Small Business: Expectations of Firms in SBA's 8(a) Program Are Not Being
Met (Testimony, 07/20/2000, GAO/T-RCED-00-261).

The Small Business Administration's 8(a) program--the federal
government's primary vehicle for developing small businesses owned by
socially and economically disadvantaged persons--is not meeting client
expectations. First, SBA's efforts are not aligned with the needs or
expectations of 8(a) firms. Firms want SBA to provide more assistance
that will help them obtain contracts. SBA has stressed business
management skills, even though most firms joined the program to obtain
8(a) contracts. This misalignment of SBA efforts and 8(a) firms' needs
has been further compounded by the fact that most 8(a) contract dollars
go to a small number of firms. Second, SBA has no way to tell how well
the 8(a) program is working or know the full extent of business
development assistance provided to firms. SBA is unable to measure the
8(a) program's performance in such basic areas as the level of training
provided, whether such training matched firms' needs, or even the amount
of 8(a) contracts the firms obtained. This testimony summarizes the July
2000 reports, GAO/RCED-00-196 and GAO/RCED-00-197.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-RCED-00-261
     TITLE:  Small Business: Expectations of Firms in SBA's 8(a)
	     Program Are Not Being Met
      DATE:  07/20/2000
   SUBJECT:  Small business assistance
	     Minority business assistance
	     Program evaluation
	     Technical assistance
	     Government contracts
	     Performance measures
IDENTIFIER:  SBA Business Assessment Tool Program
	     SBA 8(a) Program
	     SBA 8(a) Business Development Mentor Protege Program

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GAO/T-RCED-00-261

Mr. Chairman and Members of the Committee:

We are here today to discuss our reviews of the Small Business
Administration's (SBA) 8(a) program. The 8(a) program is one of the federal
government's primary vehicles for developing small businesses owned by
socially and economically disadvantaged individuals. Firms in the program
are eligible for contracts that federal agencies set aside for 8(a) firms
and may receive technical assistance and management training from SBA. In
the 8(a) program, SBA has to consider the needs of 8(a) firms seeking to
obtain federal contracts that may help their small business succeed along
with the needs of federal agencies seeking to maximize their procurement
dollars. In fiscal year 1999, about 6,000 small businesses participated in
the program, and $6.2 billion was awarded in 8(a) contracts.

Our testimony is based on two reports, prepared at your request, that are
being released today--one on the overall focus of the program and one
addressing the 8(a) information system. We would like to highlight two main
points that our reports make about the 8(a) program.

   * First, SBA's efforts are not aligned with the needs or expectations of
     8(a) firms. SBA has never surveyed its customers--the 8(a) firms--in a
     meaningful way to determine what experience they have or what their
     needs are. We surveyed 1,200 firms participating in the 8(a) program
     and found that firms want SBA to provide them with more assistance that
     will help them obtain contracts. Firms did not place a high priority on
     learning to manage a business because a large majority of the firms had
     owners with over 10 years' experience managing a business. In providing
     assistance, we found that SBA has emphasized business management
     skills, even though most firms joined the program to obtain 8(a)
     contracts. This misalignment of SBA's efforts and the needs of 8(a)
     firms has been further compounded by the fact that most 8(a) contract
     dollars go to a small number of firms. We recommended that SBA take a
     number of actions, including periodically surveying 8(a) firms, to
     better meet the needs of the firms in the program. SBA agreed with our
     recommendations.

   * Second, SBA has no way to tell how well the 8(a) program is working.
     Almost a decade ago, we first reported that the agency did not know the
     full extent of business development assistance provided for firms. Yet,
     SBA still does not have a tracking system in place. SBA did pilot a
     Business Assessment Tool in 1999 that would evaluate firm's business
     development needs, but at the time of our review, agency officials were
     still evaluating the results of the pilot. Changes in the contracting
     process have undermined the accuracy of SBA's contracting data. As a
     result, SBA lacks the ability to measure the 8(a) program's performance
     in such basic areas as determining the level of training provided,
     whether that training matched firms' needs, or even the amount of 8(a)
     contracts that firms obtained. We recommended, several steps that SBA
     agreed it should take to ensure that it collects data on appropriate
     performance measures.

Background

SBA's mission is to maintain and strengthen the nation's economy by aiding,
counseling, assisting, and protecting the interests of small business and by
helping businesses and families recover from natural disasters. SBA's new
budget authority for fiscal year 2000 is $886 million. SBA administers small
business programs such as the 7(a) loan program, which provides loan
guarantees to small business owners unable to secure financing on reasonable
terms through normal lending channels, and the 8(a) program, through which
qualified firms are eligible for federal contract set-asides. SBA also
provides small businesses with assistance through the agency's partnerships
and business centers. SBA's disaster loan program offers financial
assistance to businesses and families trying to rebuild in the aftermath of
a disaster.

The Small Business Act, as amended, authorizes the 8(a) program. The purpose
of the program is to help eligible small socially and economically
disadvantaged businesses compete in the American economy through business
development activities. Toward this end, the Congress made three major
legislative attempts-in 1978, 1980, and 1988-to improve SBA's administration
of the 8(a) program and to emphasize its business development aspects. The
Congress enacted the 1988 act and subsequent amendments partly because the
program was not developing firms in the program into viable businesses. To
remedy this and other problems, the 1988 act made a number of changes to
improve the 8(a) program's organization and participation standards,
business development activities, and overall management.

To be certified by SBA for participation in the 8(a) program, applicants
must show that their firm is owned by socially and economically
disadvantaged individuals, meets SBA's small-business-size standards, and
has a reasonable potential for success. Firms in the program are eligible
for contracts that federal agencies set aside for 8(a) firms. However, 8(a)
firms are not guaranteed success in obtaining contracts. According to 8(a)
program regulations, firms may also receive SBA's business development
assistance, such as contract support, financial assistance, training in
developing business strategies to enhance a firm's ability to compete for
contracts, training in transitional business planning, and assistance in
forming joint ventures with other firms. The firms' 9-year program
participation is divided into two stages-a developmental stage covering
years 1 through 4, and a transitional stage covering years 5 through 9.
During the transitional years, firms are required to meet certain non-8(a)
business contract levels in an effort to ensure that firms do not develop an
unreasonable reliance on the program.

SBA's Efforts Are Not Aligned With Firms' Needs and Expectations

Although the purpose of the 8(a) program is to provide business development
to assist eligible small disadvantaged firms compete in the American
economy, SBA has never surveyed its customers--the 8(a) firms--in a
meaningful way to determine what experience they have or what their needs
are. We surveyed 1,200 firms participating in the 8(a) program and found
that firms want SBA to provide them with more assistance that will help them
obtain contracts. Firms did not place a high priority on learning to manage
a business because a large majority of the firms had owners with over 10
years' experience in managing a business. Yet, in providing assistance, we
found that SBA has emphasized business management skills, even though most
firms joined the program to obtain 8(a) contracts and were more satisfied
with the program if they received a contract. This misalignment of SBA's
efforts and the needs of 8(a) firms has been further compounded by the fact
that most 8(a) contract dollars go to a small number of firms.

Few Firms Join to Learn How to Manage a Business,

but SBA Emphasizes Management Training

According to our survey data, most firms would like to see SBA place a
greater emphasis on increasing 8(a) contract opportunities. For example, 90
percent of those surveyed want SBA to place a high priority on increasing
efforts to link 8(a) firms with specific federal program managers. Over 80
percent would like SBA to make sure that contacts at federal agencies are
familiar with the program. Furthermore, 83 percent of the survey respondents
want SBA to increase the number of ways the agency informs 8(a) firms about
contract opportunities.

On the other hand, our survey results showed that only 22 percent of the
firms considered learning more about managing a business to be a major
reason for joining the 8(a) program. One reason why firms did not place a
higher priority on learning to manage a business is that a large majority of
8(a) firms already had substantial business experience. As shown in figure
1, 71 percent of the firms had owners with over 10 years' experience
managing their current 8(a) firm and other companies. Furthermore, over 50
percent of the firms we surveyed were in business 5 years or more before
joining the program. One respondent wrote in his survey that his company had
been in business 12 years before being certified as an 8(a) firm. Another
respondent wrote that he had over 20 years' business experience and just
needed help finding contracting opportunities, which he had not yet received
from his local SBA office.

Figure 1: Owners' Experience Managing Current 8(a) Firms and Other Companies

Source: GAO's survey of 8(a) firms.

SBA, however, has emphasized business management skills instead of the
contracting opportunities and related training that firms want. For example,
since fiscal year 1996, SBA has devoted 40 to 50 percent of its $2.6 million
8(a) training budget to executive education for 8(a) firms. A senior SBA
program adviser estimated that about 10 percent of the 8(a) firms have had
their executives participate in this training, which focuses on developing
the skills of an 8(a) firm's president or chief executive officer. The
remaining training resources are divided among contracts with various
universities and other providers. The 8(a) Business Development
Mentor-Protï¿½gï¿½ Program, which encourages private-sector relationships with
mentors, is designed to help 8(a) firms compete more successfully for
contracts through assistance, such as financial, technical, and management
assistance provided by their mentors. Yet, this program also serves a
limited number of firms. As of April 2000, SBA only had 40 mentor-protï¿½gï¿½
agreements in place.

Firms Join the Program Primarily to Obtain Contracts,

and Their Satisfaction Is Tied to Receiving Contracts

Although SBA has emphasized training for the 8(a) firms, our survey results
showed that a major reason that 86 percent of the 8(a) firms cited for
joining the program was to obtain federal contracts, especially those set
aside for the 8(a) program. As shown in figure 2, a significant number of
the firms we surveyed also entered the program to broaden their customer
base to include the federal government, overcome barriers to discrimination,
and increase their net income.

Figure 2: Major Reasons Firms Joined the 8(a) Program

Source: GAO's survey of 8(a) firms.

We found that firms' overall satisfaction with the program was mixed, but
firms that received 8(a) contracts were more satisfied than those that did
not. For example, over 48 percent of the firms in the program for at least 2
years that had obtained at least one 8(a) contract were satisfied with the
program. However, only about 9 percent of the firms in the program for at
least 2 years that had not obtained an 8(a) contract were satisfied. For
example, one respondent wrote in her survey that she is frustrated because
her firm spent a considerable amount of money marketing to various federal
agencies for over 2 years but had no results to show for it.

When asked about satisfaction with general aspects of the 8(a) program,
firms expressed the most dissatisfaction with two items relating to
contracting issues. As shown in figure 3, 58 percent of the 8(a) firms
indicated that they were dissatisfied with the amount of contracting
opportunities afforded by the program. Over half the firms surveyed were
also dissatisfied with their efforts to find the right contact at a federal
agency to discuss potential 8(a) contracts. Additionally, over 40 percent
were dissatisfied with the amount of individual assistance that SBA provides
and the level of interest that federal agencies show for working with 8(a)
firms. One respondent commented in the survey that his firm has not received
any assistance from its business opportunity specialist in over 5 years.
Another respondent also wrote that he did not even know whom to contact at
SBA and that the only information that he receives from SBA is paperwork for
recertification and requests for financial information. Another respondent
wrote that federal agencies are reluctant to use the 8(a) program.

Figure 3: Major Reasons for Firms' Satisfaction and Dissatisfaction With the
8(a) Program

Note: Those who responded "uncertain" were not included in this figure. As a
result, totals do not tally to 100 percent.

Source: GAO survey of 8(a) firms.

A Small Number of Firms Continue to Receive Most 8(a) Contracts

Firms' success at obtaining these contracts has been a long-standing concern
of the Congress, GAO, and the SBA Inspector General. In amending the 8(a)
program in 1988, the Congress sought to improve the fair and equitable
distribution of federal contracting opportunities by increasing the number
of competitive small businesses owned and controlled by socially and
economically disadvantaged individuals. Nonetheless, as our prior reports
and those of the SBA Inspector General have noted, (1) a large percentage of
the total dollar value of program contracts was awarded to very few firms
and (2) about half the firms in the program in a given year receive no 8(a)
contracts. For example, our analysis of SBA's program data for fiscal year
1998 showed that 50 percent ($3.2 billion) of the dollar value of the 8(a)
contracts and modifications went to only 209 of the over 6,000 firms in the
program, while over 3,000 firms did not get any program contracts. The
Inspector General also listed the concentration of 8(a) contracts among a
few firms as 1 of the 10 most serious management challenges facing SBA in
both fiscal years 1999 and 2000. The concentration of program contract
awards has also been reported as a material weakness in SBA's Federal
Managers Financial Integrity Act Report every fiscal year since 1994.

According to our survey results, many firms have yet to receive an 8(a)
contract. For example, as shown in figure 4, 24 percent of our survey
respondents who have been in the program for at least 2 years have not
obtained an 8(a) contract, and over half have gotten two or fewer contracts.
Of those survey respondents who primarily joined the program to obtain
contracts and who have been in the program for at least 2 years, 35 percent
indicated that they have not been successful in obtaining a contract. One
survey respondent wrote that her firm is going into its 4th year in the
program without obtaining any 8(a) contracts. The respondent wrote that her
firm was under the impression that SBA staff would assist it in contacting
federal agencies and obtaining these contracts. Instead, she said the firm
has had to use its time and resources to fill out the paperwork required by
SBA but has nothing to show for its efforts.

Figure 4: Number of 8(a) Contracts Awarded to Firms That Have Been in the
8(a) Program at Least 2 Years

Source: GAO survey of 8(a) firms.

In our analysis of the survey data, we examined the relationship between
firms that have not yet obtained 8(a) contracts and the number of years of
the owners' overall owner management experience. The survey data indicate
that firms that have owners with less management experience are not as
likely to obtain 8(a) contracts as firms with more experienced owners. As
illustrated in figure 5, nearly 63 percent of the firms surveyed that have
owners with 2 to 4 years' management experience have not obtained a
contract.

Figure 5: Percentage of Firms That Have Not Obtained an 8(a) Contract on the
Basis of the Owners' Management Experience

Source: GAO survey of 8(a) firms.

SBA agrees that the concentration of 8(a) contracts among a few firms is a
problem and has made changes to the 8(a) program in an attempt to reduce the
concentration. However, SBA officials said that it is reasonable that not
all firms in the program will receive 8(a) contracts. According to SBA, 8(a)
firms are no different from other small businesses-some will be more
successful than others. Among the factors that SBA said defined a firm's
success in obtaining 8(a) contracts are the firm's proximity to federal
agencies; the firm's capabilities, access to credit and capital, and
effective marketing; and the share of each federal agency's prime
contracting dollars that are devoted to the program. SBA officials also
stressed that according to program regulations, admission into the program
does not guarantee that a participant will receive 8(a) contracts. In
addition, SBA relies on other federal agencies to make the contract awards,
and federal procuring officials are confronted with the competing objectives
of accomplishing their agency's mission at a reasonable cost and achieving
the 8(a) program's business development goals.

SBA Can Not Tell How Well the 8(a) Program Is Working

SBA remains unable to track the training and assistance it provides for 8(a)
firms, but did pilot a Business Assessment Tool in 1999 that would evaluate
firms' business development needs. At the time of our review, SBA officials
were still evaluating the results of the pilot. In addition, changes in the
contracting process have undermined the accuracy of SBA's contracting data.
This lack of systematic data impairs SBA's ability to measure the program's
overall performance and to determine what assistance firms need.

SBA Does Not Have a System for Tracking Business Development

SBA lacks a systematic way of tracking the business development services
that firms need and receive. In January 1992, we reported that the full
extent of the management and technical assistance provided for 8(a) firms
was unknown because SBA did not have a computer network that enabled the
agency to collect this information. In September 1996, SBA testified it had
an automated information system that enabled the agency to monitor, among
other things, what kind of assistance was provided for firms and what
progress was made with business development. However, SBA's Deputy Assistant
Administrator for Technology said that this capacity was never used because
funding for training has been reduced. The 8(a) program manager told us
that, if information on training and assistance is needed, headquarters
would send an information request to the district offices, which would
provide the information. Yet, SBA's district office officials in Atlanta,
Dallas/Ft. Worth, New York City, and San Francisco told us that they do not
have a system to track training information.

In an effort to better identify what type of assistance and training an 8(a)
firm requires and what the firms receive, SBA piloted an automated Business
Assessment Tool in July 1999 at 14 of SBA's district offices. The assessment
tool was designed to match information from a series of 58 questions that
assess the firm's developmental assistance needs with the business training
and counseling resources provided by SBA and other service providers. The
tool also provided a mechanism for tracking the training and assistance
recommended. SBA officials said that the tool, which is not integrated into
SBA's current information system, is being reassessed because the pilot
showed that it needed to be more user friendly. For example, if a business
opportunity specialist were not able to complete all the data entries in one
session, the tool would not save the entries already completed.

SBA's Information on 8(a) Firms'

Contracting Activity Is Incomplete

SBA does not know which 8(a) firms are getting which contracts. When the
contracting authority for 8(a) was delegated to federal contracting agencies
in 1997 and 1998, SBA no longer required federal agencies to provide SBA
with copies of 8(a) contracts for entry into the 8(a) database. Instead, the
agency planned to get contacting data from the Federal Procurement Data
System (FPDS)-a central source of federal contracts of over $25,000 that is
maintained by the General Services Administration. However, SBA did not
begin using FPDS until mid-fiscal year 2000 and found that considerable
staff effort was needed to match contracting records from FPDS with SBA's
demographic records on 8(a) firms. Matching records is necessary for SBA to
tell which firms got which contracts. SBA said that it intends for future
8(a) systems development to simplify and automate the matching process.

Even though the information system lacks data on a significant number of
contracts, staff in every district we visited said that they are still
required to spend time entering into the system the contracting data they do
have even if it is of little or no use to them. For example, one official
estimated that the 8(a) contracting amounts for fiscal year 1999 are
underrepresented in SBA's system by about $1.8 billion when compared with
FPDS.

SBA officials told us that they plan to update the 8(a) information system
as part of an agencywide information systems modernization initiative and
have begun the development of a strategic information technology plan for
the office that oversees the 8(a) program. The testimony of Joel Willemssen
later in the hearing will further discuss SBA's information technology
management processes.

SBA's Lack of Systematic Data Impairs

Its Ability to Measure Program Performance

SBA managers acknowledged that the lack of a system to track and assess the
results of business development activities creates a weakness for the
program because it is difficult to assess the program's effectiveness. The
officials said that their system's inability to record training and
assistance could lead to an underaccounting of the benefits that firms
receive from the program. For example, a district manager noted a case in
which an 8(a) firm received considerable assistance in developing its
marketing and other capabilities. This firm, through the auspices of the
district office, later negotiated and won a contract with a commercial firm.
However, this outcome could not be credited within the system because (1)
staff have no way of recording the training and assistance provided to
firms, other than in informal notations, and (2) the contract awarded to the
firm was not an 8(a) contract, so the award information could not be noted
in the system.

In addition, the lack of accurate contracting data has made tracking program
performance difficult. Because of the lack of data, district offices cannot
readily produce accurate reports on the number of contracts awarded to 8(a)
firms in their district. For example, staff in one district office said they
had been questioned by their district office director about why the number
of contracts awarded to firms in their district had decreased dramatically.
The matter was not really that the number of contracts was decreasing, but
that the information system lacked data on an estimated 50 percent of the
contracts awarded.

- - - - -

Mr. Chairman, this completes our prepared statement. We would be happy to
respond to any questions from you or members of the Committee.

Contact and Acknowledgement

For future contacts regarding this testimony, please contact Stanley J.
Czerwinski at (202) 512-7631. Individuals making key contributions to this
testimony included Susan Campbell, Andy Clinton, and David Lewis.

(385871)
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