For eight years in a row, the federal government has met its statutory goal of small businesses receiving 23 percent of procurement spending. Underneath that top-line achievement, however, are worrying trends.
- Over the last decade, the number of small businesses participating in the federal procurement marketplace has fallen by nearly 40 percent.
- In that same time period, the number of new small business entrants into federal contracting fell by almost 80 percent.
The top-line statutory goal, in other words, has been met with more dollars awarded to fewer small businesses. This is something that policymakers of all stripes would like to reverse.
Recent policy actions taken by the White House, the Department of Defense, and both parties in Congress seek to do precisely that. The question is: will they work?
Reforms to Category Management—What Is That?
“Category management” is the name of a government-wide effort, in place since about 2016, to economize federal purchasing. It succeeded the Strategic Sourcing Initiative that began in the mid-2000s. The overall goal of these efforts—better stewardship of taxpayer dollars—is laudable and in the general public interest. Yet implementation has come mainly at the expense of small businesses.
While analysis found that category management resulted in about $27 billion of savings over a few years, it also meant the elimination of thousands of contracts. Over half of those contracts had previously been awarded to small businesses.
There are competing priorities here. The question of how to weigh small business participation in the procurement marketplace against efficiency in public purchasing isn’t an easy one. There is also good reason for small businesses—both existing contractors and those who might want to be—to feel unfairly maligned.
Why should small businesses, not large contractors, bear the brunt of attempts at public purchasing efficiency? Does $27 billion in “savings” outweigh the broader economic benefits of small business contracting? Many small businesses already feel mistreated in the contracting process. Putting them on the short end of the stick in category management could help explain why so many have simply stopped trying to participate in procurement at all.
These considerations—along with a desire to expand diversity among small business contractors—motivated recent changes announced by the White House. These changes include automatic category management credit for agencies awarding contracts for certain small businesses. Additionally, federal agencies must now develop benchmarks for “the inclusion of new entrants in the federal marketplace.” And, while announced changes in reporting structures and evaluation criteria at agencies might not garner headlines, they’re essential for changing behavior across agencies that should redound to the benefit of small businesses.
The most interesting part of the White House announcement is analysis by the Council of Economic Advisors of new data from the Small Business Administration on the race and ethnicity of small business contractors. Here’s the key CEA graph:
Having this breakdown should be truly transformative in efforts to not only expand the small business industrial base but also diversify the types of small businesses participating. That, in turn, will have an impact across the entrepreneurial landscape.
The Defense (Department) of Small Business
The White House announcement, which affects all federal agencies, follows actions already in progress from the largest government purchaser, the Department of Defense. It accounts for nearly two-thirds of federal procurement spending each year. But the agency knows that changes must be made to keep its procurement pipeline agile, innovative, and robust.
The Pentagon is developing a new small business strategy and has been looking at other changes to make it easier (and more desirable) for small businesses to work with the agency. Even if the White House changes don’t have their intended effect, reforms at the Defense Department would be hugely influential in expanding the field for small businesses. (The Bipartisan Policy Center, where I work, responded to DoD’s request for comment regarding the small business strategy.)
Not To Be Outdone …
Congress also wants in on the act of expanding small business participation in federal procurement. Some readers may be familiar with the National Defense Authorization Act (NDAA) and its laborious journey through the current Congress. The NDAA is one of the few “must-pass” pieces of legislation on the congressional docket every year. Historically, the bill has been an important vehicle for changes relating to small business procurement.
This year, several amendments were added in the House, with bipartisan support, that directly address the shrinkage in the small business procurement base. The Bipartisan Policy Center sent two letters to the relevant committees regarding procurement provisions in the bill. Those changes would have targeted similar areas as the White House announcement: category management and goals, for example.
The fate of those amendments, as the Senate finalizes its version of NDAA to send back to the House, is uncertain. What’s clear for now is that there is strong bipartisan agreement that recent trends in small business procurement are (a) undesirable and (b) should be reversed.
Will All This Work For Small Businesses?
There is clearly recognition across agencies and in Congress (with bipartisan agreement) that something has gone awry with small business procurement. The question is whether these actions will help reverse long-running trends and make it easier and more attractive for small businesses to contract with the federal government. That will remain to be seen for a while; here’s a quick primer to help us all keep track of the effects of these changes.