[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
__________
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Small Business Committee Document Number 115-069
Available via the GPO Website: www.govinfo.gov
__________
U.S. GOVERNMENT PUBLISHING OFFICE
29-797 WASHINGTON : 2018
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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
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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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