meets monthly to tackle Federal 
contracting issues.
    In the Federal contracting marketplace, as of 2018, there 
are approximately 1,700 medium or midsize companies denied by 
Bloomberg as firms with $25 million to $500 million in annual 
revenue. That compares to roughly $118,000 small businesses, 
and 110 vendors who are large with annual revenues in excess of 
$500 million. So midsize vendors account for only 1.5 percent 
of all vendors to the Federal Government. And actually, if you 
take that number down to exclude any midsizes that receive set-
aside dollars, that number shrinks to about 325 total vendors, 
which is only approximately 0.3 percent of all Federal 
contractors.
    So you stated the problem quite succinctly. As a small 
business becomes larger, it is inevitable that the business 
owners will face a choice--grow beyond the small business 
programs to compete with large companies, stay small, sell the 
business, or go out of business. Unfortunately, the Chamber's 
experience is that more and more firms are being forced to make 
those latter choices--stay small, sell, or go out of business. 
Graduated firms are having trouble competing against 
established larger companies.
    The SBA's size standards define a company's edibility for 
the small business programs. Currently, the highest revenue 
standard is $38.5 million, and is applicable to firms in 
industries such as financial services and aerospace 
engineering. A business in those industries cannot have more 
than $38.5 million in annual receipts averaged over the 
previous 3 years to qualify as small.
    In brainstorming how to help midsize companies compete, the 
Chamber's GovConNet Council, which is comprised of 
practitioners and business owners involved in government 
contracting, concluded that a major cause of the ``no man's 
land'' is that small firms are becoming large too quickly.
    Government contractors experience a unique pattern in their 
growth. Revenue growth can be mercurial, sometimes hovering in 
the single digits and then exploding over 2 or 3 years. This 
pattern of sudden growth is increasingly common because of the 
government's more frequent use of large contract vehicles under 
which contractors can be awarded huge task orders. It is not 
unusual for a contractor to win a single task order that on its 
own bumps the contractor out of the small business programs.
    So this leads me to the Chamber's first recommendation: 
change the SBA formula for small business eligibility. Our 
proposal is to allow companies to look back 5 years rather than 
3, and choose their lowest 3 years for purposes of calculating 
size eligibility. The Chamber's GovConNet Council believes that 
this change would give larger small businesses more runway to 
adjust to their rapid growth but would still protect the 
smaller businesses under the various SBA programs.
    So the rational behind this proposed change can be stated 
pretty simply: competitiveness takes time to build. Revenue is 
not an indicator of present competitiveness; it is an indicator 
of future competitiveness. Firms need time to recruit talented 
employees, develop their intellectual property, and build 
infrastructure and past performance to compete at the next 
level. Moving from a 3-year lookback to the lowest 3 in the 
last 5 would allow more time to adjust to the full and open 
marketplace.
    In addition to our lowest 3 in the last 5 proposal, the 
Chamber is offering another measure. We propose allowing 
companies to subtract independent research and development 
expenses from total revenue for size determination purposes. 
This change would support the government's initiative to 
stimulate technological and biomedical innovation and would 
allow companies to continue to pursue and develop new products 
and processes without penalty. Currently, firms who invest in 
R&D often do so at the expense of their present 
competitiveness. For firms that the costs were becoming large, 
every revenue dollar counts and must be brought to bear to help 
win the next contract award, which will maximize revenue 
streams to support that company while it transitions to full 
and open.
    This dynamic effectively discourages R&D investment. 
Allowing a firm to subtract its R&D expenses as defined by the 
IRS from its size receipts would not only support innovation, 
but it would also remove one barrier to small business 
contractors investing in their own futures.
    Let me wrap up this testimony by summarizing what the 
Chamber believes to be at stake here. Small businesses programs 
exist to ensure supplier diversity that spurs innovation and 
guards against supplier consolidation and noncompetitive 
pricing. And of course, as Chair Knight indicated, small 
businesses produce a lot of jobs. Perhaps the majority of 
American jobs. With our proposals, we want to facilitate 
success, however, not cause it. We recognize that each company 
must succeed on its own merit. However, without a greater 
number of firms crossing the ``no man's land'' to compete with 
large businesses, the Federal contractor ecosystem will suffer.
    We believe our proposals move us in the right direction, 
but no doubt, there are even more measures that could be taken. 
We look forward to working with this Subcommittee, and I 
sincerely thank you for your time, your attention to this 
matter, and for your invitation to participate today.
    Chairman KNIGHT. Thank you very much.
    Ms. Firestone, you are recognized for 5 minutes.

                  STATEMENT OF LISA FIRESTONE

    Ms. FIRESTONE. Good morning, Chair Knight, and Ranking 
Member Murphy.
    As you introduced me, I am Lisa Firestone, president and 
CEO of Managed Care Advisors. We are a health services company 
located in Bethesda, Maryland, and Lake Mary, Florida. I am 
testifying today as you said on behalf of Women Impacting 
Public Policy (WIPP), as chair of their Board of Directors. 
WIPP is a nonpartisan, public policy organization that 
advocates on behalf of women entrepreneurs.
    Let me give you a little bit of background on my company. 
We were established in 1997 and began as a boutique healthcare 
consulting company specializing in employee health benefits, 
managed care, and workers' compensation. Today, we are the 
leading provider of Federal workers' compensation case 
management services, currently operating in all 50 states and 
all U.S. territories. How we transformed from a four-person 
consulting company to a thriving Federal contractor with more 
than 120 employees has been long, difficult, and very 
fulfilling.
    In 2003, my company was asked to come and work on a 
congressionally-mandated study to assess the feasibility of 
applying industry best practices for managing work-related 
injuries and illnesses for employees who were covered under 
FECA. This initial introduction to Federal contracting was a 
turning point for my company. We identified a market with unmet 
demand, we designed a path forward for meeting that demand, and 
learned very quickly that we had a lot to learn about 
government contracting.
    In 2005, we were awarded our first government contract as 
part of a joint venture. Since winning our largest contract to 
date in 2007, which was $53 million, we have experienced 
double-digit growth year over year. Where double-digit growth 
has always been a source of pride, we are now facing the 
reality that if we have a year that exceeds 36 percent growth, 
that will take us from small to midsize, requiring us to 
reinvent ourselves in order to continue to grow and remain 
relevant in the Federal market.
    With that said, I feel my company is a poster child for the 
issue that we are discussing today. The size standard for our 
company is $15 million. We currently represent 16 Federal 
agencies with the average size of our contracts ranging from 
$1.5 million to $53 million, with annual task orders averaging 
about $1.2 million. It is not hard to see how a company like 
mine will, and can exceed the size standard relatively quickly.
    We are now at a crossroads. Our executive team has spent 
significant resources putting together a plan to survive in the 
Federal midsize world. I am loathe to restrict my growth to 
stay in the small business program. It runs counter to my 
entrepreneurial instincts, and it certainly is not good for the 
economy or the thousands of injured Federal employees who count 
on us every day to support their recovery and return to work.
    The reality is that there is, as everybody has said, there 
are limited choices for companies like mine. I acquire or I get 
acquired. I join forces with a large contractor as a 
subcontractor when they have existing contracting vehicles. Or 
I revamp my marketing sales strategy, including one important 
point--how am I going to maintain contracts that have been 
small business set asides in the past?
    It seems to me that the Federal government should seek to 
keep businesses like mine as contractors. We pound our 
technical and contracting expertise to fit the needs of Federal 
Government. We have the infrastructure and resources in place 
to support it, and we have very successful past performance.
    The topic of size standards and the great abyss between 
small and large is frequent discussion among the members of 
WIPP. On one hand, the Federal Government encourages us to 
grow, but on the other, policies restrict that growth. WIPP is 
a partner in the Montgomery County Chamber of Commerce Pathway 
to Growth Initiative as described by Mr. Ramaley, and as they 
said, these two modest proposals will give companies like mine 
greater opportunities for successful and sustained transition 
to midsize firms. WIPP represents companies of all sizes who 
are competing in the Federal market, and I do not believe that 
these changes we are proposing today will take away any 
opportunities from the smaller companies. If anything, these 
changes will provide great growth potential.
    I hope the Committee will also look at the NAICS code size 
review that the SBA is about to embark on. As I said, I have a 
$15 million size standard. While that might sound like a big 
number, it is not keeping up with the size of government 
contracts and task orders. I urge you to examine whether these 
SBA size standards will allow small businesses to compete for 
single and/or multiple award contracts (MACs) and become 
midsize contractors.
    Last year, Senators Ernst and Gillibrand championed a study 
that required SBA to analyze small business participation in 
multiple award contracts, and we look forward to seeing that.
    To conclude, women-owned businesses like mine have 
continued to grow and post impressive numbers. We are a strong 
economic force in the United States and increasingly in the 
world. More than 36 percent of all businesses are women-owned 
and are growing at 4 times the rate of male-owned businesses. 
In 2016, we created 8.9 million jobs and generated $1.6 
trillion in revenue. Despite this contribution, these 
businesses are still 21 percent less likely to get government 
contracts. Let's work together to make sure we reward growth 
and not stifle it. If we solve this problem, we will continue 
to create jobs, increase our contribution to the economy, and 
maintain a strong industrial base.
    Thank you so much for having me here and letting me 
represent women-owned businesses who have a voice in this 
important hearing.
    Chairman KNIGHT. Thank you very much.
    And Mr. Sanghani, you are recognized for 5 minutes.

                  STATEMENT OF MEHUL SANGHANI

    Mr. SANGHANI. Terrific. Good morning, Chairman Knight, 
Ranking Member Murphy, and members of the Subcommittee. Thank 
you for the invitation to appear today.
    My name is Mehul Sanghani, and I am the founder and chief 
executive officer of Octo Consulting Group, a nationally 
recognized and award-winning technology solutions and 
management consulting firm located in Northern Virginia. It is 
a privilege and an honor for me to share my views on how we can 
encourage entrepreneurship and growth amongst small and midsize 
contractors.
    Before I begin, let me state that my comments are my own 
and I am not speaking formally on behalf of my company.
    I founded Octo Consulting Group in 2006 with a focus on 
providing cutting-edge technology solutions and consulting 
services to the Federal Government. We grew from being a 
subcontractor to large prime contractor in our early days, to 
now what we feel is an award-winning firm that today employs 
over 400 employees and performs as a prime contractor on 90 
percent of its work for agencies all over the Federal 
Government.
    Aside from our hard work in innovation and technology, this 
growth was made possible by Octo's participation in set-aside 
programs like the 8(a) program. Now we are beginning to try to 
pass on what we have learned through the SBA Mentor-Protege 
program. Through these programs, I am acutely aware that many 
small businesses struggle to compete with large, multi-billion 
dollar companies once they outgrow their size status and lose 
small business protections. Once a small business has exceeded 
its primary size standard, which can be as low as $15 million 
in annual revenue for consulting services, it is no longer 
entitled to participate in small business programs and is then 
considered a mid-tier company competing against the largest 
businesses in the government contracting market. Mid-tier 
companies are no longer afforded the preferential protections 
enjoyed by small business government contractors. They instead 
must directly compete for prime contracts with these multi-
billion dollar firms, such as Lockheed Martin and General 
Dynamics. Worse still, mid-tier businesses are no longer 
attractive subcontracting partners because they cannot help 
these large, oftentimes billion dollar contractors meet their 
subcontracting quotes and targets for small business 
participation.
    Small businesses is on the verge of graduating from the 
program often choose between two choices--be acquired by a 
large business or attempt to compete with those large 
businesses. Should a small business choose to try to continue 
to grow and compete with those large businesses, certain policy 
changes would aid them in this endeavor.
    One, eliminate the trend towards quantitative competition's 
self-scoring based on the number or size of contracts a firm 
has been awarded. And you have seen that in a number of recent 
GWACs that have been awarded across the government.
    Incentivize mid-tier businesses to work together by 
requiring consideration of each team member's past performance.
    And, three, in multiple war contracts, require that small 
and recently graduated small businesses be able to compete for 
unrestricted task orders.
    In addition to these simple policy changes, I would urge 
you to reconsider a pilot program that was suggested in a bill 
called the Small Business Growth Act that created a program for 
set-aside contractors with fewer than 1,500 employees who 
otherwise do not qualify as a small business. The GSA would 
have been able to set aside contracts for these businesses when 
the contract was not otherwise set aside for small businesses. 
While I understand there is some skepticism for a new set-aside 
category, this program would be incredibly helpful to mid-tier 
companies or small businesses as they make that transition.
    So one, eliminate these quantitative competitions based on 
the number of size or size of contracts a firm has been 
awarded. And two, incentivize businesses. And then three, in 
multiple award contracts, require that these small businesses 
be able to compete.
    As the Committee is no doubt aware, billions of dollars in 
Federal contracts are now awarded through large, government-
wide contracts that are held by a smaller number of 
contractors. For example, in fiscal year 2017, some 6 billion 
in sales went through GWACs, or government-wide acquisition 
contracts administered by GSA. Award on such a vehicle can make 
or break a company and its future success. However, currently 
agencies assign point scores that account for the number of 
contracts a firm has performed, the overall size of those 
contracts, or whether those contracts were cost type or fixed 
price. Even the best mid-tier firms do not have the same number 
of contracts as the markets' multi-billion dollar industry 
leaders.
    To preserve competition, I would ask this Committee to 
consider specific legislature requiring that multiple award 
competitions not be based on mathematical self-scoring of the 
number of large contracts a firm has performed, but instead, 
that these contracts be accessible to mid-tier firms with 
agencies required to review the quality of the work these firms 
have performed.
    So along the lines of my second recommendation, it is 
common for mid-tier firms to join forces to compete with the 
scale of large businesses. However, many solicitations do not 
allow a prime contractor to benefit from the experience of its 
subcontractors. This is a huge disadvantage to those mid-tier 
companies who do not yet have the experience to compete alone 
against the industry leaders. To fix this issue, agencies 
should be required to consider the past performance experience 
and skills of both prime contractors and significant 
subcontractors, just like we do under the SBA Mentor-Protege 
program.
    Additionally, small and mid-tier businesses do not have 
very much prime contracting experiences, but solicitations will 
often refuse to consider an offer's past performance as a sub. 
This Committee should consider legislation that requires 
agencies to consider a firm's prior work as a subcontractor if 
it is relevant to the prime contract at issue.
    And then finally, as you know, small businesses that hold 
large, multiple war contracts are often not allowed to compete 
with large businesses and are frozen out when they grow out of 
the small business size status. To encourage competition and 
incentivize growth, I suggest that small businesses should be 
allowed to compete on both set-aside and full and open task 
orders under these large multiple award contracts. Further, 
once the small business graduates, it should be able to stay on 
the vehicle and compete on any full and open task orders. This 
small subtle change will give small businesses more 
opportunities even as they grow into mid-tier firms.
    In conclusion, I would like to commend this Committee for 
considering the plight of firms that graduate from the small 
business program. Mid-tier companies have much to offer the 
government contracts marketplace and should be afforded an 
opportunity to continue to grow. I look forward to your 
questions.
    Chairman KNIGHT. Thank you very much.
    And Ms. Griffin, you are now recognized for 5 minutes.

                STATEMENT OF EMINENCE N. GRIFFIN

    Ms. GRIFFIN. Thank you. Chairman Knight, Ranking Member 
Murphy, and members of the Committee, thank you for the 
opportunity to share our perspective on challenges that exist 
in the Federal marketplace for graduated small businesses.
    The IT Alliance for Public Sector represents approximately 
90 of the leading innovative government contractors in the IT 
market. The health of small businesses is important to our 
members as they utilize these firms not only as subcontractors 
but many of them sell their products to the government via 
small business resellers. As such, we understand some of the 
difficulties that graduated small businesses face as they seek 
continued participation in the marketplace, and we believe the 
answer lies in creating a more robust small business 
contracting program.
    As a result of the existing small business programs and 
goals, we have seen increased dollars awarded to small 
businesses and more of these firms graduating out of their 
size. While these are laudable achievements, we rarely look 
beyond the dollars awarded to determine whether we are growing 
healthier small businesses that have the tools to succeed in 
the full and open market once they graduate.
    Currently, only the 8(a) business development program 
monitors the contracts and growth of its participants. However, 
after a firm's 9 year term ends, the SBA ceases its tracking 
efforts. The SBA does not track whether small businesses can 
successfully compete in the marketplace after they outgrow 
their size standards. However, this information is needed in 
order to promote sustainable growth in small business 
participants and for the overall success of the programs 
themselves.
    Further, more could be done to ensure fair distribution of 
the contracting dollars among a variety of small firms. We have 
seen agencies set aside increasingly large percentages of their 
small business dollars to a limited number of NAICS codes, 
particularly in IT where the percentages are as high as 40 to 
60 percent at some agencies. This does not create a healthy 
industrial base and leaves limited funds and opportunities 
available for competition among other businesses, particularly 
those in the middle market.
    Also, large set asides have become increasingly common, and 
as a result, some small businesses are left out of the market 
while the awardees quickly outgrow their size standard without 
the ability to compete in the full and open market. This 
decreases contract opportunities for other businesses and 
reduces the ability to enhance the Nation's industrial and 
manufacturing base.
    While the set-aside process needs improvements, ITAPS 
recognizes the competitive marketplace is not perfect either. 
The process has become timely and costly, sometimes preventing 
businesses from competing with large IDIQs leaving firms 
shuttered out of the market for periods of 5 to 10 years. We 
need increased transparency into the process and onramps onto 
these contracts to help small and middle market businesses 
compete. Greater transparency is also needed through post-award 
debriefings to those offerors who lost the contracts to help 
them become more repetitive.
    In a report released earlier this year, Rand Corporation 
found that better debriefings could help the offeror understand 
why they lost and potentially prevent protests. Yet, even when 
a business wins a competition, obstacles remain. Though 
accelerated payments are helpful for businesses of all sizes, 
only small businesses are eligible to receive them. A permanent 
extension of faster payments as proposed in H.R. 5337, the 
Accelerated Payments for Small Businesses Act, is an easy way 
to cut some of the red tape out of the acquisition system.
    The Mentor-Protege program also provides an opportunity for 
healthy growth in small businesses as they open a vast array of 
learning opportunities in areas like cybersecurity and 
regulatory compliance. ITAPS believes these programs are vital 
in building sustainable firms, and middle market businesses 
have an important role to play in imparting first-hand 
knowledge on transitioning from small to middle market.
    Join ventures or teaming arrangements can also play a role 
when an acquisition is too big for a small business to fulfill 
alone. Yet, the fear of affiliation prevents small businesses 
from seizing these opportunities. As such, the rules governing 
affiliation should be simplified and modernized to more closely 
align to the business structures that have developed over the 
past 3 decades.
    Lastly, fraud and abuse continue to permeate the various 
small business programs, and as a result, small businesses and 
others are prevented from competing for contracts. Until 
agencies take real action against these bad actors, fraudulent 
actions will continue and businesses will lose opportunities to 
compete.
    ITAPS believes the recommendations set forth here and 
further discussed in my written testimony outline the steps 
needed to create a healthy and vibrant industrial base across 
businesses of all sizes.
    Members of the Committee, thank you for this opportunity to 
testify, and I would be happy to answer your questions.
    Chairman KNIGHT. Well, thank you very much.
    I have a few questions, but then I want to kind of roll 
down and get everybody's idea of this.
    Ms. Firestone, you said something that I think all of us 
took note of--plan to survive when you are doubling in growth. 
What is my plan to survive when my business is doing so well? 
And I think that that kind of hits at the heart of what small 
business is about. Small business is about making sure that 
your idea and your hard work is paying off, and paying off 
means I am probably growing. I am hiring more people. I am 
expanding and doing all those things. But then when you start 
to move out of small business and you might be leaving some of 
the contracts or the advantages of being a small business, how 
do I survive in the next step? That is something that should 
not be. Right? So that is not my question. That is just my 
statement.
    Ms. FIRESTONE. I agree.
    Chairman KNIGHT. So I guess my question is, you know, we 
talk about a small business or a small big or something like 
that. When you move into kind of a midsize arena, what are your 
advantages of doing, of being in that arena, and what are your 
advantages of maybe us saying you are a small business and then 
the cutoff is here for that certain industry, or you are a 
large business and you lose all the advantages of being in a 
small business category?
    Ms. FIRESTONE. Well, for us, you know, when I got into 
government contracting, it was something that I said, okay, 
here is a demand. And we started to grow. And, you know, your 
size standard looks pretty far off when you are starting with 
four people and you are like, yay, I just got $250,000 this 
year. So, you know, for us, as we continue to grow, it is not, 
you know, we learned government contracting. We learned the 
advantage of small businesses and small business set asides. 
And the reasons for it. Right? Nobody is handing you a 
contract. You have to win those contracts. You technically have 
to be very, very good, and sometimes I think you have to be 
better than the big companies because the perception of risk.
    So for us, as we are growing, you know, as I said, we are 
about 36--if we have another year--so we have been growing year 
over year anywhere from 30 percent, 20 percent, 15, 50 percent 
one year. If we have another year where we grow 36 percent, we 
are done in our size standard. And for us, you know, it is 
something where we have to be concerned not only about not 
competing on future small business awards, but all of the 
contracts that we have gotten in the past that are small 
business that may be up for recompete or may still have 3 years 
left on them. So what do we do about those customers; right? So 
that is a big problem.
    So I think, you know, looking at some of the things we 
looked at today, like the lowest 3 out of 5. If you are 
growing, you know, year over year, you can have a big year or 2 
big years and it allows you to grow a little bit and get closer 
to that size. There is a big gap between a $15 million company 
and the infrastructure you have and the ability to compete with 
a $100 or $500 million company. So I think looking at enabling 
us to stay within that size standard or raise the size 
standards so that we can compete with the $100 million, you 
know, or I, personally, our company, we are right now examining 
do we sell? Right? And if we look at that, the first question 
that people come in and ask is how many of your contracts are 
small business?
    Chairman KNIGHT. Well, when you start out a business, 
obviously, you are not looking at, boy, I could get this 
contract. I could do this.
    Ms. FIRESTONE. Right.
    Chairman KNIGHT. Your first thing is, how do I survive, and 
how do I, you know----
    Ms. FIRESTONE. Exactly. Make payroll.
    Chairman KNIGHT.--make payroll. But when you are selling, 
yes, somebody who is going to come in is going to say, okay, 
well, this actually becomes a liability for me if I am looking 
at all of the different things on your ledger.
    So my second question is, there are multiple award 
contracts, and this might be for Mr. Ramaley, that do allow 
streamline on ramping from small business contracts to the 
unrestricted contract. The General Services Administration 
comes to mind. Why has this common sense practice not been 
adopted across multiple award contracts?
    Mr. RAMALEY. It is true what you have just said. There are 
some onramps. We actually, I have been colloquially referring 
to them as up ramps. It is, you know, when a small business 
either recertifies or grows out of its size, they get moved up 
to the large business track. And the problem is it is not 
mandatory in the FAR. That is a permissive thing that you can 
set up and a CO might put that in a solicitation. I think Mr. 
Sanghani hit the nail on the head that making that more 
mandatory would be a good step. This is not something I have 
vetted with the chamber. This is my own personal opinion, but I 
have seen that really hurt the value of those multiple award 
contracts in an acquisition context and also incentivize people 
to not want to grow because they know they are not going to be 
able to use that vehicle anymore and they put all that B&P, the 
bid and proposal costs into obtaining that contract and then 
they cannot use it.
    And that sort of dovetails with the greater point that this 
increased use of MACs, multiple award contracts, I do not think 
that is going away. The government knows they can get a good 
value by doing that. It is sort of part and parcel to the 
bundling and consolidation discussion that this Committee I 
know has had. And we need to probably address the fact that 
that is not going away and come up with creative solutions to 
work within the confines of that paradigm. And so our proposals 
and the ones you have heard today I think help.
    Chairman KNIGHT. Thank you.
    And now I would like to yield time to the Ranking Member, 
Ms. Murphy.
    Ms. MURPHY. Thank you, Chairman.
    Ms. Griffin, in your written testimony you provided a 
number of recommendations to improve small business contracting 
programs, including developing and tracking metrics of small 
businesses and graduated small businesses that compete in the 
full and open marketplace. How can the Committee implement what 
you have suggested using the existing databases?
    Ms. GRIFFIN. So the Federal procurement database system is 
able to track each contractor through their D-U-N-S number and 
you can see what type of contracts they are getting, whether it 
is set aside. You can even filter down into the type of set 
aside, whether it be women-owned or small business, if it is a 
sole source. But you can also see how they are competing in the 
full and open competition. So if a company is relying solely on 
set asides, we can use that data to then look and see how we 
can transition them into full and open competitions, whether 
that be send them for increased training at small business 
development centers or women business centers. But the data is 
there; SBA just needs to pull it out. And they have which 
companies are enrolled in 8(a), which ones are enrolled in 
HUBZone. When the Women-Owned Small Business Certification 
Program is put in place, they will have that data, too. The one 
question will be service-disabled and solely small businesses 
that do not have to go through a certification process.
    Ms. MURPHY. So what factors other than the type of set 
aside and job creation stats do you think that we should track?
    Ms. GRIFFIN. I think revenue is very important. As you 
heard here today, revenue is what makes you either a small or a 
graduated small. And so that is not tracked. You can kind of 
look at it based on the contracts, but how their fiscal years 
are calculated, revenue is another important factor.
    Ms. MURPHY. Great.
    As you know, larger IDIQs and subcontracts have become more 
prevalent in government contracting. These opportunities are 
especially attractive for small and midsize businesses looking 
to expand and grow their revenues. What mechanisms currently 
exist for small and midsize businesses to win these 
opportunities, and how do you think they should be improved?
    Ms. GRIFFIN. Sorry; me? So I think that there are 
mechanisms that already exist in how a contract is frame that 
could provide better clarity to those that are competing, what 
they need to have. So lowest price technically acceptable, for 
instance. That is going to favor people that are able to lower 
their price. So if you move those awards to best value, mid-
tier, smaller businesses are able to compete more on the best 
value because they have that ability to provide better customer 
service or what have you.
    Ms. MURPHY. Great. Thanks.
    And then this question is open to the panel. As you know, 
there is no federally recognized definition of midsize, and a 
lack of empirical data tracking the trajectory of firms that 
graduate out of the small size standard. This means that we do 
not necessarily have a clear picture of the number of jobs that 
are created by these emergent small firms, and we do not know 
which industries are contributing to or hindering middle market 
growth or to the success or failure rate of these firms, et 
cetera. We just do not have the information. My office has 
frequently called upon the assistance of Grow Florida, and I do 
not know, Ms. Firestone, you said you are in Lake Mary, 
Florida, which is in my district. You might be aware of Grow 
Florida. It is basically a statewide economic development 
program focused on assisting second stage growth companies in 
Florida. But we rely on them for this type of data. Grow 
Florida is tracking all the information that I listed above, 
and it has been really instrumental in helping Central Florida 
identify ways to strengthen our entrepreneurial ecosystem.
    Can you elaborate on why it is critical for us to have 
access to this data at a national scale? And in what way would 
you suggest that we go about collecting it?
    Mr. SANGHANI. So I think one thing that is noteworthy, I am 
not sure if Mr. Ramaley made reference to it, but there have 
been some empirical studies that have taken a hard look at not 
just the definition of the midmarket and how we define a 
midsize firm, but also gaining access to information that is 
publicly available in some of the systems that Ms. Griffin 
talked about, in FPDS and other data sources that define the 
size and the scale of the market. When you look at it 
anecdotally, you know, and in terms of my own experience, this 
is a burgeoning area of the marketplace in terms of the 
services that are being delivered. If you look at the 
marketplace itself, it is a trillion dollar market. At the top, 
what have you seen? You have seen a tremendous amount of 
consolidation among some of these million dollar behemoths. The 
big are getting bigger in order to compete at a scale necessary 
to capture an even larger share of the marketplace.
    And then you have a ton of small businesses, you know, 
several hundred thousand that compete for what amounts to about 
20 percent of the remaining dollars. And then when we look at 
the mid-tier, I believe there are about 1,500 companies that 
represent about 25 to 500 million in size that are a 
significant component of that supply base. So I challenge the 
Committee in terms of when they look at this marketplace, they 
look at those trends, I challenge the Committee to look at any 
other component of the economy where you look at it in terms of 
your success and how that is tied to your survivability. I am 
so successful I may not be able to survive going forward. I do 
not know of many other components of our economy or industries 
that kind of have that conundrum.
    And so when you look at it from the perspective of the size 
of the market, you know, a trillion dollars, when you look at 
it from the perspective of what is good for the economy, what 
is good for the taxpayer, what is good for the jobs of 
businesses like ours, I do not think you can look at any of 
those dimensions and say that there is not room for policy to 
address this challenge going forward.
    So again, I will let the other folks on the Committee chime 
in, but I do believe there is ample data in some of these 
databases that exist publicly to allow you to not only get a 
snapshot, but really get a pulse for this issue. And I believe 
again, if when you look at it anecdotally relative to the sum 
of the issues and trends at the top of the marketplace, I think 
what you see is you see an industry that is heavily fragmented 
and you see an industry where you might be left if you do not 
look at this from a policy perspective with just 100 businesses 
that occupy 90 percent of that trillion dollar market, and 
across any of those dimensions, the economy, the taxpayer, the 
jobs, I cannot see that being beneficial.
    Ms. MURPHY. Thank you, Mr. Sanghani. And also, thank you to 
the witnesses.
    Mr. Chairman, I am really sorry but I have to excuse 
myself. But thank you all for being here.
    Chairman KNIGHT. Okay. We have heard from California. We 
have heard from Florida. We are going to hear from South 
Carolina. Mr. Norman, you are recognized.
    Mr. NORMAN. Thank you, panel, for taking the time to come.
    Mr. Sanghani, I am a small business owner. I run a real 
estate company. One of the things we try to do and do on a 
regular basis is get with our customers to ask, what can we do 
better? What can change? Does the SBA need to reconsider the 
size requirements and how that is determined in your opinion?
    Mr. SANGHANI. I absolutely do. And I believe Ms. Firestone 
made reference to the fact that there is, you know, perhaps 
some efforts underway to take a look at the size standards 
associated with that. The one thing I will say is, you know, 
from the SBA's perspective in terms of its mission, you know, 
they have a wide-ranging mission in support of a large 
community of small businesses. And you know, I think there is 
ample room for improvement. We have talked about it here from a 
policy perspective, and I will talk about the NAICS codes in a 
second. But, you know, they do not have a lot of resources 
sometimes to address those policy changes. So I did want to 
state that first and foremost.
    But when you look at these NAICS codes, and I believe 
Senator McCaskill took a hard look at this several years ago, 
you know, this is an outdated system in many ways for 
industrial classification. It is the best system that we have 
perhaps in terms of what legacy historically we have been 
looking at, but do I think that there is room for 
reconsideration of whether a system that was established, I 
believe, in the 1920s is appropriate for determining size? 
Absolutely. And do I think there is room for consideration of 
what I have talked about here from a policy perspective is an 
important component of the industrial base in terms of its 
contribution to that trillion dollar market and what is 
happening at the top? Absolutely. There should be an aggressive 
look at what is appropriate going forward.
    Mr. NORMAN. I guess as a follow-up, how would we get 
specific in implementing that? And this is for the panel. What 
do you suggest we do to have effective change and to put it in 
practice?
    Mr. RAMALEY. I can address that briefly. Our proposals deal 
with addressing a range of the problems caused by the current 
system. So currently, SBA is actually about to undergo their 5-
year review of their NAICS code standards, and I think we are 
all supportive of that review. And likely, that review will 
result in increasing of size standards for certain industries. 
Part of the problem that we have identified is not just where 
the point cutoff is. It is how fast companies are reaching it. 
It is the idea that they are reaching it so fast that they are 
not able to take that money and bring it to bear in their own 
competitiveness by investing and recruiting people. So our 
proposals are trying to address a slightly different problem 
than just the size standard being too low. Right? So what we 
proposed is instead of measuring companies over 3 years of 
their annual receipts, to measure them over 5 years but 
actually to choose the 3 lowest of the last 5 so that companies 
will be able to exclude sort of an outlier boom year and that 
boom may not actually really reflect their present 
competitiveness.
    We have also proposed a number of things like allowing 
certain deductions to their annual receipts, such as the R&D 
expenses, for example. Another group has proposed allowing 
folks to deduct subcontracting dollars from receipts. These are 
specific proposals aimed at trying to recognize what a 
company's true size is and true competitiveness is without 
throwing everybody and every dollar in the same bucket. Right? 
So.
    Ms. GRIFFIN. And I would also add, I think, I am not sure 
about the size standard changes that they are making, but I 
think generally the size standards do not reflect the current 
marketplace and how businesses lay out their business plans. I 
do not know many businesses that do a 3-year business plan. It 
is 5-year, 10-year projections, et cetera.
    And I would also say with regard to Mr. Sanghani's comment 
about the NAICS codes, the NAICS codes themselves, the various 
industry classifications, they were never meant to do size 
standards. They were meant for trade. And so we need to start 
looking at other ways to differentiate the sectors and 
industries because I think that is also causing a problem.
    Mr. NORMAN. Great.
    Ms. FIRESTONE. And I think from a small business 
standpoint, it is also a matter of business requirements are 
changing. I know you had a hearing on The Hill yesterday on 
cybersecurity. The requirements I have to meet and the 
requirements a large business have to meet are exactly the 
same. So I think as you look at the size, you also have to look 
at, you know, I have to invest a million dollars as a 
healthcare company in cybersecurity, but so does a multi-
billion dollar company. So as I look at the size and what we 
have invested over time, is it really realistic at a 15 million 
size standard to then take what we have invested and actually 
be able to fully utilize that?
    Mr. NORMAN. Great. I think I am out of time. I yield back 
to the Chairman.
    Chairman KNIGHT. Thank you very much.
    And I think that is a good point, Ms. Firestone. We look at 
some things that small business has to do that large business 
has to do on the same exact scale. If I have got 200 attorneys 
on staff and you have got you, because typically the owner of 
the business is the attorney, the payroll, the everything at 
some point during the business, you are looking at part of that 
now I have got to either hire out attorneys, I have got to 
figure out expertise, or I have got to hopefully draw from 
somebody inside my company that can help me with this. That 
does not always happen. So we have looked at that and we are 
trying to work on that. I think that that is a vital point.
    Okay. On to the great state of Pennsylvania, Mr. Evans.
    Mr. EVANS. Thank you, Mr. Chairman.
    Good morning. This morning I saw the timing release of the 
Philadelphia Federal Reserve Report on Diversity and Inclusion, 
and I want to take a moment to read from the letter of the 
President of the Federal Reserve of that district. He basically 
said my letter last year was the why. My letter this year is 
the how. Diversity and inclusion are not add-ons. What he also 
says is diversity and inclusion have to be deeply ingrained 
aspects of working culture. It needs to be so fully a part of 
what we do and who we are that it has its own muscle memory.
    I want to start off with that setting the tone for my 
questioning. It is no coincidence that we have two women 
testifying on this Committee. So I am going to start off with 
Ms. Griffin.
    You pointed out in your testimony that the only 8(a) 
business development program does continuous monitoring. Given 
your familiarity with this program from your work here as a 
staffer and now in the private sector, if we are writing 
legislation for other programs to perform the same type of 
monitoring and oversight, how would it differ, if at all?
    Ms. GRIFFIN. I do not think that it needs to differ. I 
think that the same type of growth that you want in the 8(a) 
firm you want in a woman-owned small business, you want in a 
service-disabled, you want in a HUBZone. And in the business 
opportunities that 8(a)s have, they have additional 
availability in partnerships and joint ventures that the other 
categories do not have. So it is a great program that has built 
sustainable businesses like my colleague here. So I think the 
continuous tracking has helped them in their ability to grow.
    Mr. EVANS. Ms. Firestone, your business is located inside 
the beltway in nearby Montgomery County, Maryland. Apparently, 
it has been able to prosper. I represent Montgomery County, 
Pennsylvania, just outside Philadelphia. Could you address the 
role that a small business geographically might play in getting 
contracts or even being aware if that possibility exists?
    Ms. FIRESTONE. Getting Federal contracts?
    Mr. EVANS. Yes.
    Ms. FIRESTONE. You know, with me----
    Mr. EVANS. The location.
    Ms. FIRESTONE. Right. I am located right outside the 
beltway.
    Mr. EVANS. Right.
    Ms. FIRESTONE. And you know, obviously, being that close to 
the Nation's capital, you know, you would think that is how I 
got into government contracting. But I think the real reason I 
got into government contracting was my technical knowledge in 
the past. So that is how I actually got in. Somebody called me 
because they knew I was an expert in case management. However, 
representing Women Impacting Public Policy, being within the 
beltway has helped being close to the District of Columbia and 
to the seat of government, but we represent women all over the 
country. And I think the key to that is SBA. It is Women 
Impacting Public Policy. It is the Montgomery County Chamber. 
It is people that are advocating on behalf of women and other 
minorities, and really educate us on how do we get into Federal 
procurement? Why do we get into Federal procurement? So I do 
not think it is a just around the beltway issue. As a matter of 
fact, WIPP is growing regionally at an expanding rate for that 
reason, to make sure that we are representative of the entire 
country and all the products and service they have to offer.
    Mr. EVANS. I do not want to leave out the two gentlemen. 
Any reaction to what you have just heard? I only have like a 
minute left.
    Mr. RAMALEY. Sure. I will be brief.
    I think the need for additional outreach outside the 
beltway is something that there is a consensus behind. SBA has 
been doing that through the PTACs and other various mechanisms 
that they have sprinkled throughout the country to let people 
know about Federal contracting opportunities. Those efforts 
could always be strengthened. And I think you would see real 
returns on it because there is a skew towards the beltway. And 
that does not need to happen, particularly in 2018. It is a 
global economy. Lots of online businesses can even survive with 
the Federal Government as their customer. So looking elsewhere 
would be beneficial, I think.
    Mr. SANGHANI. I totally concur. I think one of the things 
in addition to outreach I think is where are the buying centers 
associated with that industrial base? Our firm has employees in 
Boston, Atlanta, San Antonio as points of presence. And these 
are all major buying centers. I have been up to the Naval 
Supply Center up in Philadelphia outside your district. And so, 
I mean, it really comes down to these buying centers and their 
center of gravity and their ability to not only award contracts 
but award contracts that support the industrial base just 
outside their door.
    Ms. FIRESTONE. Just to add to that, our contract, living in 
the environment we do, we work in now, we have employees in 30 
states. So we are really being able to reach out using 
technology.
    Mr. EVANS. Thank you, Mr. Chairman. I yield back the 
balance of my time.
    Chairman KNIGHT. Thank you very much.
    And Mr. Comer, you are recognized for 5 minutes.
    Mr. COMER. Thank you, Mr. Chairman. And welcome to the 
Small Business Committee.
    My first question is for Mr. Ramaley. Did I get that right?
    Mr. RAMALEY. Ramaley, but do not worry about it.
    Mr. COMER. Ramaley. Where I am from we mispronounce 
everything.
    Mr. RAMALEY. That is fine.
    Mr. COMER. Regarding your proposal to subtract--if somebody 
has asked this question I apologize. But regarding your 
proposal to subtract research and development costs from the 
revenue total when calculating size, how much do firms 
typically spend on R&D as a percentage or dollar amount of 
their total budget?
    Mr. RAMALEY. It is a great question. It is actually I think 
what motivated our proposal in some sense because the answer is 
right now not a lot. Not a lot is spent by smalls. And that is 
what we are trying to change a little bit, our perception, and 
this is admittedly our perception, there is not a lot of data 
out there on this subject, but folks do not want to spend that 
money because they need it now. They need to be positioned to 
survive once they go large, and that means every dollar that 
comes in needs to be invested in present or near future 
competitiveness and that means recruitment. That means B&P, bid 
and proposal costs. So we wanted to sort of piggyback off an 
already stated objective of the Federal Government to encourage 
innovation, encourage research and development, but not 
continue to di incentivize it by punishing firms who spend 
dollars there.
    Mr. COMER. Okay. I am going to attempt this.
    Mr. SANGHANI. Sanghani.
    Mr. COMER. Thank you. That is what I was going to say.
    Mr. SANGHANI. That is right.
    Mr. COMER. Yeah. You mentioned that the past performance 
experience and skills of both prime and significant 
subcontractors should be considered. What do you mean by 
``significant'' contractors?
    Mr. SANGHANI. Well, I think if you have--and again, I think 
in order to be able to compete against some of the firms that I 
have described, I think you kind of have to stand on each 
other's shoulders to be able to compete at that level. And so I 
think there are different definitions of what could be 
considered a significant subcontractor. But from my 
perspective, anyone performing at least 20 percent of the work 
on a contract, 20 to 25 percent of the work on a contract I 
think should be deemed a significant subcontractor. You know, 
there again, and I think just to follow up on what Mr. Ramaley 
said when we were talking about NAICS codes, I think when you 
look at it from the perspective of, you know, are NAICS codes 
the best way of approaching this, or can you look at employee 
count as ways to define what is small going forward, I think at 
the end of the day, you know, when you look at it through the 
lens of job creation, you know, that may be another way of 
looking at it. And so there again, if you have firms that are 
employing, in my case, several hundred, you know, 400 
employees, but you are able to combine forces to be considered 
with another company that is of that size. I think you are able 
to compete on a more head-to-head basis with some of these 
companies.
    And lastly, when you are looking at it from the perspective 
of innovation, are you going to be getting innovation from the 
large behemoths or are you going to be getting innovation from 
midsize and small businesses? And I think that ties to Mr. 
Ramaley's recommendation on the R&D side as well.
    Mr. COMER. Right. And one of the biggest complaints that I 
receive, especially with subcontractors trying to bid on 
governmental projects, big projects in the congressional 
district is the definition of what is a small business? And I 
know that is one of the topics of this Committee hearing.
    This question is for the entire panel. Do you believe that 
we need to change the way the SBA determines its size 
standards?
    Ms. GRIFFIN. Yes.
    Ms. FIRESTONE. Yes.
    Mr. RAMALEY. Yes.
    Mr. COMER. What would be a better definition? What would be 
a better criteria for that?
    Mr. RAMALEY. Well, we have proposed, the Chamber of 
Commerce from Montgomery County, Maryland, has proposed 
changing the mathematical calculation for how you determine 
annual receipts. So we are staying within the paradigm of using 
annual revenue as the basis for calculation; right? But 
currently, it is an average of the firm's past 3 years of 
receipts. And we are suggesting that we extend that to no 
longer be such a narrow period of time. The way businesses grow 
these days in the Federal marketplace, it is a lot of up and 
down, particularly a lot of up for a successful firm, and it 
will kick them out, it will slingshot them literally out of the 
small business programs into the full and open environment too 
quickly. So by extending the time period of measurement, you 
get a truly, more accurate view of their true competitiveness.
    Ms. FIRESTONE. I am going to give you a realistic example 
because I sat and cranked the numbers yesterday on my firm. So 
as I said in my testimony, if I grow 36 percent in another 
year, I am done at a $15 million size standard. Right? But if 
you can take the lower--and we have grown year over year, but 
obviously, the bigger you are, the more you are able to grow. 
If we had the lowest 3 years of 5, it would buy me at least 3 
more years and allow me to grow enough and to get that 
infrastructure in place enough to then compete in what is now a 
midsize market, or a large market with people who are in the 
$100, $200, $500 million range. So as I think they need to look 
at the size standards to see if they really meet today's 
businesses and what you are buying, I think that is going to 
take a little bit of time to do, but this other proposal, I 
think from a realistic business owner sitting here today could 
help just a tremendous cross section of people. Again, because 
business is up and down, too. Right? We work for Department of 
Commerce. We have a census coming up and we are dealing with 
something that may be a 1 year just huge blip. And if it was 
not my company and somebody else's, that would immediate knock 
them out of a program when the next year they are back down to 
maybe a million dollars.
    Mr. SANGHANI. The other thing I offer is what I offered 
before, is revenue. And it is a little bit of a counter to my 
colleagues here. Is revenue the best indicator of size? It is 
certainly, you know, one metric or things like employee 
headcount, job creation, are they better metrics and rubrics to 
look at going forward? And I think that is one thing that 
should be strongly looked at relative to how you define and how 
you define mid.
    The last thing I will point out that should be up for 
consideration is allowing businesses some sort of transition. 
You know, and there again, if you look at my recommendation 
there, what had bipartisan support I believe in 2011, that 
Small Business Growth Act, you know, measure, and I think that 
was looking at a pilot program that looked at midsize 
businesses or set asides for businesses that had 1,500 
employees or less. I think you could, by implementing a pilot 
program, look at the success or lack of success empirically of 
that program and then decide what makes the most sense from a 
policy perspective. So try before you implement.
    Mr. COMER. Great.
    Ms. GRIFFIN. I would just add one thing. Sorry, Mr. 
Chairman. Is perhaps we need to also start looking at whether 
government contracting itself needs its own designation because 
the other small businesses that do not participate in the 
government contracting marketplace can bring down the overall 
size standard.
    Mr. COMER. That is a good idea.
    Sorry I went over time, Mr. Chairman. I yield back. Thank 
you all very much.
    Chairman KNIGHT. Thanks. So I encourage you to be very 
engaged with us. We do not do hearings to hear you; we do 
hearings to hear from you and then engage in something that can 
help. So that is what we are trying to do. That is what we are 
trying to measure here.
    If I go back to Mr. Sanghani--or I am sorry, Mr. Ramaley 
said 3 out of 5 years. Is that something that we might want to 
revisit again at some point and say now it has got to be 3 out 
of 7? Or is that something that you think would stand the test 
of time? In other words, you know, what happened in the 1920s 
does not happen today very much. So things have to evolve. But 
if we are looking at something and we are saying, look, a small 
business is now being bumped into a midsize business and either 
being forced to sell or go out of business or deny contracts, 
because I am sure that is probably an option, too, that you 
might say I cannot take that contract, is that something that 
we might want to revisit at some point, too?
    Mr. RAMALEY. Absolutely. Our perspective is that 3 out of 
7, straight 5, 3 out of 5, any of those options are better than 
the status quo. We have landed on 3 out of 5 for now for a 
couple reasons. One, most contracts last 5 years; right? So 
there is kind of a neat--well, one contract cycle, if you have 
got 5 years of receipts under your belt, if after that one 
contract cycle you are truly large, that is probably the right 
time for you to be forceful and open.
    Chairman KNIGHT. Right.
    Mr. RAMALEY. We do not want to be overbroad here because we 
are genuinely concerned for the smallest of the smalls, and 
folks who may perceive that, oh, great. Now that more 
businesses are going to be qualified as small, I may have 
enhanced competition. So we thought 3 out of 5 was a good 
balance there because, remember, the purpose of this change, or 
at least for our understanding, is that present competiveness 
is not determined by present revenue. Right? So giving folks a 
little bit extra runway should not really negatively affect the 
smallest smalls because those folk really were not 
significantly more competitive anyway. They were being 
graduated prematurely.
    Our other perception for that, our other understanding was 
really that the more smalls there are, the more likely COs will 
be able to set aside contracts because the rule of two, which 
you guys are familiar with, will be satisfied more often. So 
the smallest of the smalls will have more opportunities in 
theory to compete if these changes were enacted, so.
    Chairman KNIGHT. Well, let's continue to have that 
discussion and kind of figure out the balancing act because I 
do not want, you know, Ms. Firestone, when she is starting her 
business years ago and she is the smallest of the small trying 
to get into the marketplace, then be overwhelmed by Ms. 
Firestone of 2018 because now she cannot compete. And so we 
kind of have to have that balancing act of if you are a small 
business, we want you to be able to compete in the small 
business arena. But if you are a big, big small business and 
now you are competing with these small businesses, you have 
grown out.
    Ms. FIRESTONE. I think the one thing to consider is that as 
a small business, when I started out or got in government, I 
would not be bidding on what I am bidding on today.
    Chairman KNIGHT. Sure.
    Ms. FIRESTONE. So I think that is a consideration. The 
other thing is that there are a lot of businesses like mine and 
I think like yours because we started small and we climbed the 
ladder and with people like WIPP, it is in our DNA to help the 
smaller businesses. So we have the small-small Mentor-Protege 
program, which I think is helping that. So I think that is a 
consideration as well. I think it really will help the small-
smalls to have those of us who have been through it continue to 
help them.
    Mr. SANGHANI. There again, I think there is, as Ms. 
Firestone noted, you bid on different things and I think it is 
certainly at the discretion of the agency, procurement 
executives, the COs to look at, okay, this particular contract 
as we noted, if you do create a pilot program or a specific 
midsize category, this particular requirement is better suited 
to that midsize. We are going to set just that particular 
requirement aside. And then these other requirements are better 
suited to firms that are 15 million and below and we are going 
to set that one aside for the smallest of the smalls. There 
again, I think the benefit of having a program that perhaps is 
even a pilot program that examines that is it will give you the 
data and allow you to hear from constituents on what works and 
what does not work.
    Chairman KNIGHT. Well, I agree. And I want to thank Ms. 
Griffin for bringing up a couple words that always hit us, and 
that is fraud and abuse and that is not doing the right thing. 
And the business that is doing the right thing is now incurring 
all of these costs because they are doing the right thing. And 
somebody who is swooping in is not. And for them to get a 
contract or for them to be able to build their business under 
poor practices or illegal activity is something we should 
always be concerned in, not just in small business but across 
the board. And I deal with an awful lot of small businesses, 
especially in California. Our roofing industry out there is an 
industry that I work with almost weekly of the poor behavior 
that happens in that industry. And then you have got the 
business owner that is trying to make it and trying to win 
contracts and trying to do the right thing is now being 
penalized. So, but that is a balancing act, or that is a hard 
deal, too. And you know that. How many folks do we have out 
there enforcing? How much enforcement do we do? How much 
penalties are levied? All of those types of things are 
difficult. So that is a tough one.
    I do believe there is going to be legislation out of this. 
I do believe that we are going to start to see some ground 
swell. This is something that is talked about quite a bit. It 
is talked about because small businesses are the backbone of 
the economy, and we do not want you to go out of business. We 
want you to thrive.
    So, again, I thank you for your time today. I thank you for 
your patience. I pride myself on punctuality, and I was not 
very today.
    So, I ask unanimous consent that members have 5 legislative 
days to submit statements and supporting materials for the 
record.
    Without objection, so ordered.
    The hearing is now adjourned.
    [Whereupon, at 1:33 p.m., the Subcommittee was adjourned.]
                           
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